Swan extracts more cash with minimum of pain
A FEW days ago the big business lobby, the Business Council of Australia, was poised to decry Wayne Swan's particular brand of cost cutting. On Sunday it set the tone, releasing a statement that a surplus at any cost would damage rather than enhance the economy and its international competitiveness.
A FEW days ago the big business lobby, the Business Council of Australia, was poised to decry Wayne Swan's particular brand of cost cutting. On Sunday it set the tone, releasing a statement that a surplus at any cost would damage rather than enhance the economy and its international competitiveness.Behind that statement was a fear that business and in particular the big end of town was going to sustain deeper cuts from Swan's razor. There is already a business tax review under way and some of the proposals the government has been considering have received a frosty reception.There was always a chance a somewhat desperate government would slip some of these proposed changes into yesterday's fiscal update.Instead the $5.5 billion the government plans to raise from big business is about changing the timing of the payment of tax from quarterly to monthly.The BCA did not appear too upset by this outcome, maybe because it could have been worse or because it hasn't yet had the time to talk to its constituents about what it means to them.Make no mistake, there will be some business sectors that will not appreciate Swan's corporate cash grab.But there are two important caveats around this. Those companies that have highly seasonal or lumpy earnings won't like this move these have wild variations in revenue from quarter to quarter. Those with steady cash flows will be less affected.All large companies in the firing line will see cash move out the door more regularly and will not have the benefit of earning interest on their cash reserves, or will need to borrow for tax during some periods. This will bring forward $5.5 billion in revenue and not lose the government a vote.In this respect Swan has pulled one out of the hat.This is fine while this new measure is directed only to large businesses with revenue of more than $1 billion.But when the net widens to include companies with turnover of $100 million, there will be plenty more pain. This captures mid-size companies that will be hit with relatively greater compliance costs.On the positive side, the government has decided it is not the time to further fiddle with the superannuation system. It has pinched some money from dormant funds, but the move is otherwise a victimless crime.To have yet again undermined the superannuation system would have surely met with a voter backlash from a community already suffering fatigue from the regular petty theft from their retirement nest eggs.There comes a point where the positive politics of living up to the promise of a budget surplus is outweighed by the pain of achieving it. Clearly the government doesn't think it has reached this tipping point, and having had to make so many adjustments to live up to the promise it will do whatever it takes to adhere to it in the May full budget.There are plenty that question the smoke and mirrors that the government will continue to use to achieve the surplus.But no one is doubting its claim that tax revenues are falling in response to falling commodity prices.And it comes as no surprise that the revenue expectations around the mining tax (MRRT) have been slashed by a third.There are plenty of cynics that were wary that the minerals resource rent tax receipts were ever going to be as large as the government had forecast. Swan now says they will fall short by $4.3 billion over four years.The midyear economic and fiscal outlook now forecasts total revenue of $9.1 billion, down from the $13.4 billion made at the May budget.Net MRRT revenue in 2012-13 will be $2 billion rather than the previously expected $3 billion, which itself was a reduction from the $3.7 billion predicted a year ago.The first instalment of the 30 per cent MRRT that began on July 1 and taxes the super profits of iron ore and coal miners was due yesterday.Regardless of whether these forward estimates will be achieved using accounting tricks, they are certainly cobbled together to get an outcome that doesn't look all that coherent or sustainable."The MYEFO [Midyear Economic and Fiscal Outlook] relies on a number of special dividends, accounting treatments and timing adjustments, but major structural changes to big programs that are needed to do the heavy lifting going forward, and form the basis of a robust medium-term strategy, are still missing," the Business Council says."The risk with [the] outlook is that economic growth will be weaker than Treasury has projected. The MYEFO itself shows that an additional 4 per cent fall in the terms of trade would wipe off almost $3 billion from the budget bottom line in 2012-13 alone."Having inflicted a bit more fiscal pain on business and the state governments, Swan is now throwing down the gauntlet to the Reserve Bank to ease the pain with another interest rate cut in November.The consensus among economists is that this was already likely. It is probably now considered a certainty.If Swan can take some of the credit for an interest rate fall with the community he will score political brownie points.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free