Federal Budget 2012-13:
Is this the surplus we had to have?

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Wednesday 9, May 2012 - The Treasurer has kept his long standing promise and delivered a forecasted budget surplus against all odds, but it is hard to argue this is the surplus we had to have, EY says.

The Budget turnaround has been largely achieved by deferring planned expenditure rather than making sustainable spending cuts. Even the nation building infrastructure expenditure initiatives announced do not really take effect until 2015. All this brings the quality of the cuts and the certainty of the initiatives into question.

The Budget may deliver its surplus in the short-term, but in the long-term it may not strengthen our economy.

EY’s commentators report on the key measures of the 2012-13 Federal Budget and its potential impact:

Tax
EY Tax Policy Leader Alf Capito said the Government’s decision to double the final withholding tax rate applicable to Managed Investment Trusts (MITs) from 7.5% to 15%, from 1 July 2012, will catch the asset management, property, infrastructure and potentially private equity industries and foreign investors in MITs off guard.

“The 7.5% rate had only taken effect on 1 July 2010 so this announcement is unexpected and is particularly significant for large scale public infrastructure projects which rely on attracting foreign capital on a long term basis. This announcement is counter to the Government's stated intention of making Australia a more vibrant financial centre and will likely result in foreign investors reducing their use of Australian MITs.”

“Introduction of loss carry-back rules is to be welcomed but it comes at the great expense of not having a company tax rate cut. For Australia to improve its productive capacity, company tax rate reform is critical,” he says.

Infrastructure
EY Infrastructure Partner Bill Banks says the measures announced in tonight’s budget are inevitably modest, but targeted towards productivity building projects.

“The funding for Infrastructure Australia backed projects is welcome, as is the strengthening of their role by mandating that they assess all projects over $100 million. We anticipate this will lead to a more rigorous approach to decision making in infrastructure.”

“The innovative proposal for a Special Purpose Vehicle to encourage private sector investment in Sydney’s road network is encouraging, but the challenge will be in the execution and in achieving alignment between State, Territory and Federal Government objectives.”

Health
EY Lead Partner Health Advisory David Roberts says we would not want to see healthcare reforms stall as a result of re-profiling spending in favour of a surplus.

“While the overall policy directions appear well founded, by taking benefits early and profiling expenditure late, there is potential to cause further system stress and overall delay.”

“We would have expected this budget to consolidate across aged care, mental health, the new disability insurance scheme and health and hospital reform but it has the potential to fall short.”

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Contact details:

Katherine Meier
(Tax)
03 9655 2620/0417 859 323
EY Australia

Kate Davies
(Infrastructure and Health)
02 9248 5428/0421 615 202
EY Australia