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calculator-1180740_1920The 2016-17 Budget will be the first Budget delivered by Prime Minister Malcolm Turnbull and Treasurer Scott Morrison, and the third budget since the Coalition Government was elected in 2013.

This Budget will require the new Turnbull Government to balance multiple competing and contradictory calls from all parts of the electorate. Key political and economic factors will need to be balanced against each other if the Government is to avoid fallout similar to that of the generally poorly received 2014-15 Abbott Government Budget.

Recent political history will be a major force shaping the 2016-17 Budget.

In September 2015, following an extended period of difficulty for the Government, then Minister for Communications, Malcolm Turnbull MP, challenged the Prime Minister for the Leadership of the Liberal Party (and by extension, the Prime Ministership).  Mr Turnbull won the party-room ballot 54 votes to 44.

Upon entering the role of Prime Minister, Malcolm Turnbull signalled his Government would provide new economic leadership. The 2016-17 Budget will be the first major test.

In this environment, the 2016-17 Budget will be shaped as a product of a myriad competing policy and political pressures.

The Government has highlighted various priorities since Christmas including:

  • A reduction in income tax levels for the middle brackets;
  • Reductions in the company tax rate; and
  • Reducing net debt.

Competing with these priorities has been commitments by the Government to reduce spending and not to raise taxes. The Government has also ruled out making changes to negative gearing and the goods and services (GST) tax rate, as well as providing enough additional revenue to fund campaign commitments for the upcoming 2016 election.

The composition of the Senate is another significant factor.

In the 76-seat Senate, the Coalition Government currently holds 33 seats, Labor holds 25 seats, the Greens 10, and 8 seats are held by independents. When Labor and the Greens oppose Government bills (which happens regularly), the Government needs the votes of 6 out of 8 independent Senators.

This Senate crossbench has previously caused headaches for the Government when it refused to pass particular cost saving policies in the 2014-15 Budget, including university fee deregulation and the Medicare co-payment.

Even though both Houses of Parliament will soon be dissolved as a Double Dissolution election is held mid-year, it is unlikely the Coalition will gain a majority of Senate seats, as expert analysts such as Antony Green have noted.  In all likelihood crossbenchers will continue to hold the balance of power.

Against this backdrop, the 2016-17 Budget will be a seminal moment for the Turnbull Government, testing its ability to make hard decisions and sell them to the electorate.

There will likely be a rolling back of superannuation tax concessions for high income earners, increases to tobacco excises and reductions in the growth of school education funding. This will support modest cuts to the middle income tax brackets.

Prime Minister Turnbull has moved away from Tony Abbott’s preference for roads in infrastructure planning. He has already signalled this through projects proposals such as the east coast High Speed Rail (HSR) network.

Although pressures to reduce the deficit will limit the scale of government investment in infrastructure, the Prime Minister may take advantage of low interest rates to part-fund public transport projects in public-private partnerships or as part of equal funding arrangements with the states.

Small businesses may also be set to benefit, building on the positive measures in the 2015-16 Budget that were well received by the business community. The Government may decide to continue to allow asset write-offs for small businesses to encourage spending.

The one thing that is certain is that Malcolm Turnbull and Scott Morrison’s first Budget will be politically difficult. On the one hand the Government will feel obliged to act in line with its own rhetoric of Australia ‘living within its means’, resisting the urge to match the growing list of spending commitments being made by Labor. On the other hand, the fast approaching election will make tax cuts and spending initiatives hard to resist.

This year’s budget briefing should not be missed, please join us at our Pre Financial Year End & Post Budget Update and subscribe now to receive our Special Budget Bulletin if you are not yet receiving fortnightly Horizon Bulletins.

Thank you to Gerard Paynter for his content contribution to this article.  Gerard Paynter is Managing Director (Qld) at Barton Deakin, where he assists Queensland clients to engage with the Federal Government.

 

Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.