Economic stimulation in last night's Federal Budget comes from big items such as a $36.7 billion dollar four year package of personal income tax cuts; additional $2.3 billion package for road and critical rail infrastructure; $4.2 billion over 4 years in business tax cuts; $10.7 billion in additional defence spending; and security related measures worth $1.5 billion over the next 5 years. 

 A stimulatory budget will benefit the printing industry as the economic fortunes of the industry are largely influenced by general economic activity.

The tax cuts announced in the 2006-2007 Federal Budget will more than help to mitigate the negative impact on consumer expenditure flowing from last week's decision by the Reserve Bank of Australia to lift official interest rates by 0.25 per cent to 5.75 per cent - the highest level that official interest rates have been since February 2001.

The interest rate rise when combined with higher petrol prices was estimated to have increased household expenses by $3.8 billion per annum. The combined tax cuts and increased family benefits will now hand back more than $7.2 billion a year. The likelihood of a further rate hike in the second half of 2006 has clearly increased due to the stimulatory measures announced in the 2006-2007 Federal Budget.

And while Peter Costello's 11th budget and John Howard's 17th is forecasting a sizable budget surplus of $10.8 billion for 2006-2007 financial year on the heels of an anticipated 14.8 billion budget surplus for 2005-2006, the budget surplus would have been embarrassingly larger for the Federal Government in the absence of the multi-billion dollar stimulatory measures announced on budget night.

Key Budgetary measures

The following initiatives were announced by the Treasurer:

• Personal tax cuts comprising of lower personal income tax rates and higher income thresholds from 1 July 2006
• Major superannuation reforms from 1 July 2007 estimated to cost $6.2 billion over 4 years. Superannuation benefits paid from taxed funds to taxpayers aged 60 and over will be exempt from tax. Other proposed modifications will limit post-tax contributions to $150,000 a year, remove the compulsory drawing of superannuation amounts, and permit the self employed to claim a full tax deduction for their superannuation contributions and be eligible for the Government's super co-contribution
• Taxes on small business will be cut by $435 million over four years to reduce compliance costs for small business and increase access to small business tax relief arrangements and CGT concessions
• The FBT rate will be reduced from 48.5% to 46.5% effective from 1 April 2006 and other FBT concessions will be made
• The diminishing value rate for depreciating assets increased from 150 per cent to 200 per cent. Companies will now be able to write of plant and equipment at a faster rate for all eligible assets acquired on or after 10 May 2006. The measure is worth $3.7 billion over 4 years
• New Apprenticeships Centres to receive an additional $107 million to increase contact by Centres with apprentices and their employers and provide assistance to encourage retention and completion.
• New road and critical rail transport infrastructure spending
• Introduction of an early stage venture capital limited partnership investment vehicle providing investors with a complete tax exemption on capital and revenue gains 
• Additional $200 million for the Innovation Investment Fund which helps small companies commercialise their research work
• Extra 25,000 childcare places and the removal of limits on government funded places
• Extension of family tax benefits
• Additional funding to promote medical research
• Deferment of an increase in the present 19.6 cents a litre heavy vehicles road user charge, which was to have taken effect from 1 July 2006
• A new $1.1 billion measure to introduce a new "access card" for health and social services to replace 17 existing cards and vouchers

Budget Forecasts

The budget is forecasting an underlying budget surplus of $10.8 billion for financial year 2006-2007 and $10.6 billion for the following year. The expenditure side of the budget is forecast to increase from 21.6 per cent of GDP in 2005-2006 to 21.8 per cent by 2006-2007, while revenues are forecast to decline from 23.3 per cent of GDP during 2005-2006 to 23.0 per cent of GDP for 2006-2007.

Economic growth is expected to rise to 3.25 per cent with growth forecast to be driven by business investment, household expenditure, government expenditure and exports.

Inflation is forecast to remain within the Reserve Bank target range averaging 2.75 per cent during 2006-2007 financial year.

Wage growth is expected to remain unchanged at 4.0 per cent.

Surprisingly the unemployment rate is expected to remain unchanged at 5.25 per cent despite significantly lower rate of employment growth. Employment growth is forecast to grow at a modest rate of 1.0 per cent during 2006-2007.

The anticipated pick up of economic activity is expected to result in deterioration in the current account deficit.

The impact of higher oil prices and tighter macro-economic policies in leading economies of the world such as the United States and China are expected to lower global economic growth. The outlook for global economic growth however still remains positive with expectations of 5 per cent growth in 2006 being followed by 4.75 per cent growth in 2007.

Major risks to the global economic outlook include the ongoing global imbalances reflected in the current accounts; high oil prices; increasing financial vulnerability and possible influenza pandemic.

Budget forecasts anticipate increased resource exports which are expected to help increase both national income and taxation revenue. Increased taxation revenue increases the capacity of the government to fund further tax cuts. This no doubt is behind the logic of the budget tax cuts. The only concern with this strategy is that the resources boom will eventually come to an end and it remains a risky strategy to finance tax cuts which are likely to be permanent from short to medium term revenue streams. 

Factors that may undermine the budget outlook

• Housing prices could fall further
• Households are sensitive to interest rate and employment movements
• The probable fall in terms of trade
• Excessive wages growth
• Oil prices
• Adverse weather conditions impacting on farm production
• Slower growth in the world economy

Impact on the printing industry

With economic growth forecasts for the Australian economy being revised upward for 2006-2007, the printing industry will be faced with an economic environment that is likely to be more conducive to growth and expansion.

The package of tax cuts and increased family benefits announced by the Treasurer will provide a welcome stimulus to printing industry economy activity as soon as households start spending their additional income.

The Reserve Bank's decision to raise interest rates last week was driven by the fear of rising inflation. If the RBA believes that the tax relief package and the expansion of family benefits announced in the budget are likely to prove inflationary, then it is likely that it will respond accordingly by further lifting interest rates. 

Any further upward movements in interest rates will help neutralise the budget tax cuts and the additional cash benefits that will now flow to households and families.

No new measures or initiatives were announced in the budget that impact exclusively on the printing industry.

Addressing Australia's economic challenges

The Treasurer was quoted extensively in the press as part of the pre-budget hype that this budget was a budget to help shape Australia's future. On budget night he ended his speech by stating that the budget would build opportunities for the future.

The Australian economy is facing the following economic challenges:

• Skilled labour shortages
• Some segments running into capacity constraints
• Declining levels of household savings
• An ageing population

How does the 2006-2007 budget address these economic challenges?

There any no direct measures to address the problem of labour shortages especially skilled labour shortages. The modest rise in child care places is unlikely to have much of an impact in easing the problem of labour shortages by encouraging more parents to enter the workforce.

The tax cuts should help boost labour market participation rates by reducing effective marginal rates of taxation faced by those on welfare who decide to abandon welfare and enter the paid workforce.

The new road and rail transport infrastructure spending should benefit the economy which is facing capacity constraints.

Increased family payments and tax cuts are likely to be spent rather than put aside as household savings. The budget through the proposed changes to superannuation will help encourage private savings. Public savings levels should be further improved by the larger than expected budget surplus and the projected budget surpluses over the next 4 years.  

Tackling the problem of an ageing population is a long term objective of the government and some initiatives announced in the 2006-2007 budget such as extending family benefits to households with three children should play a role in raising the Australian fertility rate.

The initiatives announced in the 2006-2007 Federal Budget represent a small yet important step in addressing Australia's economic challenges.   

To access a comprehensive overview of the 2006-2007 Federal Budget initiatives please click on the following document. 

Federal Budget 2006-2007 (doc - 185.5 kb) A comprehensive overview of the main policy initiatives.