Federal Budget 2020-21: analysis and insights

From ‘Back in Black’ to a more than $966 billion budget blackhole in 2024, Federal Treasurer Josh Frydenberg has handed down the most significant budget in Australian history.

Since the onset of the COVID-19 pandemic, the Government has provided $257 billion in direct economic support to cushion the blow and strengthen the recovery. The 2020-21 Budget commits a further $98 billion including $25 billion in direct COVID-19 response measures and $74 billion in new measures to create jobs.

The 2020-21 Budget is focussed on measures to stimulate a private sector-led recovery that drives economic growth and employment, as well as trying to re-establish business, consumer and investor confidence. Once the unemployment rate is below 6 per cent and on a path toward previous levels, which is forecasted in 2022-23, the focus will shift towards stabilising and then reducing debt as a share of GDP.

But what does this mean for Western Australia and business? We’ve broken down the key measures for you:

• Jobs, jobs, jobs: Targeted temporary measures to address youth unemployment with a new JobMaker hiring credit, apprentice subsidies and FBT incentives to retrain or reskill workers;
• Tax cuts and investment incentives: Income tax relief to 11 million Australians, an investment allowance for businesses to instantly deduct the full cost of eligible capital assets, loss carry-back provisions and R&D boosts;
• Infrastructure spending: A $7.5 billion infrastructure plan, with $1.1 billion carved out for WA;
• A push for Manufacturing: A $1.5 billion manufacturing package, targeting six priority areas to encourage businesses across the sector to scale-up, collaborate and commercialise using a co-funding model; and
• Energy investments: A $1.9 billion investment package to support the development, commercialisation and uptake of emerging low emission energy technologies.

Jobs stimulus

Employers who give a job to an unemployed young person will receive a wage subsidy, with the measure costing around $1.2 billion. At a cost of $4 billion, employers who hire an unemployed person will receive a $200 weekly wage subsidy if that person is aged between 16 and 29, and $100 if the person is aged 30 to 35.

To be eligible for the new scheme, the new jobs must be created between October 7, 2020 and October 6, 2021. The hiring credit is then available for 12 months for each of those new jobs (meaning the scheme is set to finally come to an end on October 6, 2022).

Eligible businesses can’t currently be claiming the JobKeeper payment if they want to take part in JobMaker. The major banks have also been specifically called out as ineligible.

Crucially, businesses do not need to have suffered a fall in turnover to be eligible for the scheme. But the new jobs must be additional — that is, the total employee headcount must have gone up at the business.

An additional $1.2 billion will be spent creating 100,000 new apprenticeships and traineeships, with a 50 per cent wage subsidy for businesses who employ them. Businesses will be exempt from fringe benefits tax if they reskill or retrain workers facing redundancy.

Tax cuts and investment incentives

Stage two of personal income tax (PIT) cuts, which were legislated to come into effect in 2022, will be backdated to July 1 this year. The stage two tax cuts will lift the income threshold at which the 37 per cent tax rate applies from $90,000 to $120,000.

The cost to the budget of bringing the PIT cuts forward from their legislated start date of July 1, 2022, and tweaking them, will be $17.8 billion.

Lower income earners will be given a double cut, receiving a one-off additional benefit of up to $1,080 with the Low-and Middle-Income Tax Offset (LMITO) and the threshold for the 19 per cent tax rate lifted from $41,000 to $45,000.

The LMITO was to be removed with the commencement of Stage Two, but the one-off additional benefit in 2020-21 will provide support to households and stimulus to the economy.

The government has also backed down on plans to cut the Research and Development tax concession by $1.8 billion. The removal of the $4 million cap imposed on businesses with turnovers under $20 million, as well as the potential for 2020 clawbacks, will be welcomed by business.

At a cost of $26.7 billion nearly all Australian businesses – with turnovers of up to $5 billion – will be able to write off the full value of eligible assets with no limit on value from 7:30pm (AEDT) on 6 October 2020 until June 2022.

This measure will be available to around 3.5 million businesses (over 99 per cent of businesses) that employ around 11.5 million workers. The incentive will apply to around $200 billion worth of investment, including 80 per cent of investment in depreciable assets by non-mining businesses.

The budget also included $4.9 billion in temporary loss carry-back provisions, which will enable the same businesses to write off any losses incurred until June 2022 against profits on which tax has been paid, made on or after 2018-19, before the COVID-19 pandemic struck.

Loss carry-back will be available to around 1 million companies that employ up to 8.8 million workers. Eligible companies may elect to receive a tax refund when they lodge their 2020–21 and 2021–22 tax returns.

Small businesses with a turnover of $10 million to $50 million will also be able to claim up to 10 tax breaks, with fringe benefits tax scrapped on car parking, phones or laptops, simpler trading stock rules and easier PAYG instalments. It will cost the government $105 million.

Infrastructure spending

Central to the economic recovery plan is a $7.5 billion package of new infrastructure investment to boost jobs nationwide. Western Australia received a healthy $1.1 billion share, on par with Victoria, to help deliver key transport projects across the State. This includes:

• An $88 million commitment to the Reid Highway Interchange with West Swan Road project;
• $70 million to the Roe Highway Widening and Abernethy Road Upgrade;
• $16 million toward sealing critical sections of the Goldfields Highway between Meekatharra and Wiluna; and
• A further $16 million to upgrade the Broome-Cape Leveque Road as well as other related regional community accesses roads.

This major investment is predicted to support approximately 6,800 direct and indirect jobs for Western Australians.

Perth City Deal

Already announced on 20 September 2020, the Morrison and McGowan Governments unveiled the new $1.5 billion Perth City Deal.

Key elements of the Deal include:

• Relocating Edith Cowan University’s law, business and Western Australian Academy of Performing Arts (WAAPA) schools to the Perth CBD. This $695 million investment by the Federal and State Governments and the University is set to deliver the State’s first inner-city campus, attracting an expected 9,200 staff and students to the city on a daily basis;
• $105 million toward Perth CBD Transport Plan to provide essential infrastructure upgrades throughout the city, including cycling and walking infrastructure. A new Swan River Causeway Bridge is the flagship of this overhaul;
• $42 million redevelopment of the Perth Concert Hall;
• Up to $100 million to upgrade the WACA, restoring it to a premier sporting facility; and
• $36 million toward facilities, safety improvements and support services for the City’s homeless.

The Perth City Deal is estimated to create almost 10,000 local jobs.

Manufacturing boost

The Federal Government’s $1.5 billion Manufacturing Strategy is another pivotal piece to its COVID recovery plan. As part of the strategy, $1.3 billion has been carved out to fund the Modern Manufacturing Initiative (MMI).

This aims to drive lasting change for Australian manufacturers by encouraging businesses across the sector to scale-up, collaborate and commercialise using a co-funding model.

The investment focuses on six priority areas: Resources technology and critical minerals processing; Food and beverage; Medical products; Recycling and clean energy; Defence; and Space.

Investment will be guided by industry specific roadmaps which will feature clear two, five and 10-year goals.

Energy technology

In September 2020, the Prime Minister unveiled his Government’s major $1.9 billion investment package to support the development, commercialisation and uptake of emerging low emission energy technologies.

As part of this package, the budget provides a $1.6 billion boost for the Australian Renewable Energy Agency (ARENA) to invest toward improving the competitiveness and penetration of renewable technology.

Underlying impact

There has been a major deterioration of the budget, with forecasted budget deficits set to peak at $966 billion by June 2024, or 44 per cent of GDP. Gross debt will hit $1.138 trillion by 2024, which is 51.6 per cent of GDP. These deficits are a result of reductions in tax revenues as well as the unprecedented emergency economic support package of around $355 billion.

The budget forecasts unemployment to peak at 8 per cent this year and settle at the pre-COVID level of 5.5 per cent by 2023-24.

Budget aggregates and major economic parameters

Jennifer Kirk is an Associate Director in Cannings Purple’s Government Relations team and spent more than seven years in Canberra working for the Commonwealth Department of Finance, the Department of the Prime Minister and Cabinet and the Commonwealth Treasury. If you need help mapping out your government engagement, contact Jennifer.