Wayne Swan’s surprise decision to drop Labor’s previously promised one per cent cut in the company tax rate will still have benefits for small business, economists say.
The Henry Tax Review had recommended a cut in the company tax rate from 30 to 25 per cent over time.
Having already chosen to reduce the cut to one per cent the loss of a cut all together is disappointing, but not as dramatic as many business leaders say, according to Commonwealth Bank economist James McIntyre.
The money – which is to be taken from the minerals and resources rent tax – will instead be filtered down to low and middle income earners, which, in time, will benefit small business says McIntyre.
In addition, the Prime Minister, Julia Gillard, flagged that a tax cut for business may come in the future.
“I am very determined to deliver a company tax cut,’’ she told ABC Radio today. ‘‘We have used that money instead to spread the benefits of the mining boom to Australian families who we know are struggling to make ends meet in many cases.’’
Despite the fact that small business will not be getting a tax cut, this time around, the redirecting of funds will still benefit them. The additional assistance for households will, according to McIntyre, help boost household confidence making consumers more likely to go out and spend the money on goods and services.
“Whilst business confidence might have been a little dented from not getting the tax cut, if they had to choose, they’d choose to have happier spending households than a tax cut probably every day of the week,” says McIntyre.
The government also announced the loss carry-back scheme, which will allow loss-making small businesses to receive a refund from taxes paid in the previous year.
Budgeted to cost $714 million over the next four years, the government hopes the scheme will allow businesses to keep their heads above water, to invest in innovation, boost the numbers of those entering into small business rise.
“To an extent, it will lower the perceived risk in entering into business, knowing that you can get some of those previous gains back,” says McIntyre.
“It gives you the chance to adapt and get it right. Anything that keeps businesses alive a little longer in a downturn is probably useful,” he says.
McIntyre says that the move could help ease the high dollar and give the Reserve Bank more room to further lower interest rates, two of the major factors behind struggles for many small businesses.
Interest rate futures are forecasting that the RBA will cut interest rates by at least 75 basis points by the end of the year.
McIntyre was quick to point out that a surplus could also have the opposite effect, with Australia being in a rare group, a AAA-credit rating, and that’s something that could attract investors to the Australian dollar.
If consumer confidence was to grow as a result of increased spending from those receiving government assistance the RBA may consider not cutting the cash rate again but McIntyre believes another cut was always likely, even before the budget.
“We think there is enough sluggishness in the economy to justify one more rate cut, but we think August is more likely than a June move,” he says.