It’s over a week now since the Treasurer delivered his budget.
Even before he finished reading his budget speech to Parliament, nearly every commentator was lining up to give their version of why it was a failure. Some described it as a ‘retreat’. Others said that it was ‘weak’ and a ‘wasted opportunity’.
However, the latest Newspoll survey (commissioned by The Australian) declared that voters thought this the best budget in seven years. That’s quite a turnaround from just 12 months ago, when the same poll voted last year’s budget as the worst in 20 years!
The Fairfax-Ipsos poll showed a similar result, with eight out of 10 surveyed thinking that the small business initiatives were a ‘good idea’. It also showed that one in five people surveyed planned to participate in the scheme, although their eligibility might be the first sticking point.
To summarise the initiatives, the two key measures announced were:
- A 1.5% tax cut for companies with turnover less than $2 million a year. That brings the tax from 30% down to 28.5%, effective from July 2015. The 96% of small businesses which are unincorporated, including sole traders and contractors, will get a 5% discount up to a maximum of $1000.
- Small businesses will be able to ‘write-off’ assets up to the value of $20,000 against their income when they lodge their tax returns.
This last measure has received most of the attention, as much for its ‘generosity’ as for the discussion about who qualifies. Although the Treasurer announced that businesses could participate immediately, it is important to clarify who can actually take advantage of the scheme, and how it applies.
First, let’s start with what it isn’t. It’s not a scheme where the government matches the money spent by small businesses on a dollar-for-dollar basis. What it does do is allow businesses to claim the amount of their purchase (up to a maximum of $20,000) against their taxable income. A business can make multiple purchases under this initiative, but can only claim these when they lodge their annual tax return.
The second point is eligibility. Many of those who believe that they will take part in the scheme might not be entitled to. This might explain why such a high number of people surveyed thought they would participate.
The third relates to the actual asset. No doubt this is one for the accountants, but a business owner will want to make sure that any asset they purchase will legitimately qualify as ‘for business purposes’.
All the politicking aside, it’s good to see small business back on the radar. There are a lot of different statistics out there on the true size of the small business sector. However, the Australian Bureau of Statistics claim that there are over two million small businesses actively trading as at June 2014. Of these, the majority turn over less than $200,000 per year.
The Treasury’s numbers further tell us that these small businesses employ 4.5 million people. That’s 43% of total private sector employment — a huge slice by anyone’s measure. Many of these small businesses are responsible for giving young people their ‘start’. So you can see why many people will positively view any initiatives that help this vital part of the economy.
Of course, the devil will be in the detail — especially around which assets will qualify. Not to mention how much the scheme will cost, which no-one seems to be able to predict. Maybe the commentators are right. Maybe this budget will turn out to be just another wasted opportunity. It won’t be the first time…or the last.
On the positive side, however, it might just be the shot in the arm that this much neglected and often ignored ‘engine room’ of the Australian economy needs to help this country grow. Time will tell.
The price of oil
Much has been written about the fall in the oil price over the last 12 months. This dramatic collapse led to a huge decline in the stock market valuations of oil producers and related services companies.
While I haven’t been able to find anyone who actually predicted this fall, there are now plenty of people out there willing to have their say on where it will go from here.
The latest oil fortune-tellers are Goldman Sachs. They came out overnight with their prediction. They now forecast the price of oil to finish the decade around the US$50 per barrel level. You can see in the chart that the price has bounced off the January and March lows of around $47 a barrel. The price has recently run back up to $60. However, many of the hedge funds who bought oil are starting to reduce their positions.
By the way, if you’ve ever wondered what a barrel is, it equates to 42 US gallons, or around 160 litres in our ‘currency’.
There are a couple of reasons Goldman Sachs think the price will stay around these levels. First, they believe that the United States will continue to produce large quantities of shale oil. Despite lower prices, companies have built much of the infrastructure and will want to keep producing oil to recover their investment.
Although some of these shale operators have gone out of business, thus reducing global production, they think this will only lead to a short term rise in the price to around $60 over the next two to three years. They then think it will drop back to around $50 a barrel.
The second reason, according to Goldman, is that they believe OPEC will continue to ramp up production to match this increase in supply from the shale producers. They will continue to do this as they won’t want to give up any market share. It will effectively become a game of attrition as the big players squeeze out the marginal operators.
This contrasts markedly with BHP Petroleum’s chief Tim Cutt, who this week spoke to the Australian Petroleum Production and Exploration Association (APPEA) conference in Melbourne.
His concern is the opposite. He’s worried the industry is not uncovering enough new discoveries to cover the future demand for oil. He believes that the shale industry in the United States will peak in the next decade, which ultimately will lead to a spike in oil prices once known oil reserves start to decline.
Part of his argument is that the world consumes over 30 billion barrels of oil a year. Although by his estimates there is currently an oversupply of about one or two million barrels a day, in the long term, the industry is not even covering half of this consumption from new sources.
This is what he had to say:
‘In the past four years discoveries were less than 10 billion barrels per year and in 2014 they amounted to less than six…That’s only a fifth of current consumption!’
The recent reduction in oil prices has led to oil companies dramatically cutting their exploration budgets, thus further reducing the chances for more new sources of oil.
You don’t need me to tell you how important oil is to the world economy. And as the two divergent views from the market experts highlighted above indicate, the longer term outlook is anyone’s guess.
What we can agree on is that there is currently an oversupply. So in the short term, don’t expect to see oil revisit anywhere close to 2014s highs.
For Markets and Money
Ed Note: The above article is an edited extract from Total Income, the newsletter in which Matt seeks out overlooked opportunities to help you build an income in a low interest rate world. To find out more, click here.