The Australian government has made as a centrepiece of its budget a temporary change to the depreciation rules that allow small businesses with a turnover of under $2 million to write off any capital purchases under $20,000 immediately rather than over the longer term. This means that anyone who purchases such an item will create a larger short term tax deduction than they otherwise might have. Over the longer term there is no difference to the deduction as future depreciation will be reduced and tax will be higher than otherwise. The change lasts to June 30 2017.

As a futurist I am always looking at the long term impacts and the unintended consequences of actions including government policy.If we examine the possible responses from different businesses and how they will play out then we can better understand the policy.

The first group of small businesses will be those that were going to spend money on these sorts of capital items already. They will benefit from a greater tax deduction but will not have contributed any spending to the economy. The government is essentially lending them money interest free because the small business more tax back in the short term but have to pay that money back in the form of tax as depreciation is lower in the later years. Those lower tax deductions are essentially loan repayment as their tax payments to the government will be higher then than they otherwise would be. Sure they may choose to spend some of that money and stimulate the economy but it is still essentially debt based spending which has to be paid back.

The second group of small businesses are those that would have otherwise not spent the money in the next 2 years because they lacked the capital or the business case to do so. Some of these will make good decisions and some will make bad decisions given that a business capital purchase that only makes sense if there are advanced depreciation write offs is generally a marginal investment. Towards the end of the policy many purchases that were going to be made in 2017/2018 will be made before June 30th 2017 when the policy ends. This makes good economic sense for the most individual small businesses. These will be good business purchases brought forward and that brings forward the economic stimulus of those purchases. The question is what happens in the 1-2 years after the temporary change is removed. There has to be a consequence of less spending and therefore a reduction in economic stimulus at that time.

The third group is those small businesses that make spending choices based on minimising tax alone. The history of such business decisions and investments is that many of them are made poorly. Poor investment decisions are bad for the economy in general as it removes capital that could otherwise be spent on other things, reducing efficiency.

There are three major possible outcomes to the policy putting aside that micro-economic impacts might drive prices up close to June 2017 reducing the efficiency of spending decisions.

The first is that the package will work as a short term economic stimulus by promoting spending in the economy but that the spending brought forward will crash demand in the 1-2 years after June 30th 2017. The cynical would say that the government does not really care about that because it will be after the next election. However the problem may be that increased short term demand could either drive up interest rates or minimise the chances of any further rate reductions. This means that rates could be higher just as demand from small business falls away causing more problems in the economy.

The second is that the package does not work in terms of demand and that small business spending does not change much so all the government has done has lent short term money to small businesses that would have spent the money anyway. That is pure waste.

The third is somewhere in between the first two but that a significant number of small businesses that otherwise were not going to spend money  make bad spending decisions on the back of tax deduction fever. Either by spending current reserves or by borrowing money from the bank to do so. This may produce some short term economic stimulus but economic stimulus based on poor investment decisions always comes back to bite you.

The government has made a big publicity splash on this measure and the fact that they have allocated $1.75 billion to pay for it. The reality is that this is not the costs of the scheme as the only real cost is the interest on the money that the government would have otherwise received in tax receipts. The actual capital will be clawed back in future years as businesses get less deductions in the future.

Based on the media coverage so far the government has had a big political win on a measure that does not cost the budget too much over the longer term. From where I see the policy going they have achieved that political win at best for no positive impact on the economy and at worst have made another set of problems.

Paul Higgins