Here's why the small business deductions are exactly what the economy needs to boost domestic growth

One of the big reasons the Australian economy managed to skate through the GFC so well, besides massive cuts in RBA rates and the fall in the Australian dollar, was Kevin Rudd’s $900 cash bonus to households in 2009. It stimulated spending which would have otherwise not occurred and helped keep the domestic economy afloat.

Tonight’s budget has a measure which could be similarly influential in both lifting the domestic economy and also in finally encouraging business to follow the advice of RBA Governor Stevens and let loose its animal spirits.

Not only did the government give small businesses a 1.5% tax cut to 28.5%, it also has given these companies a window between now and June 30, 2017, to “immediately deduct each asset costing under $20,000.”

That’s huge. It’s also a massive turnaround from last year’s budget, when Hockey cut the instant tax write off from $6500 to $1000.

The government expects it will cost the budget $1.75 over the next four years, which means they’re hoping around $6.1 billion will be spent by small business.

That means it’s probably a good time to by Wesfarmers shares, since they own Officeworks.

From July, the company tax rate for up to 780,000 incorporated businesses with annual turnover up to $2 million drops to 28.5%; 1.5 million unincorporated sole traders, trusts and partnerships get a 5% tax discount, but that’s capped at $1,000 annually.

All up, the governments says the tax cuts will give $3.25 billion to small business with the accelerated depreciation taking the total to $5 billion.

Peter Jolly, NAB’s global head of research told Business Insider that this measure has the ability to most influence growth in the near term. He believes businesses will take the government up on this incentive and that this will material lift sales in the economy.

That’s great economic news and it will be good for both business and consumer confidence.

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