Industry Newsletter

The Budget remains optimistic about Australia's short-term growth prospects, possibly too optimistic given the current pressures on business profitability and therefore on incomes and government taxation revenues. It assumes real GDP growth will dip to 2.75% in 2013-14 before reverting quite quickly to Australia's long-range average growth rate of 3.0% in 2014-15 (versus 2.5% assumed by the RBA for 2013 and a typical range of 2.25% to 2.75% by private sector economists over this period). It assumes employment growth of 1.25% in each of 2012-13 and 2013-14, even though employment growth was just 0.9% nationally as of April 2013 and the various job ads series are suggesting no strong pick-up in jobs growth in the next nine to 12 months. The unemployment rate is expected to rise to 5.75% over the next two to three years, before falling back to 5%.

An important positive is that the government is not seeking to further slow the economy in the 2013-14 year with across-the-board corporate tax increases and indiscriminate spending cuts. Last year's Budget made the mistake of moving too rapidly to consolidate the bottom line - a strategy that detracted from overall growth.

Also on the positive side is the Budget's elaboration of the relative strength of Australia's public finances and overall economic performance when compared with those of most other developed countries - particularly since the GFC. Of course, we should be doing better than most as our starting fiscal position was also much stronger and we have had the benefit of a windfall terms-of-trade boom and extremely high levels of mining-related investment.

The Budget forecasts are predicated on the expectation that the housing investment cycle and consumer spending will pick up in 2013-14, to replace waning mining investment as the biggest driver of growth in the domestic economy. Housing investment is currently at a cyclical low and is yet to reach a meaningful turning point, yet the Budget expects it to grow by 5% in 2013-14 and 5.5% in 2014-15. Further, the terms of trade are forecast to decline only slightly from levels that are still very high by historical standards.

If these numbers do not eventuate, tax revenue will be even lower than is already being assumed. This presents real risks for the Budget's projected path back to surplus.

As Ai Group Chief Executive Innes Willox said in our media release: "The 2013-14 Budget confirms industry concerns about a slowing economy but risks being too optimistic about Australia's growth prospects, our terms of trade, corporate tax receipts and the recovery of housing construction. Further, the Budget fails to introduce much-needed new measures to boost investment, innovation, competitiveness and productivity.

"Unfortunately, we risk a repeat of history. The reality of the slowing economy and the prospect of further falls in the terms of trade are not adequately recognised in the budget forecasts. As a result, the revenue outlook is considerably less promising than the Budget suggests."

There is a strong likelihood that hard calls on spending will have to be made before the Budget can be brought back to surplus over the forward estimates.

The biggest story in this Budget was the huge increases in projected deficits this year and over the next two years, relative to those outlined six months ago in the Mid Year Economic and Fiscal Outlook (MYEFO) statement. For the three years from 2013-14 to 2014-15, we are now facing a deficit of $48.3 billion instead of a surplus of $5.5 billion, a deterioration of $53.8 billion. What has caused this? $46.3 billion of it is due to big reductions in the estimated tax revenue the government can be expected to receive, including $16.8 billion less from company tax and $9.1 billion less from the minerals resource rent tax. The remainder is due to net spending increases over these three years.

The extent of the anticipated cumulative deficits over the next three years, amounting to $48 billion, is sobering news. This is a turnaround, in only six months, of close to $55 billion in forecast budget bottom lines. Even more sobering is the prospect that further revisions are in store. Economic reality has bitten.

There are some small positive measures in the budget which will assist industry to work through the current economic conditions. These include:

• Important infrastructure investments that will lift capacity and productivity;
• Increasing the flexibility of apprenticeships and aligning the apprenticeship system more closely to industry needs;
• The Skills Connect initiative aimed at helping businesses meet their training needs;
• Maintaining the immigration intake at 190,000;
• Bringing forward expenditure under the Clean Technology Investment Fund to help businesses invest in energy efficiency and low-emissions processes; and
• A modest rise in defence spending.

However, we are concerned that some measures will increase the costs of doing business and will reduce the incentives to invest and innovate. These include:

• More medium-sized businesses will be required to make more frequent and earlier tax payments, increasing their regulatory burdens and compliance costs and detracting from their cash flow;
• Uncertainties over a large number of new tax "integrity" measures that will need careful working through in very close consultation with industry;
• Increases in a variety of charges on business relating to 457-Visa applications and import processing; and
• Changes to eligibility for R&D tax offsets, that will cut access to businesses with turnover of $20 billion or more from 1 July this year. Larger companies will therefore lose an estimated $350 million in tax offsets in 2013-14, rising to $400 million in 2014-15.

In summarising the Budget Innes Willox said: "While this Budget does little immediate harm, it doesn't provide sufficient confidence in the medium-term path back to surplus and leaves fundamental economic questions unanswered."