Rebecca Archer
Welcome to Navigating the New Normal, Grant Thornton's podcast exploring trends in business and the marketplace. I'm Rebecca Archer, and today I'm excited to bring you a special Federal Budget edition of our series.
You'll hear from the speakers of our Federal Budget Virtual Seminar, Journalist Hugh Riminton, Chief Economist Besa Deda, as well as Paul Gooley, Partner and National Head of Corporate Finance, who discussed the Budget spending and how the allocations will impact Australian businesses. So, what has been delivered, and how will these decisions and spending impact Australian businesses both from a tax perspective and more broadly?
Hugh Riminton
Hello, and welcome to this Federal Budget Virtual Seminar from Grant Thornton as we go through the numbers and have a look at the political implications, the implications for business – for your business – from what we saw from the Treasurer Jim Chalmers, in his first Budget last night. May I start by acknowledging the Traditional Custodians of the land of wherever we meet today, throughout Australia, the connections of those Traditional Custodians to land, sea and community and we pay our respect to Elder's past, present and emerging and extend that to any Torres Strait and Aboriginal Peoples who are watching us today.
So, let's start with who we've got on the panel. I'm Hugh Rimminton, I'm National Affairs Editor with the 10 Network, formally Political Editor for the 10 Network. I've been some covering Budgets, for a good many years now. I'm joined by people far more expert than me though Besa Deda to my right is Westpac’s Business Bank, Chief Economist, and prior to that, the Chief Economist at St. George Bank since 2008. Before that, with the Commonwealth Bank in senior roles for many years, Besa is also the Secretary of the Australian Business Economists Association, and you'll see her regularly in the media.
And to my left Paul Gooley, who leads Grant Thornton's National Corporate Finance Practice and is Head of the Financial Advisory team here in Sydney, specialising and advising clients on mergers and acquisitions, fundraising and divestments across a range of industries and markets.
Let me give you just a quick political view of the Budget we saw last night what the Government is trying to do. And we've got to remember, this is the first Budget of a new Government, you only get one, when a new Government comes in. And in some ways, it's useful to go back to the last first Budget of a new Government, and that was the Joe Hockey Budget of 2014, and the Government led by Tony Abbott, because what happened then informs what's happening now.
When the Abbott Government came in it promised no surprises and no excuses, but set about trying to deal with what Tony Abbott had famously called the debt and deficit disaster. And so, in that 2014 Budget, Joe Hockey produced a whole bunch of things that people did not expect, including higher taxes on the high-income earners for a Budget repair Levy, and also copayments on Medicare and a whole bunch of other things. And it sank like a stone and effectively destroyed the Abbott Government in that first Budget in 2014.
Of course, one of the people watching that was Anthony Albanese. He has been in parliament for a very long time, and he has spoken publicly about wanting to be a two term, at least, Government. He has spoken privately to those in caucuses saying that Labor needs to be in office for three terms. He has looked at the experience of that Abbott-Hockey first Budget; he is determined to deliver no surprises. And so, what we've seen overnight is a Budget that is essentially free of surprises. It may not get anywhere near the amount of work that the country needs done to fix Budget repair. But what it does do, is it’s seen Jim Chalmers address a bunch of election promises that they had to get to particularly regarding things like childcare; it's been an extension and paid parental leave - limited in scope.
There are also some other fundings around housing affordability and social housing. They have gone and kicked out $22 billion worth of coalition infrastructure spending. So, this is all in keeping with the sorts of things that they said that they were going to do before the election. But the Budget in terms of its overall economic parameters, shows there are great difficulties ahead. And the structural deficit is substantial and growing. The two key fastest growing elements are interest on debt, and the servicing of that interest. That is the fastest rising element of the Budget, major element of the Budget. And the other one is the NDIS, which is frankly blowing out at its current rate of growth, 14 per cent per year. That will be a $100 billion plus impost to the Budget every year, within 10 years, unless something happens.
So, there is an enormous amount of work still to be done by this Government or future Governments to rein in spending to get Budget back under control. And it happens at a difficult time in the world, because as we know, inflation is high interest rates are high, people are feeling pressure in the household budgets are going to feel more of that, over the next months and year. Real wages remain down in the short-term. And this has political implications plainly for the Government and what it might want to do. So, there's an overview, I guess, to what this Budget involves, since the Albanese Government got in, it's at a pretty good run, it's remained popular, hasn't really put a foot wrong. But the real work of the Albanese Government started last night, and it'll be interesting to see where it goes from here. I better bring in Besa. What did you make of it?
Besa Deda
I'd agree with those sentiments Hugh. I think that Jim Chalmers delivered on a lot of his promises. There are very few surprises in the Budget. And I wonder if that's about building trust, building goodwill with the Australian public. He didn't veer away from the ugly truth with which is the structural Budget. And really to highlight that, over the medium term, that structural deficit from 2025/26 gets stuck and is quite sticky around 2 per cent of GDP, and as you say, is being driven higher by the interest debt bill, NDIS, as well as other spending on social services, like aged care, health, and as well as defence. Those pressures are very real, and in laying down the Federal Budget, I think Jim Chalmers took the view, well perhaps if we build that trust and good goodwill, then that lays the groundwork for possible future reform to address the Budget repair. I guess it's always tempting for a Treasurer, I think maybe to try and spend some of the windfall. And there was a windfall thanks to the bigger nominal economy, commodity prices up, unemployment, lower than anticipated. And inflation also high, and that's improved the tax intake and helped deliver a better bottom line. But a lot of the improvement in the Budget bottom line is in the near term. It's banked upfront, and then as you move further out, that's when you really see the cost pressure start to drive higher.
Hugh Riminton
It's even worse than they were predicting, you know, six months ago in the in the Budget update that comes immediately before the Federal Election.
Besa Deda
That’s right. And I think it comes back to I think Chalmers has been quite open around those challenges around the structural deficit, Chalmers is also looking to a cost-of-living crisis for many households. So, it was tempting, I think, to spend some of that windfall. But of course, if he spends that windfall, that can then stoke inflation. So, what we saw was that the spending was very targeted, and focused around that cost of living package, seven and a half billion, focusing on that paid parental leave scheme expansion, the childcare, the more affordable housing, making medicines cheaper and trying to get wages growth going. So, it was very targeted, which minimises the impact on inflation.
And like the Reserve Bank, the Federal Government believes that the inflation rate will peak at 7.75 per cent, this December quarter, before improving over the later years. Now, the Federal Government has inflation returning to the target band a lot sooner than the Reserve Bank, or rather, to the middle of the band a lot sooner than the Reserve Bank and a lot sooner than what we think. And in fact, on some of their economic variables, even though they downgraded the outlook, in the near term, beyond two years, they've got key economic variables like GDP, unemployment, inflation, all moving back to the long run averages. And it's questionable if that's going to happen, particularly in an environment where inflation is high, and sticky. The global economy is turning down, many major economies face possible recession, including our own over next year, and there are clouds of uncertainty. So that bit of you know, the out years is also quite questionable I think.
Hugh Riminton
In the Budget papers, he says that of the significant risks, one is that there will be a stronger pullback in consumer sentiment, because of the very pressures that you're talking about. And the unspoken element of that is that we will head not to 1.5 per cent growth, which is what's in the Budget but perhaps something with a minus in front of it. Is that a fear that so much comes down to it now to sentiment? That that If the levers had been pushed too much, particularly just in households, that we could see consumers reacting in a way that then has a self-propagating effect.
Besa Deda
Well certainly the path of consumer spending will dictate heavily the path of economic growth. We think growth next year will be weaker than what the Federal Government is expecting. But we're not we're not calling for a contraction over the financial year or the calendar year. What I would say is that when we're asked to complete consumer sentiment surveys, we tick the boxes that we’re incredibly pessimistic, and we feel downbeat about the outlook, but we're still spending. In fact, you know, consumer spending data shows that retail spending has remained very resilient, particularly on areas of services like travel, cafes, restaurants, hospitality, all of which are largely discretionary areas. So, we would have expected to see a little bit of a slowdown start to come through to consumer spending growth, particularly with the Reserve Bank, already having raised the cash rate from 0.1 to 2.6 per cent. That's the most aggressive tightening we've seen since inflation targeting was introduced. But the resilience is still there.
But we do anticipate that that slowing will come because the RBA does have more work to do in raising the cash rate and bringing inflation down. But I think the RBA is very aware that monetary policy has lags. And that's one of the reasons why it was one of the first major central banks to pivot. So instead of delivering another 50 basis points earlier this month, it pivoted to 25 basis points. The market thinks well, that possibly is too early because what then has transpired is the market believes that peeking the cash rate will occur later next year, which means they've got more tightening that stretched out over a longer period of time to do.
Hugh Riminton
The Budget papers indicate an expectation that the Reserve Bank will go to 3.35 per cent. Do you think that's realistic, some banks are predicting sound bank economists are predicting higher levels, some that are lower?
Besa Deda
So, the range among Economists in the latest survey that's available, sits between 2.85 per cent and as high as just a little bit over 4 per cent. If we have a look at interest rate markets that are reflected from 30 Day cash rate futures, they're suggesting the peak will be 4.4 per cent. So, Economists are more conservative than the market. Look the Economists haven't veered too far away from the neutral cash rate. So, the RBA has suggested that the neutral cash rate is around 3.5 per cent. What's the neutral cash rate? A good way to think of it is that level of the cash rate that's not tapping on the accelerator in the economy, it's not tapping on the brakes. And so, you can see that 3.35 per cent level is not too far from that. Our view is that will be 3.65 per cent in the first half of next year.
Hugh Riminton
What do you make of the revelations in the Budget, that power, the price of electricity is up 20 per cent this year, and other 30 per cent next year, the compound effect being 56 per cent. That flows through everything in the economy and adds to inflation. I think in this year, it’s 0.75 per cent. Next year 1 per cent of the entire inflationary input is a consequence of these gas prices and electricity prices in general. I mean, this is a major problem for the economy, isn't it?
Besa Deda
Yeah, elevated prices are no doubt a challenge for the economy. And we know that when inflation is above the target banner, it's elevated, it's hard to bring it back down. I liken it to toothpaste out of the tube, it's difficult to get it back in. And so, that is a real challenge for policymakers. And to Jim Chalmers credit, he didn't stoke that inflationary pressure through spending big but you know, through ensuring that the spending was very targeted. The risk I think is to the upside for inflation, the risk is that the RBA might need to do more. And the risk is that inflation will be higher for longer, which gets back to my earlier point that I don't think inflation will get back into the band as quick as what the Federal Government is betting on. We've also got an Australian dollar that is down around 62 US cents, it's also fallen in trade weighted terms, which is a measure of the Aussie dollar against the currencies of those economies who do the most trade with. And so important inflation is likely to be higher than what the RBA anticipated just a few months ago. And that will also feed through to overall inflation. And one of the reasons the Aussie dollars down around these levels is because the RBA pivoted but the Federal Reserve hasn't. The Federal Reserve still kept going with 75 basis point rate hikes and is expected to do so again next month when they meet.
Hugh Riminton
There is the long-term question, in fact, a whole series of long-term questions about that structural difficulty that exists in the National Accounts. Put simply, we either have to save a lot of money from somewhere, or we have to tax- build up our tax revenues from somewhere. What is your expectation as to where the Government will turn? And what do you think are the most obvious things that they're going to do to try to correct what's now a genuine threat to the economic wellbeing of the country?
Besa Deda
Look, it's difficult. And you know, the Henry Tax Review was done in 2010, and it seems like a lifetime ago, but there are a lot of good recommendations in that review, a lot of which weren't taken up. So, I expect perhaps, that review might be maybe dusted off a little and looked at a bit more closely. The Government has put in more realistic productivity growth forecasts. So, they've downgraded from the 10-year average to around the 20-year average for productivity growth. So, we've got a more realistic, I think, picture of what the structural Budget might look like over the medium term and long-term. And like I said, I do think that they are looking at possible reform, including tax reform, and that they'll need to do that, I think in order to really, I guess, eat into repairing that structural Budget, which is a real challenge.
Hugh Riminton
I mean, there's no one silver bullet is going to fix up tax reform. But if they were looking at stuff, obviously, Bill Shorten, went to the election in 2019 for Labor with a whole bunch of tax reforms. The voters didn't like it, they kicked it out. So are there obvious ones, we talked about low hanging fruit? Are there any low hanging fruit?
Besa Deda
It's hard to see the low hanging fruit and, you know, recall, with the GST that wasn't accepted, very early on when it was introduced, and then the next Government, you know, tried it again, and it sort of went through. Look, as an Economist, we do prefer the GST to be expanded. So, to include all goods and services, and for lower income households to be compensated for that, and the GST to be raised. That's an obvious one. And that seems to be a cleaner one, but whether they go down that track, and certainly there's been no hint of that, remains to be seen.
Hugh Riminton
We hear from Jim Chalmers that he has this present tense, you always look for the present tense, they have no proposals to change the legislated stage three tax cuts. Of course, you get a new proposal tomorrow to change them, and that's the nature of politics. But right now, no proposals to change them. But the only undertaking he would give last night was there will be tax cuts on the legislated timeframe, and there's wriggle room there for him to produce something else. Some other tax cuts in that legislator timeframe, which don't go as far as what has been legislated and promised. Do you think that's a likely sort of off ramp for him?
Besa Deda
Look, our view is that the stage three tax cuts won't be scrapped. But they will be tinkered at, particularly for particularly at the high end, it will be pared back in some way because it costs a lot. But one thing is that Australia does have a very big over reliance on income tax relative to consumption tax, particularly compared to other major economies around the world. And one of the things that the stage three tax cuts can do is inch a little bit closer to relying a little bit more on consumption tax, which would be a slightly better balance. So, from that perspective, you know, I'm in favour of not scrapping it completely, but can understand that they might choose to tamper, tinker with it at the edges.
Hugh Riminton
And just finally, I guess any changes – a lot now depends on what the opposition does and what the tone of the opposition is between now and really leading up to the next election because they'll have to, for these long-term difficulties. It's not going to happen on one term of Government, it's going to go over a long period. You know, Peter Dutton, is also new to the role of opposition leader, he has a reputation as a hard man in politics. And yet the initial signals were that there might be a willingness on the Coalition to look at things like for example, some sort of updated windfall profits tax in the resources, industry, that there might be some bipartisanship about looking at NDIS and the blow out there. In other words, there might be some cooperative approaches rather than just a simple, you know, combative approach. We've seen so much of how important you think it is for Australia to resolve these questions. In these deep budgetary questions, that there is a constructive approach in the parliament – across the parliament.
Besa Deda
Well, as you say, you know, the combative approach hasn't really helped us in the last decade. And as we can see the structural budget issue and the large challenge that faces us, I think is testament to that. So, I think if there can be more of a collaborative approach, particularly around the really important productive reforms, I think that would be a massive tick for Australia's future and, and I hope that comes to materialize Hugh.
Hugh Riminton
Okay, fantastic. Besa Deda, thank you so much. Can I bring in Paul Gooley now, from your perspective, what did you make of it just as a sort of top-down view?
Paul Gooley
Yeah, I think you were correct in the sense really it's a plan for the next three years. There wasn't much new, there wasn't anything really, that's going to transform business conditions in the interim period. Obviously, there's a Budget next May, and some of the reforms that may go through will come to light there, but there was nothing in the Budget that really is going to change business confidence levels dramatically at present. Clearly, we've still got labour shortages, we've still got supply shortages in certain areas. Business conditions, though, per the recent surveys are still fairly buoyant, along with consumer spending as Besa mentioned, but business confidence is low and that's really looking forward in terms of what's going to happen in 23-24.
Hugh Riminton
It's a curious thing, isn't it that as you say, business confidence is not great, but the business activity is reasonably good.
Paul Gooley
Yes. And I think some of that's coming back out of COVID, and as Besa said, consumers are still spending, there is still stability, I guess, in markets, although obviously equity markets have come off their highs, but there's still a lot of stability there. I think the most important thing for businesses in this Budget was it was responsible, they did return, the money that's come through the commodity price increases, they did return it to the Budget, so we're not going to see initial inflationary issues, we're not going to see a UK style hit to our capital markets, which I think business would have been very happy with if that had occurred, then obviously, the conditions would have would have been quite difficult for business. So, I think that's a very big positive.
Businesses are looking forward - if you look at some of the estimates in the in the numbers, particularly in company tax, it's 3.2 per cent, for next year increase, but a 21.6 per cent decrease in 24. And that points with a GDP number at 1.5 per cent. It's fairly negative trading conditions for corporates. And so, I think the corporates would be looking out there, what are we going to do to get to 23-24? What can the Government help us to improve conditions there, and as you said, there's a big imperative to fix the Budget, and some of those initiatives may target business and make provide more cost to business. So, I think there's a lot of uncertainty for business in relation to how 23 and 24 are going to play out. As you said, a lot of these initiatives are long-term solutions.
So, there's some very good positives around some of the key issues around labour and supply, and infrastructure and construction. But they are long-term plans; they are not going to resolve conditions in the next six to 12 months. Power prices, as you mentioned, is a key input for a lot of businesses. There's nothing in the Budget that is really going to resolve it and a lot of it is outside the control of Government. So initial thoughts are that, yes, good to have stability, good to have a Budget that’s responsible, but nothing here for business apart from some tweaking around the edges is really going to fundamentally change their trading conditions for the next six to 12 months.
Hugh Riminton
You mentioned that drop off in expectation of corporate tax revenues. I just see that transferring to a whole bunch of boardrooms around the country, where I guess a lot of Directors and Executives of companies are looking at that and going that they've feeling that themselves; that profitability is going to come under strain and depending on where the exposures are of course. And in that setting, do you think that there is a risk that that companies will become too risk averse?
Paul Gooley
Well, definitely it will mean businesses will be looking forward, particularly around the lag that's usually occurring from a drop interest rates or an increase in interest rates. So, we would usually see these lags to be anywhere from nine to 12 to 18 months from when the peak conditions start, and when we potentially go into a contraction - we're not calling a contraction at this stage. So, businesses would already be working towards trading conditions and how hard they are going to be. It's a little, I guess, a little uncertain, particularly with a Budget coming in May of what the Government is going to do to try to resolve some of those issues. And, as you said, Budget repair is going to require greater taxes. Is that going to come through corporates?
Part of this Budget, some of the savings in this Budget or some of the additional tax revenue, obviously they didn't increase taxes, but they're going very hard on compliance, they're putting a lot of money. There are some fairly big multiplier effects assumed in the Budget on tax compliance, both for individuals but also for small and medium sized businesses. And I think some of the concern on that would be, whilst it's encouraging us to recover more taxes and to fix the Budget in that manner, that usually comes with a fair bit more compliance cost, a fair bit more regulation, to run small, medium sized businesses.
So, it'll be interesting to see how that actually plays out in the market. But I think Boards definitely will be looking forward to deteriorating conditions and one of the areas obviously, that will be a factor and that is how they employ and how they looked for labour. Labour has been very difficult to come by; there's still a lot of labour shortages around. Whilst I saw the number on wage growth 2.6 per cent, in the private markets for some time now, we have seen wage pressure, we have seen good increases going to our employees in businesses. And you see the RBA minutes I think mentioned that as an early signs of private wage growth increasing and so we have definitely been seeing that for six to 12 months. And that is going to play out into the labour market in the next 12 months as those increases really take position.
So, I think there is some concern for business and to your point, does that decrease investment? There is a lot of investment in this Budget, but it's very targeted to certain sectors, it's not targeted in a broad base manner. Some of the R&D tax incentive schemes were supported again. So, there's a very big positive, but there's not a lot more there at the moment in relation to innovation, apart from longer term, clean energy, innovation, etc. A good $50 million for critical minerals research, which I guess is a very big positive in terms of our resources of minerals. But there's not a broad base support, I guess to support business investment, and usually, that's where business will start to reduce, and that's when conditions, particularly on the labour side, may start to deteriorate.
Hugh Riminton
So, for those businesses for whom a primary constraint is skilled people, there are some medium-term solutions in there – TAFE places a few more university places, particularly in nursing, teaching other sort of in demand professions, immigration is going to go up against skilled immigration. What positives Do you see there for helping that particular constraint on business?
Paul Gooley
Yeah, definitely one of the main ones that we've seen is the immigration obviously, coming out of back of COVID. So the extra 35,000 places is welcomed, I guess, and probably more importantly, there's $36 million to resolve the backlog. Our clients are seeing significant backlogs, I think the days are out in the 80s, for visa processing, etc. So, some of those critical staff shortages are going to be assisted by this, I guess, focus on the backlog.
Hugh Riminton
So, they see the talent, they want to try to get that person across, or all those people across, and they just simply can't get it through the bureaucracy.
Paul Gooley
And we're working in global pools here, and also our major pools of talent coming from, say Europe and the US having exactly the same issue. So, it's very difficult to relocate people in this market. So yeah, I think that's a very big initial positive that we've seen from the Budget.
Besa Deda
We are hearing from our business customers that in recent weeks, in the last six weeks, it's just become a little bit easier to get in skilled migrants from overseas in terms of the fast-tracking of visas. It was much harder earlier on. It's also notable in the Federal Budget, I think, that for this financial year, there's been quite a big upgrade in net overseas migration forecasts. So, it was previously 180,000 and they're now looking at 235,000. So that represents some extra labour supply and the childcare measures that may help the participation rate of parents and particularly women's, you know, where the caring role on average does fall on. So, there were some I think, measures around the edges, I think to help boost labour supply. We're also hearing from our business customers that offshoring is returning. And so, with the economy slowing down, we are expecting the unemployment rate to gradually lift - still represent a pretty tight labour market over the next 12 months. But the Federal Government does have a higher unemployment rate than what we're expecting for next year.
Hugh Riminton
I mean, one of these things about immigration, that puts more issue on the housing stock. And that's another big focus of this Budget. Do you think that, you know, they've got this headline of “A Million New Houses Over Five Years from 2024.” It's not quite as great as it sounds because a country of this size produces housing in the normal course of events. However, there are some initiatives in there. Do you see benefits there, you know, for business to take advantage of this new accord that is being trumpeted by the Government that is going to deliver more affordable housing around the country?
Paul Gooley
Yeah, definitely. There's a boost in terms of the construction sector. I guess one of the concerns would be does that put more pressure on input supplies and also labour in that sector, which has been extremely tight. Although we are starting to see some reduction in in some of those, particularly on key input prices, like steel, etc. We are starting to see a softening in those prices. So that could cause issues. We have done a little work in affordable housing; it is it is definitely a key requirement. And I think the population does see that as a key requirement. So, we would support further investment in there. I think that million-dollar comment may come back to bite Chalmers – that's probably the worry. That concerns me a little bit. But just knowing how difficult it is, indeed, this construction of houses, I think there's a few initiatives around 10,000, up to about 50,000 that the Government is going to control. And they are still fairly large numbers when you look at what is required to build affordable housing.
So that is a good initiative and something but I think the million houses initiative is going to be obviously difficult to achieve in terms of affordable housing. And it will, it will potentially play some constraints on construction, although we may be going into a cycle where construction may need a bit of a boost. And so, we've got the National Housing accord, we've also got a lot of the infrastructure, clean energy technology, that's going to boost investment. So it may come at a good time where the market starts to turn down in terms of construction, and this will be a boost for that. So, we would see that as a positive, I think just on labour markets as well, the childcare initiative, it is going to be a positive, I guess. We have gone post COVID to a very flexible working environment in most firms, and this can only improve that ability for flexibility. It's very important to have greater workplace participation, particularly around diversity.
And the paid parental leave as well – Grant Thornton was a very early adopter in 26 weeks, so we're a big proponent of the indirect benefits, whilst it may provide some short-term costs to business, and we've definitely seen that in our business, the benefits, the indirect benefits of having greater workplace participation, greater retention and development of your workforce outweighs the cost to business. So again, very positive announcements around the move to 26 weeks. So those initiatives should have some effects. I think the downturn in economic conditions will probably also fix the labour shortage as Besa just mentioned there.
Now, I think it's going to more economic conditions will open up the labour market a bit, and opening borders. But clearly, these are longer term initiatives that are important that the TAFE places and the university places, again, they are longer term skill benefits to employment, but they're not things that are going to really have any effect in it for business, at least for the next two or three years.
Hugh Riminton
Just want the housing thing Besa, the accord, there's more details we need to find out about this system.
Besa Deda
Yeah, so it's scant on detail isn't Hugh.
Hugh Riminton
One of the elements they've gone to a superannuation as being a party to this. And I just wonder a lot of people out there looking at their superannuation balances and they've gone down over the last 12 months. And now there is this view that Superannuation is going to use the vast amount of money that's there under, you know, under management, somehow rather engaged in this process of producing affordable and social housing. How do you think that's going to work? Do you anticipate pushback that the old Bill Kelty, who was one of the architects of course of the Superannuation System said, “it has one purpose and that is to provide the best possible retirement income for the workers of Australia.” It's now going to essentially what might be described as kind of a social engineering, you know, general community good, but that's shifting a little bit, the purpose of it.
Besa Deda
There might be some pushback, because I would envisage that without incentives the return on building housing, affordable housing, wouldn't perhaps be as great say over, you know, the medium to long-term that the return from a share market or other major asset classes would deliver. So, there could be some groans from the industry, or, you know, the institutional investors around that. But there wasn't a lot of detail on how they might be engaging those investors in the Accord with Government, or how they might be incentivising them to participate. So, I imagined that might come down the track, I think they'll have to incentivise in some way. Otherwise, I think there could be groaning from that source.
Hugh Riminton
As the argument might be made, there's not enough in it for the people who actually hold that money. We saw the disastrous and short-lived Liz Truss Prime Ministership fall apart in Britain, because the Government was doing, in a fiscal sense, what the central bank, the Bank of England was doing, in direct opposite. And one of the things probably, that struck me, it worked to the advantage of the Albanese Government, of Jim Chalmers, particularly because he was able to say, have a look, folks have a look over there. It's not great.
So therefore, he was able to put up an argument that essentially no one could dispute. And that is, that you can't give money away at a time when you're at the same time trying to, you know, constrain the economy. How long do you think that lasts? At what point do you think with all the Budgetary pressures, there are also political pressures and political pressures will come to bear, particularly on a Labor Government to look after those at the bottom? At what point does that imperative shift a little bit when the political imperative, heading into the next election, is going to be to do something for people on the bottom? And that there's a risk at that point, that we again, lose the discipline that was shown last night?
Besa Deda
Look, I don't think we, I don't think it's going to shift in a real hurry. One, because it's going to take time for inflation to get back to the band. So, the Reserve Bank has to keep tightening rates. And we think that'll be a feature of 2023. We could say rate cuts come in 2024, or 2025, there's certainly people in the market that are forecasting it as early as late next year. But we've still got to get through a lot before, you know, we can see that as transpiring. And in particular, we need to see concrete signs that inflation is turning around, which we don't yet have in Australia. So, I think until you have concrete signs that inflation is coming down, and the RBA has finished its rate hiking cycle. I don't think monetary policy and fiscal policy can be working in different directions.
And I think that was part of Liz Truss’ problem, that the levers were working in different directions, uncertainty and volatility in financial markets is already quite high. It's higher than the average of the last year. It's higher than the average over the last ten years. And we've seen very wide trading ranges in bond markets and currency markets. And so, I think the Government and the central bank have to be working more closely together and more cognizant of each other's policies.
Hugh Riminton
So, they're pretty much in sync as a consequence of this? There's a reasonable mesh there.
Besa Deda
Look in our Budget note last night, we've got a section that says Budget winners and in the first paragraph we said its families and in the next one, we said it's the RBA. Because Jim Chalmers didn't make the RBA’s job harder in bringing down inflation by keeping spending targeted, but also baking most of the windfall back into the Budget. In fact, you know, over 90per cent of the windfall was banked.
Hugh Riminton
What are the markets doing? What are the capital markets doing?
Paul Gooley
Overnight they were pretty stable actually. I had a look at it after the Budget, both currency and equity markets, the ASX futures were quite steady. And I guess it just talks to Besa’s comments there were, you know, it was responsible from that perspective. I think the markets would have been spooked if there was large spending that wasn't covered, if those savings weren't bank. So, I think that, and my perspective, because a lot of this was a setup Budget for the May and the longer-term plan, a lot of these longer term initiatives and election promises. The biggest thing for business here was that we've got stable financial markets, we've got stability in terms of that the outlook from that perspective, at least until the May Budget. So, and to be honest, I think as we've seen, businesses are looking forward at potentially deteriorating conditions. So, the last thing they would have needed was instability in markets.
Funding costs are still very low comparatively. They will obviously increase, but we're not seeing major issues on debt markets at the moment. Equity markets are obviously substantially down from their peaks but have stabilised since the last few months. So, the markets, I think will take this in their stride, and we'll be really looking at I think the international scene is probably more important than international markets at the moment, you see what's happening in Europe and the US and the tightening cycles, and inflation seems to be accelerating rather than the decelerating.
So, I think that's a concern that affect our markets here. Obviously, we'll get inflation through potential imports through the dollar, particularly the US keep tightening like this, you know, the dollar could keep going down. And that's going to be quite difficult on the import side, obviously, it'll help our exports. So, I think the markets will look at this as expected, this is what we expected. And let's get on to looking at how we're going to keep trading, what's the outlooks and particularly what's going to happen in international markets.
Hugh Riminton
That's consistent, I guess, with Jim Chalmers comment, that it's responsible and that no surprises, I guess. Let's take a few questions which are coming in to us. One question is, do you think there's enough in the Budget to incentivise innovation within businesses, perhaps, Paul?
Paul Gooley
Well, so there is support in the Budget papers for the R&D tax incentive, which is one of the main attributes of innovation. So, I guess that’s a positive. There is money - I think it's a billion dollars for sovereign manufacturing. Not sure there's a lot of detail there yet on how that's going to occur, but there are some incentives there. But overall, I think the incentives in the Budget for innovation haven't really been fleshed out yet. I think that's part of probably what we're going to see in May. And at the moment, I guess it's probably more around trading conditions. So, we haven't seen a lot of additional incentives, includes a bit more compliance, particularly in international businesses as well. So, I think, I guess a lot of the innovation has been focused probably more on the clean energy side, so pools of money there for research and development and some initiatives in that space. But the broader business, I think, innovation side, and the tax incentive, size pretty much hasn't really been changed.
Hugh Riminton
There's a lot of money going in, as you'd expect. This is a huge structural transition to the, I think it's $20 billion, for the Rewiring of the Nation, that transition, there's got to be business opportunities there?
Paul Gooley
Definitely, I think we would have expected on the EV side that the funding for charging, we're definitely seeing State Governments starting to ramp up funding for charging. So, we're seeing that. There's solar batteries, for housing, and storage, and solar panels for housing. So, I think those are all positives. But the real spending, and again, this, these are long-term plans, so and they may have some immediate well - they won’t resolved power pricing, so that 56 per cent compounded price increases, these initiatives, obviously can't do much about those now.
I guess the plan is to obviously, build the infrastructure so that we can get more renewables online and be cheaper. But there is an enormous amount of investment. So, I guess from a business perspective, that's facing that investment, there's some very large opportunities, particularly around, you know, the construction side. And on the retail side, there is as well. So, I think those are all very, very positive, but they are longer term investments in trying to reduce power prices. And I think that's going to be a major issue for businesses and something that the Government doesn't really have a lot of levers to control, particularly in the short to medium term.
Hugh Riminton
A question regarding freight costs being on the rise – there's extra pressure on importers and exporters, will the Budget help alleviate those costs for those businesses? Did you see anything there Besa?
Besa Deda
Well, in terms of freight prices, they've actually been coming down. So, when we look at a range of global shipping prices, they suddenly come down a long way from their peak. You know, I think the shipping companies have become a lot smarter at, I guess, anticipating what demand will be and matching that with capacity. So, I think that shipping prices, while they might have a little bit more room to fall, we may actually not see those prices returned to pre-pandemic levels because the shipping companies have become savvier, and they might want to protect a bit of a wider margin.
Particularly in Australia, where shipping lines collapse to three companies. So, we are seeing that flow through. We are hearing from our business customers, that it is a bit easier to get supplies, you know, supply of materials in; the delivery times have improved. I'm not saying they still don't have to order well in advance, but it's certainly a lot better than when it was late last year. Also, what the data is showing, what we're hearing from our customers is that because they've been ordering really early, just in case, they can't get it on time, or just in case it's not available when they need it, stock at warehouses is really full.
And in fact, in the wholesale trade industry, it's just off a record high in terms of the amount of inventories. So, one of the questions I have in my mind is, well, if consumer spending slows too fast, and you know, global supply chain disruptions keep improving, as global consumers move away from spending on goods, which is what we did during COVID. And back to services, and we're certainly doing that we're taking our holidays overseas and eating at the cafes and restaurants and take advantage of our freedom post COVID, then will they have to discount that stock to move it?
Paul Gooley
That's a very good point.
Besa Deda
That inflection point.
Paul Gooley
It's a good point. Our clients have definitely seen very high stock levels. And I’m also seeing capacity in the freight system. So, and I think a lot of that is coming into Christmas, a lot of people have stocked up and so there is free capacity and freight costs are down substantially. If you look at the container prices, they are down substantially. So, I think that is a large risk. If consumer spending continues to hold up, it'd be hard to talk down consumer spending given how resilient it's been over many periods.
But you would expect that's got to reverse at some stage, that sort of six to nine month lag usually plays out. So, if that does eventuate, I agree there will be stock, there will be some discounting, particularly the February-March period, again, is usually difficult for retailers, we could see that again, with large stocks and large discounting that's going to have to occur and these interest rates will have to at some stage play out into consumer spending.
Besa Deda
We think they'll bite much more over next year, particularly with 66 per cent of households that have a fixed Home Loan Rate, they'll be rolling off by the end of next year. So increasingly, as we move through the rest of this year, next year, you're going to have more households rolling off fixed Home Loans onto these higher variable rate loans. And also, the RBA has more work to do. We think they will need to take the cash rate to possibly as high as 3.65 per cent. But as I said earlier, there's an agreement among markets, well, there's a consensus among markets and financial markets that there is more to do, it's just how much more does the RBA need to do?
Hugh Riminton
It struck me as I went to the news conference with Alan Joyce recently in which he was announcing this return to larger profit than was expected. And that was essentially being driven by the you know, the factors that you talk about that people have come out of the pandemic, and they really want to travel, they want to travel for their own personal growth. But there's also a lot of pent-up family travel where people haven't seen grandkids, you know, we're a migrant nation, there are people who feel as if they need to make reconnections with families. But that's incredibly expensive, hence the profits for the airlines at the moment. And that itself, absorbs and takes out of people's capacity to discretionary spend, I would have thought, if you're spending a lot of money to go back to home countries.
Besa Deda
I would also say is if we have a look at our short-term arrivals, they're turning up much more higher, you know, sharply higher, same with students, same with immigration, those numbers are all recovering. I've just returned from Europe and the number one message I got from Europe was the tourist season started earlier. It's a lot bigger than what they'd seen in a really long time. And it hadn't it finished when normally it would have been finished by the time, you know, by around mid-late September, and it hadn’t. And I do wonder well, we're now heading into our summer here in Australia and that pent-up demand around the world, I think some of that will flow over into Australia. And those tourists will be spending money and that could support some of the consumer spending, or at least provide a little bit more resilience to the cut spending consumer spending growth outlook in the short-term.
Hugh Riminton
One of the other known unknowns I guess I can use that or phrase that Jim Chalmers pointed to was the cost of weather related events. So, the Budget contain the $3 billion, which I presume they shoehorned into the Budget in quite the recent past and the lead up to the Budget, bearing in mind what's happening in the Riverina flooding and other parts of New South Wales as well. Obviously, that money is involved in a lot of recovery, a lot of infrastructure, there's a lot of roads and bridges that have been washed out and damaged for business, even as the Government winds back on those Coalition promised infrastructure, particularly regional infrastructure, projects. Are there other opportunities? Do you think that, emerge from the fact of these weather-related events?
Paul Gooley
Yeah, well, obviously, you can't predict the weather-related events. But clearly, the construction sector, particularly the civil construction sector, will have work to do in those particular regions. So, it is notable that there was a lot of money shifted in the Budget in terms of the former Coalition grants, I guess a lot of it was actually water related, which is interesting. And I guess we don't have a shortage of water issue at the moment. So, a lot of those projects have been either moved or shelved, and a lot of them were regional. But then again, the spending is gone. I guess from an overall perspective, the spending has just been shifted into things like this and other areas.
So, there'll be some short-term benefits to some construction companies, I would have thought through that. But I guess the other side to that is the inflationary pressures of, of groceries, etc, will that have a material effect on inflation, etc. That's probably a wider discussion, but there will be a short-term hit. I mean, the weather is interesting. We've obviously gone through the La Niña, I think there was some direct yesterday to say that might continue for a few more months. But you would expect if things played out that we may go into a drier period, as is a customer and therefore, they will have different challenges, but at least I guess some of these construction costs, these construction spins will prop up some of some of the industry, I guess, as we talked about, potentially downturn in 23-24.
Hugh Riminton
One of the things which the Government made much of was its crackdown on multinational tax compliance, getting tax income out of the multinationals. The original promise was that would bring in about $1.9 billion, the Budget figures show it'll be less than half of that. So, does that indicate that that's a bit of a dud?
Paul Gooley
Well, it's always politically popular. And obviously, anything that can increase tax revenues from foreign multinationals is important from a Budget perspective and overall Budget perspective. I guess, we need to look at the detail. And some of our tax experts will follow this and have a look at the detail, because some of these measures sometimes have a catch all. And so, what you don't want to see is foreign investment effected because of the rule changes. Some of them are just really working in sync with the global changes that are occurring and the requirements to get better tax on intangible assets, etc. To have a look at the thing, capitalization rules and the like. So, I guess positive in relation to a generation of more tax revenue, I guess we'll need to look at the detail to make sure that it's not going to be a disincentive for foreign companies to invest in Australia. And that's probably the last thing we need if we're going into a bit of a contraction.
Hugh Riminton
What's your view on the multinational tax measures?
Besa Deda
I think that's one of their revenue raising measures. And you know, they had a raft of measures where they're trying to raise a bit more revenue, and put that towards the structural Budget repair.
Hugh Riminton
It’s not that much.
Besa Deda
No, it's not that much. But it's a little bit of something. I guess what I was thinking was that just like, the tax intake will be smaller going forward for our Government because the nominal economy is shrinking. So, the nominal economy in Australia is set to shrink from 8 per cent, this financial year, to contract to minus 1 per cent. In the following financial year, that's also facing other economies around the world. Company earnings will get tougher in a global economic environment that has dark clouds over it. And so that might be part of the reason why some of that tax in intake might have been downgraded, given the economic conditions around the world and the earnings prospects for companies in the major economies.
Hugh Riminton
We're almost out of time, I'd be interested to get your view, on a couple of, on essentially, the key problem. And that is that if you look at the five areas, which have been nominated by Jim Chalmers where costs are rising ahead of you know, the general economy, health and aged care, NDIS, Defence, the servicing of the debt. They need to rein that in as much as they can, but then need more income from somewhere or to find other cost savings somewhere else. It's not obvious where this cost savings come from. So what is your sense of it looking now over the next couple of cycles, electoral cycles, what is Australia going to have to do to bring its books back in order?
Besa Deda
They're going to have to lift productivity reform in order to really address that structural Budget issue. We talked about innovation a bit earlier, spending on R&D, spending on innovation is really dropped away in Australia relative to other countries. We've dropped in, in terms of our ranking on how well we do for business dynamism. You know, how easy is it for businesses to form, how easy it is for business to exit the red tape? You know, it's a very complex issue productivity, but there really, I guess, got to bite the bullet and try and start, I guess, pushing in that reform over the next few years, because the issue really starts to grow from 2025/2026 beyond. So, while the issue is still there, in the near term, those cost pressures really blow out beyond the two years, particularly when the nominal economy starts to shift down again. And we don't have, you know, higher commodity prices, lower unemployment, and improving economic growth delivering a revenue windfall to the Budget bottom line.
Hugh Riminton
What's your thoughts?
Paul Gooley
Yeah, I agree. I mean, I there's not many levers apart from more broad-based taxes, which I guess we would support as well. But that's, that can be difficult to implement. There's not much else they can do apart from trying to incentivise growth and grow, grow our way out of the structural deficit. So again, business does get hampered by the compliance cost. They do get hampered by the regulations. And, so anything that can be done to free that up in terms of just the day to day compliance, also the way they employ people, some of the taxes that are involved in that. I mean, there's a whole raft of, I guess, initiatives, some of them are more difficult than others.
But, again, we need to find ways to do that. I do think that part of their Budget repair will pay will come through stage three, there's no doubt that that that will be one of the key parts to raise additional capital, additional funds. But we do need to get for more fundamental structural reform. I mean, even corporate tax rates, obviously, we've had the reduction down for the small businesses to 25 per cent. But clearly, we need to be more competitive on that and a whole range of different productivity measures. So, they are longer term, and you probably need a couple of term Government to really push some of that through. But in the short-term, I think it's really businesses bunkering down and see how they can, can trade through this and hopefully, you know, the consumers will maintain their spending, and also, as you said, there'll be more immigration, more foreign tourists. And some of this infrastructure spend will start to spur, it gets better trading conditions for some companies.
Hugh Riminton
So, we've got a short-term slowdown, whether it's a short-term short or medium term slowdown that's in the in the figures and a lot of work to do in the long-term. It’s been really great to talk to you both Paul Gooley, Besa Deda thank you so much. Thanks for joining us. I'm Hugh Remington. Have a great day.
Rebecca Archer
Thank you for listening to our special federal Budget edition of Navigating the New Normal. We hope you enjoyed a deep dive into the Budget spending and the implications it will have on Australian businesses.
My name is Rebecca Archer, and if you liked this podcast and would like to hear more from the series, you can subscribe to Navigating the New Normal podcast by Grant Thornton Australia on Apple podcasts or Spotify.
