More Victorian businesses go bust as interest rate rises hit hard

Businesses are pleading with the state government to avoid inflicting further tax pain in the upcoming May budget, with new figures showing a sharp jump in the number of companies pushed to bankruptcy by soaring interest rates and other cost pressures.

Australian Securities and Investments Commission data reveals the number of insolvencies recorded in Victoria leapt to 2372 in 2023 – up 29 per cent on the previous year.

More than one in four, or 28 per cent, were in the construction sector. A further 11.3 per cent were hotels or restaurants, while 8.4 per cent were retail businesses.

Although Victoria’s jobs market remains tight, with unemployment still close to the lowest level for decades, the increase has added to worries that the state economy is in danger of buckling under the strain of 13 consecutive interest rate increases.

Business leaders are warning the state is facing a tough year, with consumers keeping their hands in their pockets against a backdrop of global economic uncertainty.

“You have an economy where most people have less to spend, driven by higher interest rates, mortgage stress and the rising cost of living,” Victorian Chamber of Commerce and Industry chief executive Paul Guerra said.

Victorian Chamber of Commerce and Industry chief executive Paul Guerra.Credit: Penny Stephens

“As they spend less, the liquidity and cash flow issues that the business is facing increases, and their ability to service debt goes down, and then as a result, they’re going out.”

Other states are facing similar pressures. In NSW, the number of insolvencies recorded by ASIC increased by 48.3 per cent in 2023, while Queensland recorded a 45 per cent jump.

Guerra said some medium and large businesses were also struggling with high land and payroll taxes and Workcover premiums, warning the added pain would ultimately be passed on to consumers. He urged the government not to impose new taxes in the upcoming May budget.

“If they can’t pass that on, then it starts to impact their profitability, and if they’re being squeezed by supply chain costs and staff costs, it just adds to their inability to get through. They cannot absorb increases in taxes.”

The rise in insolvencies coincided with 13 consecutive interest rate hikes over about 18 months, with the Reserve Bank lifting its cash rate from a historic low of just 0.1 per cent in May 2022 to 4.35 per cent by November last year as part of an aggressive campaign to stamp out high inflation.

Businesses, particularly those in the construction sector, have also been buffeted by rising prices for raw materials, supply chain issues, and more recently by weakening demand as cash-strapped consumers keep their hands in their pockets.

Greg LaManna runs a South Yarra-based specialty greengrocer on Chapel Street called LaManna & Sons, employing about 100 people. His father migrated to Australia from Italy in 1948 at the age of 16, eventually scraping together enough money to open a fruit shop, before getting into the wholesale fruit and vegetable business.

LaManna, who set up his current business about six years ago, isn’t surprised the number of insolvencies is going up. He warns cost pressures, rising wages, higher interest rates and the growing burden of government taxes and regulations have made it increasingly difficult to turn a profit.

South Yarra specialty food store owner Greg LaManna, with daughter Kayla and son Brandon, says the cost of doing business in Melbourne has risen sharply.Credit: Chris Hopkins

“Because of the rising cost of doing business, people in Victoria can’t make money,” he says. “So the only way out for some is to run their business down or as a worst-case scenario even close.”

LaManna said payroll and land taxes, along with WorkCover premiums, had become so onerous that some businesses were being forced to sell assets to pay their bills, while rising interest rates and a work-from-home ethos had also cut spending.

“We really do care about not only what we do, but what Melbourne is all about,” he said. “But we are wearing down. We used to have a national wholesale business and our favourite state to do business in was Victoria. But for us it’s lost its charm.”

Brad Walters from credit-monitoring firm Equifax said although the increase in insolvencies in Victoria over the past year as a whole had been lower than NSW and Queensland, data for the final three months of 2023 suggested a more recent acceleration.

“The uptick in Victoria was very much around the hospitality industry, as well as construction and retail, he said. “On the basis of preliminary numbers for January, it looks as though that trajectory is going to continue.”

A survey of company bosses by the Australian Industry Group found optimism about the outlook for the year is now at the lowest ebb since the mining boom ended more than a decade ago, with many warning of rising cost pressures and anaemic demand.

Australian Industry Group Victorian head Tim Piper said Victorian businesses were bracing for a year of uncertainty, compounded by cost pressures such as rising wages and taxes.

“Victorian businesses are looking to see how they can reduce their costs,” Piper said. “Those types of things are affecting their investment decisions, affecting their employment decisions.”

Treasurer Tim Pallas recently ruled out any major increases in taxes, but suggested there could be targeted tax changes around the margins, warning of a “very, very tight budget”.

“Since the last budget, we’ve had multiple increases in interest rates. We’ve seen that our construction costs continue to mount as a consequence of an overheating infrastructure delivery pipeline,” he said.

A spokeswoman for Pallas said more than $21 billion had been provided in business support during the pandemic to keep insolvencies at historically low levels. “Business insolvencies are now returning to more normal levels,” she said.

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