Deloitte warns of $69bn collapse in investment

A $69bn collapse in business investment this year threatens to undermine the post-COVID economic recovery, Deloitte says.

A $69bn collapse in business investment this year threatens to undermine Australia’s post-COVID economic recovery, according to Deloitte Access Economics.

Construction and engineering work will sink by more than a third this year, as firms react to the blow from the COVID-19 crisis by reining in spending, a report from the consultancy firm has detailed.

As Josh Frydenberg warned of a $50bn hit to the economy over the three months to the end of June, state and territory governments are preparing to lift social distancing restrictions, and policymakers are turning their mind to the post-pandemic recovery.

Close to three-quarters of firms surveyed by the Australian Bureau of Statistics late last month said they expected the pandemic to hurt their businesses in the coming two months — a dour outlook that will discourage boards and company owners from investing in growth and maintenance.

Yet Deloitte partner Stephen Smith said “business investment will be critical to Australia’s recovery from the pandemic”.

With an uncertain recovery ahead for the economy, Mr Smith warned that investment was likely to “remain weak for a number of years”.

“While the government can and should fund infrastructure projects and investment activity in the short term, reforms to encourage private sector spending in the medium to longer term are equally important to shore up Australia’s future economic prosperity,” Mr Smith said.

The Treasurer on Tuesday reiterated the government’s commitment to “new infrastructure projects, big and small, to ensure our $100bn, 10-year pipeline is maintained”.

Mr Frydenberg also flagged Australia’s internationally “uncompetitive” corporate tax rate as an anchor on new business growth and hiring.

Mr Smith said cutting the corporate tax rate to boost the potential return from investments would help companies regather the “courage” to invest again in a post-COVID environment.

“In order to boost business investment we need to be improving the potential return on investment,” he said.

“Tax reform, particularly the rate of company tax, is one of the broadest approaches that governments can take.”

Implementing “user-pay” systems to fund new projects, such as roads, would also be a worthwhile measure, he said, echoing calls from Ian Harper, a Reserve Bank board member and lead author of a major review into competition policy.

The Deloitte report emphasised that smaller infrastructure projects delivered greater economic return for every dollar spent than larger projects, as well as more swiftly.

Recent analysis by The Australian showed that states and territories face paying $1.6bn more a year to service a combined $140bn increase in debt by the middle of next year.

Mr Smith said the increasing stress on state and territory finances would detract from their capacity to increase infrastructure spending.

He added that “there are concerns about the construction industry’s ability to deliver the existing pipeline of infrastructure projects, let alone a larger and more urgent pipeline”.