Federal government punts on investment boom and surge in company tax receipts
Non-mining business investment is expected to reach a 12-year high in the middle of next year, supported by a strong economic recovery.
Strong corporate balance sheets and a significant economic recovery out of the Covid-19 pandemic are expected to drive business investment to a 12-year high by mid-2023, with the Morrison government banking on a surge in corporate tax receipts.
Budget papers painted a bullish outlook for the economy despite rising energy prices from the war in Ukraine, with annual non-mining business investment forecast to surge by 7 per cent this financial year and 9 per cent the following – reaching just over $200bn by June 2023.
The investment boom is expected to peak in the June quarter of 2023, when non-mining business investment will climb to its highest quarterly share of the economy since 2011.
Non-mining capital expenditure expectations, the budget papers show, show a rise to about $105bn in the same period.
But the Business Council of Australia has been more concerned, with the peak corporate lobby earlier this month releasing a report authored by consultancy Pottinger pointing to a decline in capital investment as a proportion of GDP. The report said this had “declined significantly over the last decade, reaching the lowest level observed in 60 years in 2019”.
BCA chief executive Jennifer Westacott said business would be pleased with major spending in skills and training – but additional measures were needed to boost investment in the long term.
“Long-term business investment remains the missing link,” Ms Westacott said. “The budget shows a severe business investment decline in the outer years coupled with GDP growth back to 2.5 per cent – that is not the basis of sustained wages growth.
“We need to permanently make Australia a more attractive investment destination and a more competitive place to do business, that’s how we deliver sustained, higher wages … both sides of politics agree we need to deliver a business-led recovery.”
The government’s election-eve commitments – and hope of returning the budget to surplus – will be supported by higher-than-expected corporate tax receipts, the budget papers show.
Company tax receipts have been revised up significantly in 2021-22 and 2022-23 largely as a result of elevated bulk commodity prices increasing profits in the resources sector, but this strength is expected to taper off in later years in line with the assumed decline in iron ore and coal prices,” it reads, noting a $10.8bn upgrade for the coming financial year compared to forecasts contained in the mid-year financial outlook released late last year.
There continues to be considerable uncertainty around the forecasts for company tax receipts,” the budget papers read. This is partly due to substantial uncertainty around the outlook for the economy, particularly given commodity price volatility as a result of the Russian invasion of Ukraine, as well as uncertainty around the extent to which companies will use losses incurred during the Covid-19 pandemic to offset future profits.”
In recent quarters, pandemic restrictions and ongoing supply chain disruptions for capital goods like cars have weighed heavily on non-mining business investment.
However, leading indicators now suggested that these factors were beginning to ease, with the latest pandemic wave not anticipated to have a significant impact on investment and business confidence rebounding quickly after case numbers peaked.
In the mining sector, investment is forecast to rise by 0.5 per cent in 2021-22 and 9.5 per cent in 2022-23 before scaling back to 1.5 per cent in 2023-24.
Investment in iron ore is continuing in order to maintain production capacity, while investment in liquefied natural gas is expected to lift over coming quarters as construction work starts on recently announced projects.
More broadly, the Australian Bureau of Statistics is forecasting the highest level of mining investment since 2015, but the overall response is expected to be disciplined because the rise in commodity prices after the Russian invasion of Ukraine is likely to be temporary.
The optimistic economic outlook was invoked by Josh Frydenberg to claim that the nation’s economic recovery was leading the world – faster than the US, the UK, Canada, France and Germany, among others.
More Australians were in work than ever before, he said, with the unemployment rate now forecast to reach 3.75 per cent in 2022 – the lowest rate in almost half a century.
The 2021-22 budget deficit was also anticipated to fall from $99bn at the time of MYEFO last December to $78bn, even with extra spending.
Deloitte Access Economics said the deficit had shrunk “stunningly fast” and was already back in a range that the nation had often seen before.
The time was right, it said, for a wind-back in policy, such that the current emergency levels of support should “disappear fast”.
“And that’s happening: federal spending fell by a record 10 per cent in the year to January 2022, and the cash underlying deficit over that same period is already down to a quarter of the $204bn peak it hit in early 2021,” the consultancy said in a report this week.
“But even with Covid costs now much smaller, policy settings are still highly supportive at a time when they no longer need to be.
“The RBA should tighten next, and the government shouldn’t ease.”
While official rates are seemingly stuck at 0.1 per cent, other central banks have started to lift their policy rates in response to entrenched inflation.
Deloitte said the RBA’s policy settings were more extreme, and the politics of adjusting them were much easier.
Further, the process had already begun with fixed-term mortgage rates “roaring up” since the RBA abandoned yield curve control in late 2021.
Deutsche Bank earlier this month joined the parade of pundits to bring forward its expectations of the first rate increase since 2010.
The investment bank said the RBA was likely to hike in August, with follow-up increases in September and November and the cash rate ending the year at 0.75 per cent.
“We think the significance of buffers built up over the past two years will give the RBA confidence to respond to strong inflationary data as it comes through over the second half of the year,” analysts said.
As for budget policy, Deloitte said it was definitely time to stop any further easing, otherwise fiscal and monetary policy would end pulling in different directions, leaving “one foot on the accelerator and one foot on the brake”.
Amid a stronger economy and buoyant commodity prices, the Morrison Government upgraded forecasts for profits in the resources sector, mainly due to strong non-farm commodity exports.
Company tax receipts were expected to take off, surging by $9.8bn over the next four years to 2025-26, although they were expected to taper off in later years due to the assumed decline in iron ore and coal prices.
There was a lot of uncertainty, however, about the outlook for commodity prices, particularly with the volatility in prices as a result of the situation in Ukraine.
There was also doubt about the extent to which companies would use losses incurred in the pandemic to offset future profits.
However, tax policy measures flagged by the government were expected to have an impact, lifting company tax receipts by $600m over the four years to 2025-26.
The increased revenue – after a significant investment in the Australian Taxation Office’s capability – would flow from an extension to the tax avoidance taskforce on multinationals, large corporations and high net-worth individuals.
As a result, the government was budgeting for a $2.1bn increase in total tax receipts over the four years to 2025-26.
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