Economic battlelines set as business investment surges

Handing out taxpayers’ or borrowed money to stimulate an economy is easier for any government than creating conditions that encourage business investment, which is the harbinger of sustained economic and jobs growth. Small businesses and company boards put their money on the line investing in new plant, equipment, enterprises and staff only when they are confident of a reasonable return. As Reserve Bank governor Philip Lowe said in March, there is “no magic ingredient for boosting business investment”. Scott Morrison and Josh Frydenberg can take satisfaction from the fact on Thursday, when the Treasurer releases the mid-year economic and fiscal outlook, it will show an 8.5 per cent rise in business investment in the non-mining sector this year. That will be followed by an 8 per cent rise next year, taking overall non-mining business investment to a record $200bn in 2022-23. That is well above Australia’s long-term average. It is remarkable after the Covid-19 pandemic created the biggest economic shock since the Depression. The mining investment outlook also has been upgraded to its best level since 2015-16, with major investments in iron ore and liquefied natural gas.

The government’s competitive taxation settings, including instant asset write-offs and generous depreciation allowances, have been crucial to the turnaround. As Dr Lowe said in March, business investment also depends on businesses having confidence that the economy will grow and that there will be demand for their products and services. Stable, predictable regulatory regimes were also important, he said, as was access to finance on reasonable terms. On those measures, Australia is clearly ticking the right boxes.

In his past two Covid budgets, Mr Frydenberg has summoned the power of aspiration to create the conditions for a recovery led by the private sector. The strategy is paying dividends. MYEFO will show an $8bn forecast improvement in the budget bottom line, despite the Delta downturn in the September quarter. The improvement is due to booming personal income and company tax revenue. As more Australians return to work and come off welfare, JobSeeker payments are already $1.2bn lower than projected in the budget in May. Such progress should not be taken for granted. Victorian budget figures released on Friday showed a deficit blowout in our second-largest state, despite surging property taxes.

The Morrison government, understandably, is preparing to fight the coming election on the economy, not only because of the budget bottom line but also because growth, productivity and increasing revenue will fund the health, education, childcare and disability support services Australians want, without higher taxes. Non-mining investment as a share of the economy, Mr Frydenberg points out, is 35 per cent higher since the Coalition won office. That is a vital trend for long-term diversification of the nation’s economic base and job opportunities across the manufacturing and services sectors, especially in industries such as construction, transport, postal and warehousing, retail and wholesale trade, and media and telecommunications.

MYEFO also will address long-term skill shortages, a problematic constraint on expansion. One of the most enduring economic impacts of Covid will be a smaller overall population, with 1.5 million fewer people after 10 years than expected before the pandemic. Net overseas migration shrank by 100,000 people in 2020-21, and population growth has fallen to its lowest rate in a century, the government’s Population Statement showed last month. The nation’s falling birth rate is a concern, as former treasurer Peter Costello points out. We need a younger as well as a larger population, as he says.

Mr Frydenberg says MYEFO will estimate that net overseas migration will be 120,000 higher across the next two years than forecast in May. The newcomers will increase the skilled workforce in sectors facing shortages and boost consumption, fuelling growth. Measures such as temporarily allowing international students to work more than 40 hours a week in supermarkets and in aged care, and doubling the Pacific Workers program, will help. Mr Frydenberg is determined to stick to the government’s fiscal strategy of reducing unemployment to below 5 per cent. Doing so, as he says, is more than an economic objective. It is “a societal one because there is dignity in work”. If the government is returned, it will need sustained fiscal discipline to repay the deficit, which is set to be more than $40bn in MYEFO. Federation reform will be another key challenge, as will productivity improvement.