Businesses hitting pause on investment amid of uncertainty
Businesses are delaying or cancelling investment decisions due to rising uncertainty in the economy, due to an unclear policy outlook.
The economy is entering a period of rising uncertainty that will sharply weigh on business investment, with companies facing slowing demand, escalating costs, and an unclear policy outlook.
Data from Deloitte Access Economics reveals a marked shift in sentiment, with project investment up over the past year, yet broader trends pointing to caution as businesses delay decisions. The Economic Policy Uncertainty Index has more than doubled since early 2024, signalling growing concerns over inflation, interest rates and global instability.
Deloitte associate director Sheraan Underwood said this heightened uncertainty was stalling economic growth by delaying household spending and business investment.
“The slowdown in the Australian economy has hit business revenues. This has particularly been the case for businesses reliant on discretionary consumer spending such as those in the hospitality and retail trade,” he said.
“This challenging operating environment of decelerating demand and rising costs is starting to chip away at profits.”
Despite not expanding in recent months, the value of Deloitte’s Investment Monitor database remained about 15 per cent higher over the year and included $505bn worth of defined projects (defined as those under construction or committed). This was offset by the value of planned projects in the database (those under consideration or possible) decreasing by $16.2bn over the fourth quarter to $60bn.
While many businesses have been able to pass on higher costs to customers and keep profit margins around pre-pandemic averages, the past year saw total business profits decline, with large falls in the mining industry and smaller falls elsewhere.
“Businesses are now responding by implementing cost-cutting measures. Against this backdrop, many businesses will find it prudent to shore up their balance sheets and wait for greater certainty around the broader macroeconomic environment before investing,” Mr Underwood said.
“Constrained construction industry capacity is contributing to the muted near-term outlook for business investment. Yet these pressures are abating at the same time as growth in the Australian economy is forecast to accelerate.”
Mr Underwood said policymakers chasing stronger economic growth needed to focus on minimising uncertainty, with greater transparency, well designed institutions and strong communication key to improving outcomes.
“Making policy decisions, and their transmission through the economy, more predictable will be an important step in driving stronger investment, faster rates of productivity growth and sustainable growth in the economy over the long term,” he said.
However, with the economy expected to accelerate, longer-term opportunities, including the shift to net zero and investments in AI and infrastructure, may spur future growth.
Deloitte’s warning of a chilling in business investment comes as Labor’s legislation to extend its existing instant asset write-off – which allows firms with a turnover of up to $10m to deduct the cost of new assets worth up to $20,000 – remains stuck in the Senate.
The Coalition and key Senate crossbenchers are opposed to the legislation in its current form given the policy has been bundled with several other controversial measures, principally Labor’s plan to scrap tax deductibility of late fees levied by the tax office on small businesses.
With the small business sector set to be a key battleground during the impending federal election, which must be held on or before May 17, the Coalition has pledged to make the instant-asset write-off permanent and raise the deductions cap to $30,000.
The measure has proved popular among builders and other tradespeople, who have taken advantage of the tax offset to purchase large vehicles such as utes and SUVs.
But the efficacy of such business tax breaks has been thrown into question, with research published by the Reserve Bank finding a cut in the company tax rate likely to have a greater impact in spurring private sector investment than another round of business tax breaks.
The paper written by pre-eminent tax expert Bob Breunig, RBA economist Jonathan Hambur and Nu Nu Win of Treasury, found that there was “little evidence” that tax breaks implemented during the 2010s or during the coronavirus pandemic had a substantive effect on business investment.
“Our results suggest the effectiveness of the policies studied is mixed at best, and probably highly dependent on the nature of the policy and macroeconomic conditions,” the trio wrote. “In normal times they seem to have little effect.”
By contrast, the RBA research found that the former Turnbull government’s move in 2015 to cut the small business tax rate to 25 per cent, down from 30 per cent, was more effective in driving investment.
Among OECD countries, Australia has one of the highest corporate tax rates, yet neither Labor nor the Coalition have flagged a cut to company taxes that would confer a substantial hit to the budget bottom line in forgone revenue receipts.
Originally published as Businesses hitting pause on investment amid of uncertainty
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