Why has the business community not responded to the election of a Coalition Government by confidently increasing investment?
While Treasurer Joe Hockey can tell global finance ministers that Australia can achieve growth via infrastructure spending, he also needs an uplift in business investment.
For that to happen, bank lending to business has to grow much faster than the anaemic level of between 1.5 and 2 two per cent that is currently taking place.
Both Joe Hockey and Prime Minister Abbott hoped that the abandonment of the carbon tax, business deregulation, more independent contracting and other Coalition initiatives would kickstart business investment and job creation.
The fact that some of these initiatives have to await a new Senate is part of the problem, but the reasons why bank lending to businesses is not growing go much deeper.
Over a wide area of Australian business, banks now have systems that can alert them to when a business is running closer to the wind than it should be. Today’s big Australian banks try to preempt trouble and convince businesses to act before lending covenants are breached. That might prevent business failures, but it also makes a whole range of enterprises much more cautious.
On the other side, given the fall in interest rates, shareholders in many companies are now seeking greater income. That means there is pressure on directors to divert money into dividends which, in previous eras, would have been used for investment.
Both Telstra and BHP Billiton are good examples of this, but greater income pressure extends through a wide range of companies.
Many Australian companies have signed SPC-style agreements with their workforces and unions, which makes it hard to manage those enterprises efficiently in the current environment.That stops investment and encourages companies to go offshore for services and goods, particularly given the level of the dollar.
The business community knows there are three tsunamis coming their way between 2015 and 2017: the rapid decline in mining investment expenditure; the employment effects of the switch of retailing spending away from stores; and the motor industry devastation. To that, you can add government cutbacks (A tsunami warning for business and executives, February 11).
Unemployment will almost certainly rise above 7 or 8 per cent and could go higher. That increases nervousness and no amount of government hot air will change that situation.
Infrastructure spending, the carbon tax abolition, deregulation, more independent contracting will all help. But you also need to face up to what is happening and what is holding back business from investing.