How Canberra can wake small business from hibernation

There are four main ways the government can improve the small business environment, starting with reducing their tax burden and providing a balanced federal budget.

With the federal election now less than six months away business is becoming more focussed on the main requirements of the next government. The clear message is that mainstream business places prudent stewardship of the economy well ahead of delivering an expensive shopping list of spending on business programs.

There are four essential economic policy initiatives detailed below which can provide the platform for stronger confidence levels and the setting in which business and especially smaller business, is able to create jobs and wealth.

What shape is small business in?

For the most part smaller businesses have not been a leading participant or necessarily a direct beneficiary over the past several years in the stronger parts of the economy – mining, energy and engineering construction.

Smaller enterprises tend to be more prevalent in sectors including housing construction, services, retail, hospitality, tourism and manufacturing - which are areas of the economy that have been under increasing pressure.

It is therefore no surprise we are continuing to see low levels of business confidence among smaller and middle ranking business.

Small businesses are hibernating until a clearer and more optimistic economic outlook appears likely to take hold. Business lending remains flat as proprietors play a safe game and show a reluctance to extend facilities in a period of uncertain demand. This impacts expenditure on both plant and equipment and building and structures, despite favourable timing opportunities with a strong currency affording potential cost savings. Evidence also suggests continuing weakness in the labour market with job shedding taking place in sectors including construction and retail.

Our own business surveys which are among the largest and long running in Australia reiterate this subdued performance. A round of March quarter surveys indicated that general economic conditions, sales revenue, profitability investment and employment remain in contractiary territory with specific indicators at or near historic lows.

 Factors contributing to weaker conditions

A range of factors are contributing to weaker conditions and the immediate near term outlook including:

  • Persistent international volatility and the uncertain impact this has on the domestic economy
  • An elevated currency is placing pressure on trade exposed businesses and reduces competitiveness
  • Changing consumer spending patterns and the preference to reduce debt
  • Unease about the performance of minority government and resulting policy responses which endorse a low growth green policy agenda
  • The impact of higher utility prices brought about by the carbon tax and other emission reduction measures, and
  • An established view of policy makers that business can help deal with the unexpected revenue shortfalls of government through higher tax rates or new taxes

Economy in transition – making sure mainstream business is able to benefit

A well-recognised feature of the domestic economy in recent years is the uneven nature of economic growth.

The peak of the capital investment stage of the mining and energy expansion is expected to occur in 2013 which will encourage more broad based economic growth. There is no formula how this transition might take place or necessarily any economic precedent to follow and it is not an automatic response.

The record high terms of trade and accompanying income boost derived from higher commodity prices was a welcome and perhaps longer than expected dividend for the national economy and for public revenues.

To some extent it provided a security blanket which delayed the need to act more quickly on productivity enhancing reforms which would have helped business. It also bolstered revenue to government delaying the urgency for proper public expenditure discipline and encouraged more indulgent spending across the wide sweep of government.

The four economic reforms a new government should implement

1.     Provide for a balanced budget

Strong fiscal management underpins a healthy economy and despite the budget challenges we cannot afford to settle for a vague and ever receding surplus objective. It’s an important economic benchmark that Australia returns to surplus and begins the task of reducing public debt.

For a mid-sized, trade exposed economy which is vulnerable to commodity price swings, the consistent achievement of a balanced budget is sound practice and a useful bulwark where international conditions are less stable.

In 2008 a sound fiscal framework gave us the capacity to deal with a large external shock and kept the economy growing. Given our current budget outlook, if such a dislocation occurred in the foreseeable future our capacity to respond would be diminished.

To achieve the surplus objective ACCI considers this will require an independent root and branch review of government spending. This review needs to have a broad reach with no spending categories deemed to be off limits including business programs.

2.     Reduce the overall tax burden and restore incentive

Addressing our fiscal position provides the basis for not just tax reform but lower taxes which will lead to enhanced economic activity.

More immediately ACCI considers no new taxes, or tax increases should be implemented in the May Budget and for the purposes of providing certainty, the Government should now rule this out.

Our taxation system needs to be tilted to provide the incentive to invest, encourage workforce participation and for small business it needs to reward risk taking and entrepreneurship.

To some extent the economic slowdown affecting many of our trading competitors has provided a relief valve alleviating the need for more timely and responsive improvements in our tax system. However time has caught up and a period of policy stall has left us with an increasingly uncompetitive and productivity detracting taxation regime.

Personal income tax remains a priority area of reform, high personal rates distort efficient decision making including workers choosing not to return to the workforce or encouraging income to be spent on consumption rather than saving and investment.

Personal income tax is not just a tax on wages and salaries. Personal income also includes individual income from unincorporated businesses which can be particularly responsive to the level of tax in their decision making and preparedness to undertake entrepreneurial activity.

ACCI understands the fiscal reality means much of the tax agenda is a medium to longer term matter but that should not prevent government from setting out its aspirations in this area.

3.     Curb the growth in regulation

A future government needs to recognise the impost of red tape on business both its direct cost and the way in which it alters decision making by business owners – and have a commitment to reduce its burden.

The growth of regulation and the weight of existing regulation is an endemic problem across all modern economies and to mitigate its growth lawmakers will have to be committed to resisting legislative responses as their first reaction. They also need to acknowledge it is not up to government to create a risk free society for as many of its citizens as possible.

We urge government to listen to the concerns of small business in this area especially as larger businesses can have a much higher tolerance for regulation.

4.     Reduce energy costs and abolish green programs

For a country that built its post war industrial base and urban expansion on the provision of accessible and affordable energy it is a monumental failure of policy that many Australian states and Territories now have close to the highest retail electricity prices in the developed world.

Rapidly escalating energy prices are having a profound effect not just on households but across many industries and businesses of all sizes with energy intensive sectors bearing the brunt.

Empirical work undertaken by ACCI has shown some of the largest negative impacts in industries including plastics and chemicals, food processing and metal manufacturing.

Price rises can be attributed to a number of factors including inefficient network regulation in the case of medium and smaller users, and also the deliberate policy decisions of government in the form of the carbon tax and the full range of other carbon abatement programs which are significantly affecting the competitiveness of Australian companies.

Running at odds to the Government’s message of support for the manufacturing sector, we are beginning to see evidence that high energy costs are inducing a de-industrialisation trend in the economy.

In the case of smaller businesses there are negative spill-over consequences with such closures while the direct impact of higher energy prices sees many enterprises unable to pass on the cost impost because of their relatively weaker position in the market place or supply chain.

The next government should abolish the carbon tax, the renewable energy target and other green programs which are all putting upward pressure on prices. A review of energy market regulation needs to be undertaken which places far more weight on the views of energy users.

The federal election provides an opportunity to take notice of business, particularly small business. Immediate and overarching policy responses can be made to restore confidence, promote economic activity and enhance national productivity.

There is a stream of other essential work including:

  • Delivering labour market flexibility
  • The provision of essential infrastructure based on sound cost benefit appraisal
  • Ensuring competitive lending markets and the availability of finance for business
  • Advancing the free trade agenda, and
  • Enhancing the availability of human capital

Each area has pressing claims for reform and also needs to be progressed, however unless we get the fundamentals of domestic economic management right we will severely curtail the benefits flowing from these important micro-economic reforms.

Greg Evans is the chief economist and director of economics & industry policy at the Australian Chamber of Commerce and Industry.

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