The budget revolution that will stun CEOs

A series of new business strategies woven into Joe Hockey’s budget will have huge implications for companies.

The many leaks prepared us for a harsh budget, but few were prepared for the enormity of the change in business strategy underlying it. It will take a few days for CEOs and entrepreneurs to grasp the full implications. In particular, apart from the deficit levy the government has actually done what it said it would do, which involves the most dramatic change to our spending patterns for a generation.

More specifically, let me pinpoint some of the other underlying forces.

First, as we expected, the government is promoting infrastructure, but the extent of the program is mind-blowing and without precedent -- in all, there is $125 billion in infrastructure investment that is triggered by the $50bn Commonwealth investment over five years to 2019-20. Each year that investment will add 1 per cent to GDP growth, and that growth is vital to the government’s forward revenue estimates in light of the fall in mining investment.

But each of the projects must comply with the government’s building code, which requires big builders to end their cartel-style agreements with unions and manage their operation on a far more productive basis. This will be a massive change in management style for the likes of companies such as Lend Lease and Leighton. Without strict rules administered by the ABCC we will have cost blowouts, Gorgon-style, across the country.

Second, the government has decided to pick a winning industry -- research -- with a massive injection of funds into a $20bn Medical Research Future Fund. And just as importantly, that research funding will come from upfront medical payments-- one of the most controversial parts of the budget. The enthusiasm for research is being extended into a $100m fund to finance innovation in Australia’s agriculture fisheries and forestry sectors. Barnaby Joyce very proudly made the announcement.

The government has decided that medical and agricultural research, along with having world-class universities, are areas in which we can excel. Given the cuts everywhere else, this is a major policy decision.

Thirdly, the government knows that employment will be generated by small enterprises rather than their larger peers, and this is becoming a constant theme in many business programs. Perhaps the most dramatic decision is tucked away in a small corner of the budget documents -- a firm commitment in writing by the Minister for Small Business, Bruce Billson, to deliver on Abbott’s promise to extend to small business the same protection as consumers when it comes to unfair contracts imposed by big business. We have just seen Coles charged over alleged unfair conduct. The budget vow will mean that all large companies and government organisations will have to review their contracts. The protests by big business will be loud, but if the government holds its nerve it will be a huge boost to the largest employers in the land. There is also provision for a small business and family enterprise ombudsman as a one-stop shop for small business into the government and to help with dispute resolution.

And of course the company tax rate is being reduced for small enterprises, but not for the largest 300 companies (see below).

In a further boost to smaller businesses, the government is investing $484m in a program to bring research and business closer together to develop and commercialise “home-grown ideas” and equip small-to-medium businesses with the management and business skills that lead to change and expansion. This is designed to replace the vast array of small grants. Picking the right programs to support -- i.e. picking winners -- will not be easy. These programs have failed in the past because too many losers were supported.

There is also an array of programs to deliver more skilled labour to employers and to encourage them to employ those on social services, particularly older people.

Finally, although there is no change to superannuation, the cut in the company tax rate from 30 per cent to 28.5 per cent does not benefit the 300 largest companies who cop a 1.5 per cent levy to pay for the paid parental allowance scheme. But the 1.5 per cent levy will not qualify for franking credits so it will be retirees and those saving for retirement who will fund the levy via lower franking credits.