Australia’s investment environment has gone seriously wrong

08 June 2023

This opinion article by Business Council chief economist Stephen Walters was published in The Australian Financial Review on Thursday, 8 June 2023 

Wednesday's National Accounts confirmed that Australia’s investment drought is not over. Capital spending by private businesses did rise in the first quarter, but only after a lengthy period of decline. Investment remains at around a 30-year low as a share of the economy.

Our farmers may disagree but, as droughts go, this is about as bad as it gets. Mining investment has dropped over 60 per cent since the 2012 peak, despite recent high commodity prices, but investment outside mining is weak too. As former Treasury Secretary Ken Henry says, business investment usually is this anaemic only during recessions.

We should remember that business investment matters to everyone, not just the firms involved. Prudent investment boosts the economy’s capital stock, allowing more to be produced for less, including higher quality goods. It’s also a key driver of productivity which, last decade, was the weakest in 60 years.

Workers should care because sustainable wages growth depends on generating faster productivity growth, supported by investment. The Productivity Commission found that since Federation, almost all wage gains have come from productivity growth. This means higher living standards for all Australians and more tax revenue for governments, too.

Something has gone seriously wrong, given the external environment has been providing tailwinds. For example, the terms of trade were the highest on record and the cost of finance, until recently, was low. And rates of utilisation of firms’ existing plant and equipment are at record highs. This normally is a trigger to expand capacity.

One interpretation is that, for all our obvious advantages, including our world class rocks underground, Australia has become a more difficult and expensive place to invest. Our tax system already was uncompetitive, particularly for larger companies, yet taxes on business are rising.

Also, the increased pace of policy change breeds uncertainty, as does unpredictability of decisions. This is exacerbated by the tendency to dismiss isolated impacts of policy decisions, which opens the door to a host of policies with seemingly small impacts on their own. This ignores, though, the cumulative impact, which can be substantial.

Also, there have been heavy-handed interventions in workplace relations, energy and elsewhere and the imposition of even more rigorous approval hurdles to clear. There also have been changes that greatly increase the costly and time-consuming reporting burden for businesses.

This heavy load in the nation’s investment saddle bags comes at a time when other countries, including the US with its massive Inflation Reduction Act (the IRA) subsidies, are making it easier and cheaper to invest. Canada and countries in Europe and the Middle East are doing the same. No wonder investment here as a share of the economy is sliding.

Global capital now is more mobile than ever and is quick to respond to changing incentives. The numbers on this are damning. For the first time in decades, more direct investment capital now leaves Australia than is coming the other way, including from the US. America remains Australia’s largest source of foreign investment, but the sucking sound from the IRA is becoming louder. And that’s just in renewable energy.

So, what can we do to bring an end to our long investment drought? For starters, let’s stop making things worse, like the Victorian government’s recent hammer-blow of higher taxes on successful businesses and aspirational providers of investment capital. Like doctors’ Hippocratic Oath, governments also should commit to first, do not harm.

We cannot compete with the sheer scale of the IRA, which offers investment incentives to the tune of US$400 billion. But we can get the fundamentals here right, like fixing the tax system and speeding up the approvals process. We also could ease the productivity-sapping reporting burden. Time-consuming regulatory activities soak up business resources that would be better used elsewhere.

These changes would encourage, rather than discourage, investment. Similarly, a lower corporate tax rate would help level the playing field for Australian companies. As things stand, three quarters of countries have a lower company tax rate than our 30 per cent. Many Australian companies struggle to tack into this strong anti-competitive headwind.

Realistically, a lower tax rate for larger companies is unlikely any time soon given the persistent structural budget deficit and other fiscal demands. A fruitful alternative, though, would be an investment allowance. The BCA long has advocated for a 20 per cent allowance to make more investment options stack up.

Droughts usually end with a period of flooding rains that rejuvenate the soil and set up the next bountiful phase of growth. Investment serves a similar purpose for an economy. But we can’t forecast an end to Australia’s investment dry patch until key barriers are lowered.

Stephen Walters is the Business Council of Australia's Chief Economist


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