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MANUFACTURING AND THE BUDGET: FILLING A HOLE IN DEMAND

20-10-2020
by 
in 

St.George Bank chief economist Besa Deda has conducted an analysis of what the federal budget means for manufacturing and the sector’s role in the recovery from the COVID-19 recession.

It is a budget Ms Deda describes as one for our times. “To do nothing or do little risks leaving future generations with a severely degraded economy and lower living standards,” she said. “The forecast for the budget deficit to widen to a record $213.7 billion in 2020-21 is consistent with this narrative.

“The budget aims to fill the hole in demand, ripped out by the COVID-19 pandemic. It gives tax relief to businesses, provides tax cuts for individuals and support for those employers hard hit by government-imposed restrictions.

“There is a deep awareness within the budget that businesses create jobs, and creating more jobs is the best way to limit the scarring in the economy from the shock of this pandemic.”

Ms Deda said assistance for businesses was one of the budget’s core themes. The main measures were the temporary full expensing measure and temporary loss carry-back tax provisions.

“Businesses will be able to deduct the full cost of eligible depreciable assets of any value in the year they are installed,” she said. “The cost of improvements to existing eligible depreciable assets made during this period can also be fully deducted.”

The temporary loss carry-back for businesses allows the write-off any losses incurred until 30 June 2022 against profits made on or before the 2018-19 financial year.

Both measures are for non-mining businesses with turnover of less than $5 billion and are effective from October 6 this year until June 30 2022.

There are also refundable R&D tax offset changes and help for small business operators to utilise technology.

There is also hope by the federal government that it can shift the dial from savings to spending.

The idea is that the extra money in the pockets for individuals from tax cuts will be spent, increasing demand for the goods and services that businesses produce.

In the June quarter, the household savings ratio surged from 6 per cent to almost 20 per cent, reflecting caution among consumers.

Recent surveys show consumer confidence is improving but the overwhelming feeling is still pessimism.

The idea is also that businesses spend to take advantage of the business measures in the budget, thereby creating more spending and jobs.

More jobs help improve job security for individuals, which improves consumer sentiment and can encourage spending.

However, the window for some of the key business measures runs until the end of June 2022.

The risk is businesses remain cautious amid heightened uncertainty and wait to take advantage of these initiatives.

It means the biggest boost from these business measures might be more likely felt in the second half of next year and in the first half of 2022 unless a vaccine materialises sooner, causing uncertainty to drop.

Ms Deda said the focus on creating jobs was evident through the new initiatives involving JobMaker hiring credits and the JobMaker wages subsidies for apprentices and trainees.

“The budget has laid a good foundation, but the path to economic recovery will be long and, in many cases, difficult,” she said.

“The government forecast the economy to move out of recession and pick up from late this year, assuming COVID-19 is effectively contained. After a forecast contraction of 1.5 per cent in this financial year, the government estimates a return to growth of 4.75 per cent in the following financial year.

“It is an ambitious growth forecast. The challenges and uncertainties for the economy from COVID-19 remain significant with no viable vaccine yet available”. Further, population growth is forecast to fall to 0.2 per cent in 2020- 21, the lowest rate in more than 100 years, which will restrain the growth outlook, she added.

In conclusion, Ms Deda said the emergence of a vaccine, a reopening of international borders, a full opening of interstate borders and a resumption of international immigration were key factors that would help determine the pace of economic activity over the next few years.

See a video of Ms Deda’s budget analysis.

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