Post-election insights: What business needs to know

Garreth Hanley:
This is With Interest, a business, finance and accounting news podcast brought to you by CPA Australia.

Elinor Kasapidis:
Welcome to CP Australia's With Interest. I'm Elinor Kasapidis and following the Australian Federal election over the weekend, today we're exploring the challenges and opportunities that the incoming Albanese government is facing. We're talking today to Dr Brendan Rynne, Chief Economist with KPMG. His expertise includes econometric analysis, economy-wide modeling, cost benefit analysis, impact assessments, efficiency improvements, and legislative and regulatory reform. Alongside Brendan is CPA Australia's Business Investment and International Lead, Gavan Ord. Thank you for being here. Gavan Ord: Thanks Elinor.

Dr Brendan Rynne:
Thanks for having me.

Elinor Kasapidis:
So Brendan, let's dive straight into the key issues: looking macro, what's your assessment of Australia's current position in terms of the economy and what are the opportunities for this government and reform?

Dr Brendan Rynne:
Well, I think the Australian economy is actually in quite an interesting spot at the moment. We had seen the economy start to kick up a little in the final quarter of last year. We had growth of 0.6 of a percent following a couple of, or three quarters of only 0.2 of a percent. We also saw the turnaround in GDP per capita declines, so we'd had seven straight quarters of declining GDP per capita, and in the December quarter we had that turned around.

Not necessarily because the economy was going gangbusters, it was in fact just because population growth started to come back a little. We had hoped, or had anticipated, that that increase in economic growth and sustained improvement in the economy was now starting to, to lift its way through.

Unfortunately, it looks like this March quarter is also gonna be pretty tough. What you've seen is a decline in consumption activity. The reversal in retail sale spending is probably a pretty good indicator that households are still finding it tough, despite the fact that we had interest rate cuts by 25 basis points in the February meeting.

It's obviously not enough to help kick up the economy into a more sustained period of growth. So I still think we're probably gonna see a weakness return to the Australian economy in the first quarter of this year as well, which is, in fact, quite disappointing. Unhelped, of course, by what we're seeing globally, with all the tariff and, and trade war drama that's emanating out of the US administration.

So the… unfortunately we're in a economic quandary really I think for the new, or for the returning government and, and what that means is that the short term policy settings that they have are gonna be even more important in terms of helping the economy turn around. What we've seen is that the Australian economy, certainly through most of 2024, was much more dependent on public sector spending then we would've hoped.

We would've liked to have seen the private side of the economy kick along stronger, but it just hasn't. And even some analysis that I looked at yesterday showed that public sector spending as proportion of GDP is now at a level that's higher than the peak of public sector spending was during World War I , and it's at a level, of an elevated level of spending that was, it really took two years into World War II to surpass.

So the dependency on government spending really is quite unique at the moment, and I'm certainly not suggesting that's an inappropriate policy position, but what I am saying is that the corresponding policy framework that goes around funding that, hasn't changed. So we've had no changes around the revenue generation side from public sector perspective, and what that means is that we've got deficits as far as the eye can see.

Gavan Ord:
Yeah, I have to say, I'm looking at Elinor when you said about that, that World War One figure, we… Elinor and I went, wow, that's like a… that's like one of those moments you go, gee, really we are out spending what we did in World War I?

Dr Brendan Rynne:
Yeah, so World War I, we were spending 25 and a half percent of GDP on public sector spending. We're now at about 28 percent. World War II we got into the low forties, so we're away from World War II. But that was a total war economy, right?

Gavan Ord:
Yes.

Dr Brendan Rynne:
But we are spending, and, and the likelihood is that with government spending that's baked-in in the budget we'll be pushing close to 30 percent of GDP in the next couple of years, particularly if the economy doesn't grow, because it's ratio… so if we're not getting that growth in economic activity and we're spending at rates faster, public sector spending rates faster than GDP growth, then of course that ratio's gonna increase. Gavan Ord: And can I just add like, in terms of engaging with members in business, very much reflect what you are saying, that they're not seeing their businesses grow and grow as much as what they would like. Particularly in the small business sector, which our own research points too, that that sector has continually underperformed for many, many years. So what you're saying is also reflecting in what members are telling us as well.

Dr Brendan Rynne:
Yeah, and, and so mixed income, which is a measure of small business profits and wages, is a bit of, is basically been flat and bumbling along zero growth for many, many years. So it's not surprising, that that's exactly what you are hearing. What we're also seeing is general profitability across the economy's slowing, and so there, there's been greater returns to labour than there's been returns to capital over that time.

Elinor Kasapidis:
And so that puts the government in an interesting position because it's almost like if they pull back to allow business to start to grow again, that poses its own sorts of challenges, people are becoming dependent, so they almost then become almost a funder of the economy, and what is the right balance? And of course, big government means big taxes, so how do you see all of those bigger issues around our economic policy, how we mix public and private investment and, and spending? Do we have the balance right or do we need to have a conversation about what the optimal settings might be for the country?

Dr Brendan Rynne:
Oh, we obviously need a more open discussion around what those optimal settings are, but I think if you take the last election campaign as a good indicator, or as a reasonable indicator of what the general public wanna see… and what they want to see is more direct support for them. So they're very much focused on, or the general public, and you can understand that when times are tough economically and, and where they feel.

But the, the other thing to realise is that, and this is the thing that I've really grappled with, is that you look at consumer sentiment and the levels of consumer sentiment that we've had, or poor levels of consumer sentiment we've had, is worse than what it was during the GFC, is worse than what it was during COVID.

And the downturn in consumer sentiment correlates perfectly with an increase in interest rates, and the decline in household disposable income, because it's the combination of both increased mortgage payments and increased tax payments. So how much extra money that we have to spend has declined.

But it's also been at a time when the economy's been relatively strong, we've got the lowest level of unemployment that we've had for decades, like four or five decades. Yet people think that life's pretty shitty, and so I can't actually match the two up at the moment.

But more directly to your point is that what we've got is a situation where there feels like an increased dependency in the population on some form of government support in some way, whatever that be, either direct through direct welfare payments or through other rebates and supports through electricity and childcare and those sorts of things.

And so the conversation's been very much around: what is it that government can do to look after me? As opposed to: what is it or who's actually going to pay for it? One measure that I've been looking at for, for many, many years is what proportion of households pay net tax and what that net tax calculation is.

I use the Hilda data for it, so I look at individual households. So how much income tax and GST do they pay, less how much they get in some form of government support. And the long run measure of that is that 60 percent of households in Australia pay no net tax. So only the top 40 percent of households contribute tax in some way. This is from a household income tax perspective, and it's not businesses.

But in the last few years what we've seen is that 40 percent even slipped down to 38 percent. So there's even more households that are paying, or that are getting a net positive contribution from the, from government and, and when I say government, what I mean is that government acts as the facilitator to transfer wealth from one part of the population to another part of the population.

And that's the society we live in, we expect that we, you know, that's our social compact. But what's becoming more acute is that the, the people paying for it is getting more and more condensed. And so what that says to me is that at, at some point we need to have a better conversation around how is…well, what's the level of fairness?

And, and people talk about an unfair… Australia's unfair. I actually dunno what that means, and the question that I pose people… and I don't have an answer for it, and I'm, and I'm certainly not judging that 60-40 is the right number. I don't know what the right number is, but what is the right number? Where is the level of fairness?

What is that tipping point in our community that it's reasonable to expect some form of income transfer from the haves to the have nots. And I know that we absolutely need to do that, but where's the right point of that? And that comes back to tax reform, it comes back to tax efficiency, it comes back to what our expectation of government is, and what sort of society we wanna live in.

Elinor Kasapidis:
And it really is that, question around the middle, isn't it? So, so we absolutely… that bottom 20 percent, the have-nots, I think everybody's very supportive of the transfer system and things. But when you start to also concentrate your tax revenues in an increasingly small and narrower base, that can also be unfair.

And that dependence is also risky because you don't have that spread. So it's really, I think when you talk to people and they look at the tax withheld or the GST on their receipt, they may not actually be observing the transfers and the benefits that they, they receive. And I, I would argue that many people would never look at themselves as being a nil net tax household, so it's…

Dr Brendan Rynne:
No, no, that's right, yes.

Elinor Kasapidis:
It's a perception thing, again, that sentiment, the sense of unfairness and, and perhaps it's really around how do we get people not only to look at their household, but to look at the overall figures and, and understand where they sit, how, whether they are in the have nots, whether they're in the middle, and whether they're, they're part of that increasingly small attack space. So that's a really challenging conversation to have.

Dr Brendan Rynne:
Yeah, a hugely challenging conversation, and one that I don't think the politicians or the electorate are actually ready to have yet. Often, you know, what people say is that you need a crisis for those types of major reforms to happen, and we're nowhere near a crisis.

And I know that, you know, there are some pundits out there or some commentators out there saying that we're in this sort of fiscal imperative at the moment. The reality is that we're nowhere near that. You know, we've got, yes, you know, our level of debt as a proportion of GDP is higher than probably where we historically feel comfortable.

We are, yes, we've had a couple of surpluses in the last couple of years, but we've got deficits as far as the eye can see, and their, you know, increasing, and so there is the potential for us to kick the can down the road. The question is, is that the right thing to do for the next generations? Or should we be looking to have that reform and start some of that reform now?

Because we know reform's hard, and we know that it's gonna take some time, and some of the reforms we're talking about are at least going to be a decade from start to finish, in terms of being able to implement them and move fully out of, you know, one sphere into another.

Gavan Ord:
And we were talking off-air beforehand and, and how reform is needed, but reform becomes harder if you kick the can down the road, the ability to compensate those most negatively impacted by the reform becomes less and less. So it's really incumbent on those in government, both state and federal, to start looking at reform now, seriously looking at reform and not just think, wow, we can just keep going on, that's a problem for another government. It just becomes much harder in the future.

Dr Brendan Rynne:
Well, and often, as I said, you know, you sort of get to a point where you have a crisis and, and that enables you to have the reform. But often what… that reform then happens in a crisis is that it's a much bigger shock.

So the shock to turn things around is amplified, and then if you actually take the reform opportunity before you get to that crisis… you think about all the austerity measures that countries like, you know, Greece, Italy, Portugal, had to do during the GFC. They were severe, you know, we don't actually want to subject our population to severe economic shock.

Gavan Ord:
And those reforms were imposed on the government by external factors, it wasn't driven by the local government.

Dr Brendan Rynne:
No, no, that's exactly right. And you know, we are a wealthy nation, there is lots we can do as a country and as an economy to support our society, but one of the real challenges I think our population needs to understand is that we can't do it all. We can't do everything, we can't pay for everything. And so, you know, that also comes back to what sort of, you know, fiscal proposition we expect to get from our government.

Elinor Kasapidis:
And underlying that all is, you need a healthy economy.

Dr Brendan Rynne:
Yeah, absolutely need a healthy economy. And, and you cannot have the government as the growth engine of an economy. You cannot… and what we've had in the last couple of years is government being the growth engine of your economy. You know, we've seen countries. where that's been reliant on the past, and that didn't end particularly well for the USSR did it? So, you know, you need to have a healthy private sector growing the economy and creating opportunities for everyone.

Elinor Kasapidis:
So how do you think the government might start to shift, because they've been obviously driving this spending and, and this economic activity. So what is the delicate tightrope that they need to walk in terms of making sure that business is ready to go, that jobs and employment stays strong, while tailoring and perhaps better targeting the expenditures that they do have. Do you see opportunities there?

Dr Brendan Rynne:
I also suspect while we are talking, and a lot of what we've been focusing on has been around fiscal restraint, I also suspect that we're in a position where, you actually probably have to spend a bit more to, to at, you know, in the short run to, to get things going a little bit.

And that may be not physically spending, but it may be giving things away. So, you know, one of the arguments I think that we need to really be having a look at is our competitiveness internationally around corporate tax so that, you know, we can be still an attractive destination, particularly if America goes from dropping their, their corporate tax rate from, or their federal corporate tax rate from 21 to 15 percent. I mean, that's a game changer, absolute game changer.

And I, I think that we need to see how we can make our overall economic environment continuing to be attractive for foreign investment. Australia's a small open economy, or a medium open economy, we are dependent on… you know, our marginal investor is a foreign investor, and we need to still make that an attractive destination for those foreign funds.

Fundamentally, tax is important, but it's at the margin, right? What it does is it, it helps differentiate from a post-tax return perspective an investor choosing between opportunity A and country A versus opportunity B and country B. You know, that's, that's where it comes down to. So how do we make sure that we become the most attractive destination for that, if you're in fact in that position.

So tax is important there, but even before you get there, how do we make sure that Australia is a destination that is giving those pre-tax return Opportunities. How do you make sure that, you know, we are a destination that allows, strong returns to happen within the private sector? And I think that that requires more industrial policy. What are we doing around industry to strengthen industry and create those opportunities?

And some of it is a sort of, a bit of a chicken and an egg thing. If you make the tax environment competitive you enhance investment opportunities, those investment opportunities grow the economy, they strengthen the economy. They, they themselves will then bring in investment, because you've both got those catalysts of, of competitive tax arrangements and stronger, economic outlook. That will then grow the economy and it feeds on itself.

So I, I think that what you might need to do is have that permanent competitiveness improved, and then that will drag through new investment opportunities and strengthen the economy.

Gavan Ord:
Could I just add to your comment around the broader environment and definitely hear from members that, the Australian business environment has become less business friendly, that they, they don't feel there is enough support from government, they don't feel there's enough policy support, so, and they feel that government has a predilection to regulate, rather than let the market respond to the situation.

So if there's a problem, there's a regulation, sort of the culture. And we definitely hear that, that it's not a business friendly environment, and we, we also hear that from our members based overseas. They perceive Australia to be less business friendly than what it was before.

Dr Brendan Rynne:
Yeah, no, and that's right, and you hear people talk about, you know, red tape and cutting red tape and all that sort of stuff. I mean, that goes to the, to the heart of the, one of the, the current problems that the, the government's facing is around productivity.

You know, if I, if I were focusing on productivity improvements, one of the fundamental ones I would be doing is cutting regulation. As Australia's become more a service economy, what red tape has done to those service sectors is actually tied up people's ability to deliver service outcomes, because it's often time that, you know, services require time to deliver, deliver things.

It's not capital intensive manufacturing industries that actually require the, the time that you get is, you know, the machines producing the widgets and they can work independently, you know, while someone deals with the regulation. But for a service business, you either, the an, an owner has to deal with the regulation themselves, therefore not being able to be on… effectively the tools, delivering the services, or they've gotta employ someone to answer that regulatory requirement, which then takes their profit down. So regulation and cutting regulation is a fundamental imperative to improve productivity within this country.

And it's not just at the margin, it's wholesale reform that needs to happen. And one of the challenges that we've got at the moment, and going back to this public expenditures, is that there is a philosophical position clearly within government at the moment that bigger government is better than smaller government, governments regulate to manage risk. So in private sector, what we do to manage risk is you, you take a risk trade off, you accept the level of risk, and you work to that level, and then you move on.

Whereas in government, government has a zero risk appetite, and therefore they regulate to a zero risk appetite. And what that means is more regulation than less. And so there needs to be, I think, a better balance and an understanding of a risk trade off in government, that means that you can regulate less.

Elinor Kasapidis:
And without risk, businesses can't grow. So it actually stifles innovation, there are broader things and business can't be run like a public service entity with a zero percent risk

Dr Brendan Rynne:
But that's the, that's the philosophical position that's in government, and that philosophical position then has that regulatory overlay, and there's that regulatory overlay of zero risk appetite, and therefore what we will do is ensure business has achieved that zero risk outcome by regulation. That doesn't work, and what that then does is stifle innovation, it stifles opportunity, and it reduces productivity, and it's a productivity killer.

Elinor Kasapidis:
So we have got a lot, Gavan, on small business, we wanna see young people come into the economy.

And so Brendan, that's been such a thoughtful, um, conversation and really this is what we wanna see from treasury, from the treasurer, some more comprehensive narratives around the status quo, what is actually happening? Not cherry-pick data for a particular narrative.

I've heard that we wanna look at our international competitiveness, our domestic competitiveness, public spending, driving economic activity, taking a look at that again, and seeing where the private sector, including with incentives and some government spending to make sure it gets off the ground. How does that look in the form of a broader industrial policy? And then some really interesting insights about the tax load and the increasing concentration. We talk about having a broad based tax system, and increasingly just through bracket creep, through tax and transfer changes, it's increasingly becoming more and more concentrated even on the income tax side.

So Gavan, your thoughts about the insights that Brendan shared with us today?

Gavan Ord:
Well, I mean, they, they perfectly in line with what we're saying. So in our post-election release we spoke about the need for the government to concentrate on the three Rs: Revitalise, Reform, and Repair, and I think what we're saying is exactly what, what you are saying, we need to revitalise the private sector.

It is underperforming, so we need to revitalise that sector. We need to reform, we need reform, tax reform in particular, but also you spoke about regulation and we, we definitely see that culture, that zero-risk culture come through all the time. And when you talk to government and they talk about red tape reduction, it's typically, removing the red tape with the previous government. They don't look at their own processes and how they create regulation. So they need to actually look at their own processes and put in place barriers to the introduction of, of new regulation.

So it's a, it's a two-way thing. It's looking at the existing stock of regulation, but also putting in place controls over the growth of the, of the new stock of regulation. And often we find that regulation by itself, we look at it in silo: Oh yeah, we can understand that. But a business doesn't think like that, they're going: oh my God, that's something else on top of everything else I need to do.

And the other thing is, we need that budget repair. We need to start, we can't, we can't have a decade of deficits without looking at how do we improve our fiscal position. So we need more fiscal discipline. So I think everything you said is very much aligned with what we're saying as well.

Elinor Kasapidis:
While noting, of course, that we are a wealthy country, that the economic signs are quite good and we do have room to move. So it really is around what are the next few policy announcements, the kind of consultations that are going to be led. So Brendan, any final thoughts or messages for the treasurer if you had a wish that you'd like to see him do?

Dr Brendan Rynne:
I think, understand that the maintenance of the status quo is an unrealistic policy position, and that while we can understand that tax reform is political poison, we know that, like I've, I've worked myself, on the Henry Tax review, on the tax white paper. You know, I've been inside the tent on both of those key reforms and, and know the, the political challenges associated with that.

They are things that need to actually happen for us to ensure the future prosperity of this country, 'cause as I said before, tax ultimately is an unsexy thing, but it's important at the margin. It helps at the margin. And when you're in a globally competitive environment like Australia is, you know, we're not a world power, we're a middle order economy, that, that does bat above its weight in many things. Being able to offer reform at the margin is actually really important, so we can't lose sight of that.

Elinor Kasapidis:
Thank you so much, Brendan, for your insights and Gavan for your guidance as well. For our listeners, eager to learn more, please check out the show notes for links to additional resources on dealing with geopolitical uncertainty and small business innovation from CPA Australia, and don't forget to subscribe to With Interest and share this episode with your colleagues and friends in the business community. Until next time, thanks for listening.

Garreth Hanley:
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