Budget 2020: what it means now and what’s to come
Budget 2020 was huge, with a wide range of stimulus measures. But what might it mean for 2021?
Budget 2020 was huge, with a mass of stimulus measures aimed at addressing the COVID slowdown. NAB Chief Economist Alan Oster decodes what they might mean for business in 2021.
The 2020 Federal Budget has been described as a budget for business. Certainly, for small and medium enterprises (SMEs) it offers several important stimulus measures to help them grow and even thrive. But will it be enough to see a more general turnaround in 2021?
While NAB’s most recent Monthly Business Survey shows that business confidence is on the rise – and the budget goes to significant lengths to boost this still further – the fact is, 2021 may require further government support for business, according to NAB Chief Economist Alan Oster.
That’s because any positive sentiment is necessarily linked to the pandemic’s progression and its impact on various states and sectors. Moreover, while the budget provides business with some critical tools to thrive in the current environment, cashflow – and lots of it – will be the essential element in any sustainable recovery. That comes down to consumer sentiment.
It’s all about spending
Oster breaks the budget down into three key themes. The first is all about the government spending its own money. That includes the $7.5 billion for transport infrastructure it put forward – a potential positive for SMEs since the government has said it will “draw on local businesses to stimulate local economies”.
The second theme is about giving people more money to spend. That’s reflected in the income tax cuts that were brought forward. “The most important thing about that tax cut was the back-dating,” Oster says. “That means money now.”
Unfortunately, this measure won’t really help those who are set to lose much, or all, of their income due to the tapering of JobKeeper and JobSeeker. However, the cuts may soften some of the impact on businesses, as they will put many Australians in a better position to spend on goods and services.
The measure is also supported by the government’s ‘loss carry-back provision’. While Oster describes it as “not nearly enough”, it will potentially help SMEs by allowing them to offset any of this tax year’s financial losses against profits from earlier years – again putting tangible money in the pockets of business in the form of a tax refund.
This ties into the third theme, which is about getting business to spend more. The government put forward two major measures here: the first being an instant asset write-off for companies earning under $5 billion – a tax incentive that allows your business to deduct the full cost of any eligible depreciable assets in the year you bought them. The second is the government’s hiring incentive, where a business may receive $200 a week if it employs someone aged under 30 who was previously unemployed and $100 a week for someone under 35. In addition, the business may be reimbursed 50 per cent of the wages of a new or returning apprentice or trainee.
Confidence is key
Yet the success of these latter measures depends entirely on business confidence. As Oster notes: “It’s critical that business is confident enough to do these things.” After all, even if you’re able to write off an asset immediately, you still need the cash to make that investment in the first place.
Similarly, “there’s no point in hiring somebody if you don’t think your business activity is going to pick up”.
It’s for this reason that NAB’s most senior economist is pinning his hopes on the government’s income tax relief. If all goes well, it will pave the way for further consumer spending, which would mean more cash – something business is crying out for.
What SMEs want
Cash was a theme picked up by NAB’s Special 2020 Federal Budget SME Insight Series survey, which set out to understand what Australian business wanted from the budget. Based on the responses of more than 750 businesses across the country, it became clear that cash was a high priority, particularly for small businesses.
This was further supported by a second finding that only 38 per cent of businesses were concerned about access to finance or capital, which indicates most aren’t considering spending up big anytime soon. On the other hand, more than three in 10 SMEs (27 per cent of small businesses and 41 per cent of medium businesses) do expect to restructure their service or product offerings to meet their changing needs in the next 12 months.
Do the budget measures support this? To some extent, Oster says. Apart from the immediate asset write-off, there’s some special assistance for specific industries, including higher education and agriculture. For example, the government’s $1.5 billion Modern Manufacturing Strategy includes help for food manufacturing, which will in turn assist agribusinesses. Conversely, while the healthcare sector saw considerable support regarding COVID – including special help for hospitals – most healthcare enterprises will receive little to boost their business.
Nevertheless, those companies that invest in research and development will see additional support from an extra $2 billion allocated to the Research and Development Tax Incentive. But yet again, it comes back to whether businesses have the cash in the first place, and the confidence to spend it.
An eye to costs
In fact, according to NAB’s survey, cost reduction was viewed as key to moving forward. This included cutting staff and wages. While the government’s hiring incentive may help here, particularly for those SMEs seeking growth opportunities, Oster remains circumspect: “It’s going to be difficult. The government’s [hiring incentive] does help in that sense, but it’s really early days; it’s hard to tell.”
He points to ABS payroll data from late September to 3rd October, which shows that employment fell over that two-week period across the country. “I’m not sure if it relates to the fact JobKeeper came off during that time, or whether it’s seasonality or something else we don’t understand. But it is unusual to see that.”
What 2021 has in store – and beyond
Of course, any measures must be viewed in terms of the bigger economic picture and how it will be influenced by the 2021 budget. Oster is confident that the economy will continue to improve into next year off the back of a huge deficit that amounts to seven per cent of GDP. However, he’s not so sure that growth will continue strong into 2022 as the government moves to withdraw JobKeeper and lower JobSeeker – or, as he puts it, as “about $100 billion worth of stimulus disappears”.
He points to the fact that SMEs are likely to be significantly impacted here. “We have been looking at which areas get hit the hardest if JobKeeper disappears – in terms of the income coming in – and it’s by far SMEs.”
Yet circumstances will also play their part. According to NAB’s survey, less disruption from COVID-19 is seen as the key to restoring confidence and Oster agrees, noting that if business is to flourish, “you need to open things up; you need to get the states opening up their borders”.
Whether that happens will largely depend on the progress of the virus in our community, and the fact is, none of us knows how it will proceed in the months to come.
Banks have a vital role to play
It’s why, despite the big budget spend, Oster believes the government might need to step in again with additional financial assistance. It’s also why he underlines the importance of the banks at a time like this – to support businesses, even those that are doing reasonably well. “It’s really important that the banks are around.”
To this end, NAB’s introduced numerous measures to support Australian businesses. These include providing assistance with cash flow, working capital solutions, restructuring existing finances as well as payment deferrals.
“‘Shock absorber’ is the term most people use in this kind of environment,” Oster says. “That’s the banks and that’s really helpful.”