Ahead of the 2022 federal election, AICD chief economist Mark Thirlwell MAICD examines the economic issues and priorities for AICD members.

    This year, Australia will elect its 47th parliament. The outcome will likely be driven by the usual mix of stories, personalities and media obsessions that help shape voter preferences, many of them loosely related to economics, if at all. Yet, economics really should matter this year, not least because there have been some profound changes in our economic environment since the last federal election.

    Most obviously, the economy has suffered a sequence of pandemic- driven economic shocks including: the largest (in the second quarter of 2020) and third-largest (in the third quarter 2021) falls in quarterly real GDP on record; a transformation in the country’s fiscal position, with the biggest federal budget deficit since the end of WWII helping put public debt on track to exceed $1 trillion later this decade; the embrace of unconventional monetary policy, with the cash rate at a record low of 0.1 per cent and a program of asset purchases on course to see the RBA holding some $350b of Australian and state government bonds by February; a cheap money-fuelled housing market boom and renewed angst around home ownership and affordability; shuttered international borders that have remade both national demographics and the operation of the labour market; and a broader evolution in a business environment grappling with the WFH (work-from-home) revolution, an accelerated shift to digital and online, and severely stretched global supply chains.

    Climate challenge

    Second, the policy challenges posed by climate change have become even more pressing. The Black Summer bushfires of 2019–20 led to the deaths of 33 people, burned more than 24 million hectares of land and had an estimated economic cost in excess of $100b. That was a powerful signal of Australia’s vulnerability to more frequent extreme weather events, with one set of estimates projecting that the annual costs of natural disasters could rise from around $38b in 2020 to between $73b (under a low-emissions scenario) and $94b (under a high-emissions scenario) by 2060. Subsequently, the growing international focus on climate change risk saw increased pressure for countries to deliver more ambitious emissions reductions in the run-up to COP26 in November last year — and the Glasgow Climate Pact calls for enhanced targets again this year. There is also a growing probability of quasi-coercive measures such as carbon border adjustments (duty on imports based on the amount of carbon emissions resulting from the production of the particular product).

    China crisis

    Third, the years since the last federal election have brought further corrosion of the bilateral relationship with China. True, tensions between Beijing and Canberra were building well before 2019. But the first year of the pandemic saw a significant deterioration after Canberra’s call for an independent, international investigation into the origins of the COVID-19 virus. A series of formal and informal Chinese restrictions on Australian exports followed, with the industries impacted including beef, barley, coal, copper, cotton, timber and wine.

    Any adverse impact on aggregate Australian merchandise exports was more than offset by a surge in iron ore prices, which actually saw the share of total Australian goods exports to China rise from around 35 per cent in May 2019 to a high of more than 42 per cent by July 2021. But non-iron ore exports are now well down from their mid-2019 peak and although many Australian exporters have been able to secure alternative markets, optimistic forecasts citing Australia’s ability to benefit from access to a dynamic Chinese economy in the medium term no longer seem realistic.

    Moreover, the economy was already facing challenges that pre-dated COVID-19. In June last year, the Productivity Commission warned that the previous decade had seen the slowest per capita growth in output and income in at least 60 years, even excluding the pandemic’s impact. Last year also brought the latest policy recommendations from the OECD and IMF — to move the tax mix away from inefficient choices such as stamp duty, income tax and company tax towards the GST and taxes on land; and to accelerate emissions reductions, preferably in the least-cost way via an economy wide carbon price — that were notable mainly for the length of time they have been stuck on the “to do” list.

    Director Sentiment Index

    According to the results from the AICD’s latest Direct Sentiment Index (DSI), many of these issues are also at the forefront of directors’ minds. Following two tough years, the DSI showed directors in an upbeat mood regarding the economy and business, with 67 per cent of respondents predicting a strong economy and 64 per cent expecting strong conditions over the year ahead. But it also picked up some familiar themes. For example, directors cited climate change as their top pick for the federal government’s short- and long-term priorities. Half of respondents also agreed it was a material risk for their organisation and the most important barrier to climate governance was uncertainty around climate policy settings. Sixty per cent of directors now support an emissions trading scheme for the Australian economy, with only 19 per cent opposed. And when it comes to tax reform, directors continue to prioritise state- based taxes such as payroll, followed by company and personal income taxes.

    However, one notable change in the DSI was in the top economic challenges facing Australian businesses. More directors selected labour shortages (55 per cent) than COVID-19 (43 per cent), with climate change, the Australia-China relationship and global economic uncertainty rounding out the list of the top five issues. Labour market challenges also appeared in directors’ nomination of skills shortages as the second most pressing short-term issue the federal government should address. Sticking with the labour market, directors judged that, on balance, the WFH revolution is positive for staff health and wellbeing, recruitment and retention, and for reducing overhead costs, but negative for cybersecurity, organisational culture and innovation. Cybersecurity also topped the list of issues that were keeping directors awake at night.

    Finally, pre-Omicron, COVID-19 was still on directors’ minds. As well as ranking second in terms of economic challenges and fourth on the overall ranking of causes of director sleeplessness, a large share of respondents — 76 per cent — supported making vaccines mandatory for staff in their sector.

    AICD’s Director Sentiment Index survey was conducted between 28 October and 8 November 2021 — after the reopening of NSW (11 October), the ACT (15 October) and Victoria (22 October) from their Delta-driven lockdowns, but before news of the Omicron variant. Polling also followed the release of the government’s Long- Term Emissions Reduction Plan on 26 October.

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