Economic concern, taxation reform and government failings are the key findings from the 2014 second half Director Sentiment Index, writes Angela Faherty.

    Directors are more pessimistic about the future health of the Australian economy than ever before, a study has found. Figures from the 2014 second half Director Sentiment Index (DSI) show that more than 40 per cent of directors considered the Australian economy as weak in the past six months, while half see it as weak at present.

    The survey, conducted by the Australian Institute of Company Directors, measures the opinions and future intentions of 501 directors of private business, not-for-profit organisations and ASX-listed companies.

    It found that the future outlook for the Australian economy is even more pessimistic, with 55 per cent of directors expecting the economy to remain weak over the next year.

    Remaining consistent with the first half of 2014, directors cited low productivity growth as the biggest economic challenge facing Australian business. This was followed by global economic uncertainty and low consumer confidence.

    Overall, director sentiment regarding economic indicators was down from the first half of 2014, with 86 per cent of directors expecting to see the value of the Australian dollar decline further over the next 12 months.

    Almost 60 per cent expect to see a rise in unemployment across the country, while 34 per cent expect the rate of inflation to increase. Thirty eight per cent expect a hike in the Reserve Bank of Australia’s official cash rate. 

    For the first time since the survey began, directors expect the US economy to be stronger than Asia over the next 12 months, with almost 40 per cent expecting an uptick in the next year. 

    However, director sentiment regarding the European economy has remained pessimistic, with 70 per cent expecting it to remain weak over the next 12 months.

    Tax reform
    Directors have identified taxation reform as a priority for the federal government, the DSI found. 

    In particular, multinational tax arrangements, such as transfer pricing, were viewed as an area most in need of change, with state-based taxes such as payroll tax and the GST also areas where directors felt reform was needed.

    The study found that overall, director sentiment regarding the level of corporate and personal taxation remains pessimistic, with almost 70 per cent of directors believing the level of personal taxation is too high.

    In line with previous surveys, 42 per cent of directors believe the level of corporate taxation is too high, while 43 per cent think it is “about right”. 

    In contrast, only 15 per cent of directors believe corporation tax is too low, compared to 6 per cent for personal taxation levels.

    Commenting on the study, John H C Colvin FAICD, CEO and managing director at Company Directors, said: “It is clear that tax reform is now a significant item on the national reform agenda.

    “Any debate about this issue needs to consider all aspects of taxation so that Australia can adopt a robust system that will generate sufficient public revenue without compromising business investment or entrepreneurial spirit.”

    Colvin added: “The DSI results show that productivity growth and taxation reform are critical issues for the government to address in the short term. Directors have, for the first time, indicated that both these areas are a greater priority than infrastructure investment.”

    Confidence slumps
    In another blow to the federal Coalition government, the study also found that more directors than not now believe that the current government does not understand business.

    Overall, directors’ confidence in the government has slumped to its lowest level since its election in September 2013, slipping 7.1 points since the last survey and falling back to the same level recorded in early 2013 when the former Labor government was still in power.

    Almost half of all directors rate the government’s performance in its first year in office as “poor” or “very poor” with a similar number believing the government’s performance had a negative impact on their business decision-making.  Around 75 per cent believe it had a negative impact on consumer confidence.

    This continues a downward trend in sentiment that has been apparent since the Coalition took power last September.

    Of particular concern for directors, is the level of red tape burdening business.

    Thirty five per cent of respondents believe this has increased over the last 12 months, while more than a quarter of directors expect an increase in the coming year.

    Around 70 per cent of directors identify both workplace health and safety and preparing and paying taxes as the aspects of their business most affected by red tape.

    Overall, directors estimate that red tape compliance accounts for approximately 24 per cent of their total board commitment, with around 40 per cent believing this commitment has increased in the past year.

    When questioned on government funding, directors indicated broad support for the idea that the government should provide financial assistance to select industries with a capacity for growth.

    The sectors considered most worthy of federal funding include research and development (R&D) organisations, start-up companies and those operating in niche markets with high barriers to entry.

    The study found that 97 per cent of the 501 directors responding to the survey said the R&D industry should receive some, or full, financial support from the federal government.

    Ninety per cent believed the same level of support should be given to start-up companies.

    In contrast, 58 per cent of directors believe industries facing severe market decline should receive no financial support from the federal government.

    Fifty nine per cent of directors also supported financial investment in companies operating in niche markets with high barriers to entry, however, 36 per cent also believed these companies should not receive any financial support.

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