The latest Director Sentiment Index shows faith in the economy and business outlook is faltering as the Federal Government’s efforts to implement policies remain hamstrung by a hostile Senate. Tony Featherstone reports.

    Company directors have become more pessimistic about Australia’s economy, citing poor productivity growth, weak consumer confidence and balance-of-power issues in the Senate as key impediments to a lift in business conditions.

    Almost 70 per cent of directors expect the domestic economy to be weak in the next 12 months and they rate its prospects only slightly better than those of the troubled European economy, the latest Australian Institute of Company Directors’ (AICD) bi-annual Director Sentiment Index (DSI) shows.

    Business confidence among directors has hit a two-year low. Almost 40 per cent of directors surveyed have become more pessimistic about the general business outlook and the same proportion said business growth weakened in the second half of 2014.

    Directors are eager for higher infrastructure spending, tax reform, and productivity growth initiatives, but are concerned about the Federal Government’s ability to deliver.

    “The results are a telling indication of the desire for change, as our members come from all parts of the community, not just business,” said AICD managing director and CEO John Brogden in a statement. “However, the survey also highlights a widespread fear that hostile Senates are a barrier to significant reform of any kind.”

    A third of respondents ranked balance-of-power issues in the Senate among the top three economic issues facing business.

    “This unexpected outcome is indicative of the degree to which the Federal Government’s efforts to implement policies are hamstrung by the Senate make-up. It is operating in an environment in which it is almost impossible to govern effectively,” Brogden said.

    “It is a problem now faced by successive governments and is an impediment to sensible policy-making. Directors are looking for quality public debate on a range of issues affecting the economy – including budgetary policy, tax reform, industrial relations and infrastructure.”

    Remarkably, 85 per cent of respondents rated the current policy debate as “poor” and the majority of directors believe the Federal Government does not understand business.

    These findings will alarm Australian industry. As the only indicator measuring the sentiment and intentions of directors, the DSI shows boardrooms across Australia are becoming more pessimistic and risk-averse as the economy weakens and an obstructionist Senate stalls reform.

    The economy badly needs a pick-up in business investment, but the DSI suggests boards will be less likely to approve higher-risk acquisition or expansion strategies in the next 12 months as the economic outlook deteriorates.

    Here is a snapshot of 11 key findings from the first-half 2015 DSI:


    Directors are more bearish on Australian and European economies, neutral on Asia and increasingly bullish on the US. The majority of directors expect a weaker Australian dollar (US 73¢), higher unemployment (6.6 per cent) and further cuts in the official cash rate in 12 months. A slight rise in the Australian sharemarket is expected.

    Key challenges

    The big movers in rankings on economic challenges were balance-of-power issues in the Senate, low infrastructure spending, an ageing population and government debt levels. Directors were less concerned about the Australian dollar’s value, energy costs and credit availability compared with the previous survey.

    Business conditions

    Only 19 per cent of directors surveyed are optimistic about the general business outlook over 12 months and only 29 per cent are optimistic about their sector. Directors have become more concerned about the future growth of their business, with sentiment deteriorating over four consecutive halves, although it remains slightly positive on balance.

    Mergers and acquisitions

    Almost 70 per cent of directors expect a rise in mergers and acquisitions (M&A) in the coming year, in line with the previous survey – a surprising finding given growing board pessimism on the economy and business conditions, and risk aversion.

    The budget

    Restructuring the tax system to increase long-term revenue should be the key budget priority, say directors. About 65 per cent of respondents believe the Federal Government should aim for a budget surplus within five to 10 years. That suggests boards are concerned about the potential damage to economy from greater fiscal austerity.

    Short-term priorities

    Infrastructure investment should be the Federal Government’s top priority in the next three years, followed by taxation reform and productivity growth. Directors have consistently rated infrastructure as a key government priority in the DSI, and almost 90 per cent in the latest survey believe current infrastructure spending is too low. They are slightly less concerned about Australia’s international competitiveness and industrial relations compared with the previous survey.

    Long-term priorities

    After infrastructure, addressing the ageing population should be the government’s key priority over 10 – 20 years, say directors. Productivity growth continues to rate highly and reducing Government debt was the biggest mover in the rankings. Directors are less concerned about Australia’s energy resources, border protection and defence spending.

    Tax reform

    Directors rate the goods and services tax (GST) as the top priority in any comprehensive review of the tax system. Almost 80 per cent support a change to the GST system; a third of directors say the government should increase the rate of GST and broaden its base. Other tax-reform priorities include multinational tax arrangements such as transfer pricing and state-based taxes, including payroll tax. Reform of negative gearing had the biggest rise in the rankings and company-tax reform had a slight fall.

    Red tape

    Directors have become more concerned about the level of red tape and its effect on business and board productivity, despite government efforts to reduce it. About 35 per cent experienced an increase in red tape in the past 12 months and the same proportion expect higher red tape in the coming year. The effect of red tape is most pronounced on workplace health and safety, workplace flexibility, employing new workers and preparing for or paying tax. Directors say red tape compliance consumes about a quarter of their total board commitment.

    Government sentiment

    Director perceptions of whether the Federal Government understands business has fallen sharply since the September 2013 election. More than 60 per cent of directors believe the Government does not understand business, although overall sentiment towards the Government is still considerably higher than when the previous Government was in power.

    Growing risk aversion

    More than 70 per cent of directors believe there is a risk-averse decision-making culture on boards and almost 85 per cent say the risk of personal liability has caused them to take an overly cautious approach at some point. Director liability and compliance requirements continue to have the largest negative influence on the willingness to serve on boards. Some good news was an increase in directors who believe the public perceives them as ethical.

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