Australia’s economy is grappling with mounting challenges, with key business groups urging government intervention. Sky News reports that the Australian Industry Group (AiG) and the Council of Small Business Organisations (COSOBA) have expressed concerns over the current economic climate.
Both organisations are calling for swift action to support the struggling private sector amidst growing inflationary pressures. With economic instability on the horizon, the future of Australia’s growth hinges on effective policy measures in the upcoming federal budget.
Struggles of Small Businesses Amid Inflationary Pressures
The economic environment has been tough for small businesses over the past year. COSOBA reports that nearly half of all small businesses are not breaking even, with the combined pressure of slow growth and rising input costs.
This has led to a significant toll on profitability, especially for businesses that rely on discretionary consumer spending. Approximately 49% of small and medium business owners surveyed said they were feeling less optimistic about the economic outlook for the year ahead.
COSOBA emphasised that the combined cost of living and doing business is causing significant financial and emotional stress on individual business owners.
COSOBA stated :
The economic environment has been challenging for many small businesses over the past year. Growth in demand has slowed while input costs remain elevated, putting pressure on profitability – particularly for businesses reliant on discretionary consumer spending.
The Impact on Large Enterprises
Large businesses are not exempt from the economic downturn. AiG revealed that large firms are experiencing the steepest annual decline in gross operating margins since records began in 2001.
The Producer Price Index, which measures inflation in goods used by various industries, had risen by 14.6% over the three years to the September quarter of 2024. Some industries, like manufacturing, saw a 29% increase in costs, while construction saw a 33% rise.
The rising cost of doing business, particularly in sectors like gas, is hurting overall profitability, with gas prices for manufacturers increasing by 52%.
AiG warned that it is unsustainable for businesses to continue absorbing rising input and wage costs without affecting profitability and the ability to invest or generate new jobs. Without significant action to moderate these pressures, the investment needed to stimulate private sector growth will not materialise.
The Growing Fiscal Deficit and Its Consequences
AiG raised alarms over Australia’s rising fiscal deficit. The group noted that federal spending is projected to peak at 27.2% of GDP in 2025-26, the highest level since the economic reforms of the mid-1980s.
Federal spending has been increasing at a rate much faster than revenue, leading to a widening fiscal deficit, which is expected to reach $26.9 billion in underlying terms and $47.8 billion in headline terms for this financial year.
AiG cautioned :
Surging federal and state spending will have deleterious consequences for the prospects of a durable economic recovery in Australia.
AiG emphasised that this level of government spending is not sustainable in the medium term and that continued growth in public spending could lead to significant fiscal challenges. Managing structural deficits would require either cuts to public services, an increase in taxes, or growing public debt.
Concerns over unavoidable spending
AiG expressed concern over how the Albanese government characterised many increases in public spending as “unavoidable”, suggesting that the spending programs were designed in a way that inherently leads to cost increases. This could pose a significant risk to Australia’s financial security in the long term.
Both AiG and COSOBA have called for greater government intervention to mitigate the current pressures. While the Albanese government has been quick to offer relief to consumers, particularly in the face of rising energy prices, the business groups emphasise that the same level of support must extend to the private sector.
The lack of relief for businesses could lead to a prolonged economic stagnation, preventing much-needed investment and job creation. As Treasurer Jim Chalmers prepares for the upcoming federal budget, the government’s ability to balance spending and support the private sector will be key to Australia’s economic recovery.
