CMAX Advisory closely follows political developments internationally and analyses implications for businesses operating in Australia.
We develop a weekly report of the most important political and economic news in Australia, utilising our understanding of complex political issues and processes to inform companies of relevant developments and forecast likely outcomes.
This week's top story
Defence review focuses on Indo-Pacific
The federal government has released its 2020 Defence Strategic Update, which focuses the Australian Defence Force (ADF) on an increasingly contested Indo-Pacific, with the government looking to acquire capabilities to keep any adversary further at bay.
In releasing the new structure plan and strategic update, Prime Minister Scott Morrison announced the acquisition of a number of capabilities, including anti-ship missiles, and a commitment to explore hypersonic weapons.
The new structure commits A$270 billion over the next decade on new and upgraded defence capabilities, an increase from the A$195 billion committed in the 10 years from 2016, when the last Defence White Paper was released.
The focus is on the acquisition of capability that can be deployed in the near future, rather than in decades, to deal with the possibility of aggression in the Indo-Pacific. The aim is to rapidly increase not only the lethality of the ADF, but the reach of offensive weapons, keeping any adversary in the Indo-Pacific further from Australian territory, and maximising the cost of an attack on Australian interests.
In his speech, Mr Morrison acknowledged that “tensions over territorial claims are rising across the Indo-Pacific region, as we have seen recently on the disputed border between India and China, in the South China Sea, and in the East China Sea”. He said Australia needed to prepare for a post-Covid world that is poorer, more dangerous and more disorderly and needs to face the reality that “we have moved into a new and less benign strategic era”.
The rising threat in a region that Mr Morrison said will increasingly be the focus of “the dominant global contest of our age” has secured defence expenditure amid an uncertain budget outlook. Despite acknowledging “many pressures on the Commonwealth budget”, he reaffirmed the government’s commitment “to properly funding defence with the certainty of a new 10-year funding model that goes beyond our achievement of reaching 2 per cent of GDP this year”.
Finance minister to quit politics
Finance Minister Mathias Cormann has announced he will leave politics in the coming months, opening the way for a Cabinet reshuffle before the end of the year.
Senator Cormann has been finance minister for seven years and is one of the federal government’s most senior members. His role places him at the heart of government decision-making, particularly with regards to spending decisions across portfolios.
As well as sitting on the Expenditure Review Committee, which is responsible for advising Cabinet on budget spending priorities, he sits on the National Security Committee and chairs the National Security Investment Committee.
He is also the government’s chief negotiator in the upper house, where the government lacks a majority and must negotiate with cross-bench senators if the opposition Labor Party and the Greens combine to vote against legislation.
The West Australian senator said he intended to resign within the next six months, which would allow him time to help Treasurer Josh Frydenberg finalise the government’s budget, which has been delayed from May to October due to the coronavirus pandemic. He will also help in developing the 23 July economic update.
Senator Cormann said if he continued in parliament beyond the end of the year he would have felt compelled to contest the next election. His decision will not change the government’s numbers in the Senate as his departure will create a so-called “casual vacancy”, to be filled by the Liberal Party.
However, his departure will lead to a reshuffle of the federal ministry before the end of the year. A number of names have been suggested as possible replacements, including Trade Minister Senator Simon Birmingham, who is also likely to succeed Senator Cormann as the Liberal leader in the Senate.
Other names have included Health Minister Greg Hunt and Attorney-General Christian Porter. However, reports suggest Mr Hunt is keen to remain in his portfolio, given the coronavirus pandemic is far from over, while Mr Porter is involved in negotiations between unions and business groups to develop a new industrial relations system.
Both are also members of the lower house, and while it is not a requirement, the finance minister is typically picked from among the ranks of the upper house.
AMA calls for pause in easing of restrictions
The Australian Medical Association has called for a pause in the easing of all Covid-19 restrictions across the country, as Victoria battles to maintain a fresh outbreak of the disease.
The group wants all state and territory governments to pause their easing of restrictions to see how the situation in Victoria develops, with AMA President, Dr Tony Bartone, saying the next two weeks would be crucial.
“Clearly, what we have seen is that there is almost this sort of competitive tension to be the first state to get back to full pre-Covid ways,” he said.
Australia’s states and territories have been gradually easing restrictions on public activities such as eating at restaurants and large gatherings as the number of coronavirus cases across the country continued to drop.
However, a spike in cases across the Victorian capital of Melbourne in recent weeks has led to the state government imposing lock-downs on a number of suburbs, with talk of a state-wide shutdown if cases continue to rise. The outbreak has also led to other states banning Victorian residents from entering their jurisdictions.
“Let’s see what happens in Victoria over the next two to four weeks. If we can got those numbers right become down, if we can get the confidence that we have got these outbreaks under control and then assess, indeed, whether there has been any other outbreaks or any other failures in the process around the nation,” said Dr Bartone.
Prime Minister Scott Morrison has said outbreaks would be a part of reopening the economy, and what mattered was how those outbreaks were handled. “This is part of living with Covid-19,” Mr Morrison said in late June, “and we will continue on with the process of opening up our economy and getting people back into work.”
Choice-PHA debate continues
Private Healthcare Australia has again taken aim at consumer group Choice, accusing it of pursuing an ideological agenda, as the group also pushes for a lowering of medical device prices.
It came after the consumer advocacy group published a report examining positive and negative aspects of private health insurers’ response to the Covid-19 pandemic. It said while insurers had taken steps to support people financially affected by the pandemic, more needed to be done.
It described the industry’s response as “a lot of talk and not enough follow-through” and that insurers would need to do more to “address people’s concerns about the cost and value of their insurance”.
In response, Private Healthcare Australia chief executive Dr Rachel David said health funds were one of the first sectors to offer support to their members during the pandemic.
“Today’s ‘investigation’ by Choice of health funds’ response to Covid-19 is poorly researched. Choice has long campaigned against private health in Australia,” she said in a statement.
Private Healthcare Australia has also called on the federal government to revisit amendments to private health to keep Australians in cover, including examining the cost of medical devices.
Dr David said many projects, including improving the affordability of private health insurance, were put on hold as governments and the healthcare sector focused on addressing the immediate crisis.
Dr David said the federal government should reexamine regulatory changes to bring down medical implant costs that she said are “escalating way out of proportion to the rest of the world”.
RBA backs retention of spending
The Reserve Bank of Australia has warned that suddenly removing government spending measures would cause problems, with Deputy Governor Guy Debelle saying ongoing fiscal and monetary policy support would likely be needed for years.
To soften the impact of shutting down large parts of the economy to contain coronavirus, the federal government rolled out a A$70 billion wage subsidy to keep people employed and a A$550 supplement for welfare recipients.
Those schemes are scheduled to end in September, with the government facing pressure from the opposition, business leaders and from within its own ranks to extend the scheme in some form. The government is due to announce its plans in an economic update later this month.
Dr Debelle has added his voice to those calling for continued stimulus spending, saying that while the economy had done better than originally expected, the recession would have a long-term impact that required ongoing policy support, including government spending.
“If everything ceases at the end of September, yes that would be a problem,” he told the Economic Society Australia.
“Recent data indicate that the outcomes in the Australian economy have been better than earlier feared. But we should not lose sight of the fact that the decline in the economy and the impact on households and businesses is historically large. Notwithstanding the better than feared outcomes, the fiscal and monetary support that has been provided was, and remains, warranted,” he said.
R&D changes face opposition
The federal government is facing opposition to its planned changes to research and development, as an inquiry into the changes re-opens after coronavirus-related delays.
The Senate Economics Committee is reviewing the federal government’s amendments to its principal mechanism to stimulate industry investment in R&D by providing a tax offset for eligible R&D activities.
Under the government’s proposed changes, a refund cap of A$4 million would be introduced, and a tiered system created, calculating an “incremental intensity” measure based on R&D expenditure as a percentage of total business expenses.
Shadow Minister for Employment and Industry, Science, Small and Family Business, Brendan O’Connor, said the industry stakeholders appearing before the committee “universally rejected the changes … particularly in relation to the unintended consequences of the intensity threshold, the bill’s retrospectivity, and the budget implications, which will undermine future research and development by Australian industry”.
Opposition Leader Anthony Albanese has also suggested that scaling back the scheme could hamper economic growth, while Centre Alliance Senator Rex Patrick said he was concerned industry participants were not having their apprehensions with the bill heard.
While the government appears committed to the planned changes, even planning to apply them retrospectively, Labor and Centre Alliance opposition to the bill would make its passage through the Senate more difficult.
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