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Australian Weekly Report

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.

Defence spending to be boosted

The federal government will boost defence spending by A$50 billion over the next decade as part of its continuing overhaul of the Australian Defence Force (ADF).

Announcing the National Defence Strategy (NDS) and the Integrated Investment Program (IIP), Defence Minister Richard Marles said the government was also considering plans to recruit non-citizens to serve in the ADF to address ongoing workforce recruitment and retention issues.

Mr Marles said annual defence spending would now almost double over the next 10 years to A$100 billion in the 2033-34 financial year. He said the government would allocate A$5.7 billion in additional funding over the first four-year budget cycle, signalling that most of the increased funding would come in the medium to long term.

Speaking at the National Press Club, Mr Marles emphasised the need for Australia to project military power further from its shores. “To contribute to regional security we must be able to project,” he said. “To resist the coercion that would come from the disruption of our sea lines of communication, we must be able to project. And to defend Australia’s interests in the geography-less domain of cyber we must be able to project,” he said.

The government has already committed an extra A$11 billion over the next decade to expand the nation’s fleet of warships while preparing to outlay A$368 billion over 30 years to develop a fleet of eight nuclear-powered submarines. That spending comes in the context of last year’s Defence Strategic Review (DSR), which said the ADF was not “fit for purpose”.

The DSR said the ADF needed to become a more “focused force” rather than a “balanced” one that tried to do too many things. It also said the country’s military was not prepared for the modern “missile age” of warfare, which would require the rapid acquisition of long-range weapons. The Army would also need to be restructured, according to the review, so as to focus on “littoral manoeuvre operations by sea, land and air from Australia” rather than land warfare.

Mr Marles said that in the light of ongoing workforce issues, the NDS also calls for a widening of eligibility criteria to enable more people to join the ADF, including “developing options, where appropriate, to recruit non-Australian citizens”. Defence will develop a new, comprehensive workforce plan this year that will be aligned with the NDS and IIP to help meet workforce needs.

Some A$30 billion of the A$50 billion in funding is in the form of already announced spending, according to analysts, leaving A$20 billion as new money. Economists also suggest the inflationary aspects of the spending to be minimal, given much of it will not be spent locally.

The challenge for the minister will be ensuring the medium- to long-term spending actually materialises, while the government also needs to address the fact that it is still delivering less capability at a time where Australians will be feeling less safe about the state of global affairs, particularly in the wake of Iran’s attack on Israel and its likely response.

Other news

Government to consider new tax incentives

The federal government is expected to offer wide-ranging tax concessions to attract billions of investment dollars into major projects under its Future Made in Australia plan.

The government’s push is part of a global effort from governments keen to intervene in their economies to boost domestic manufacturing, particularly when it comes to renewable energy and the transition to a net zero economy.

“The world is changing and we need a slice of the action,” Treasurer Jim Chalmers said. The global push is being led by the United States and its Inflation Reduction Act, which is pouring significant amounts of money into the push for net zero.

Dr Chalmers defended the federal government’s attempt to join the contest with its Future Made in Australia Act. “We need to understand that a generational change in the global economy, and in the opportunities available to Australia, requires us to undertake a generational change in our thinking,” he said.

In an effort to allay fears about perpetual or misguided government support, Dr Chalmers said there would be “rigorous and robust tests” to ensure government money was not wasted.

He said there would be faster approvals for some investments and stronger checks in areas of concern. “That will be all about recognising that we can streamline investment when it’s in areas which are low risk but high reward,’’ he said. “And we need to strengthen the arrangements where the risks outweigh the benefits.”

Rather than cut the company tax rate to attract investment, the government is expected to announce tax concessions that will target specific industries.

“We are prepared to consider the tax system as one of a whole range of levers that may make ourselves that indispensable part of the global net zero economy,” he said. “It will be broad, it will be comprehensive. The tax system may play a part; public investment will play a part, but what we’re trying to do here is incentivise private investment, not replace it.”

Inflation fears over Middle East conflict

Efforts to rein in inflation have stalled, according to the International Monetary Fund (IMF), although the global economy remains “remarkably resilient”.

It comes amid concerns that continuing conflict in the Middle East could put pressure on global prices, which would see central banks hold back on cutting interest rates and undermine investment confidence.

In its latest World Economic Outlook, the IMF said the global economy remained weak, although the outlook had improved over the past six months. It was also optimistic that central banks would help deliver a “soft landing” for their economies.

According to the IMF’s forecasts, global economic growth would be steady at 3.2 per cent in this year and the next. However, uncertainty over China’s economy and conflicts in the Middle East and Europe clouded the outlook. The IMF forecast Australia’s growth rate to a sit at 1.5 per cent for this year, while real GDP growth for 2025 was lowered to 2 per cent.

According to the IMF, global inflation would continue to track lower to 2.8 per cent by the end of 2024, and to 2.4 per cent a year later. In Australia, inflation was expected to reach the top of the Reserve Bank of Australia’s 2-3 per cent target range by the end of next year.

The IMF’s chief economist, Pierre-Olivier Gourinchas, said that most of the good news on inflation had come from a fall in energy prices and goods inflation.

However, Iran’s decision to launch missiles and drones against Israel risked escalating an already tense situation, which could have flow-on effects to the global economy. This would only add to any price increases resulting from further trade restrictions on Chinese exports.

Federal Treasurer Jim Chalmers said rising geopolitical uncertainty would increase economic volatility and slow the push to rein in inflation.

In the US, Federal Reserve Chairman Jerome Powell said interest rate cuts would be delivered later rather than sooner, since inflation remained stubbornly high. If price pressures continued, he said, the Fed could keep rates steady for “as long as needed”.

In Australia, financial markets had already pushed back expectations of the RBA’s first interest rate cut to December, with a small possibility that this could be delayed until 2025.

AMA sounds alarm over public hospitals

Elective surgery waiting times are the longest on record, and emergency departments are failing to treat up to one third of patients with life-threatening conditions on time, according to the Australian Medical Association (AMA).

The AMA says a combination of chronic disease, inadequate access to primary care, and a lack of disability and aged care support is putting too much pressure on the public hospital system.

For example, a lack of community support for aged or disabled patients means they cannot be discharged from hospital, forcing the cancellation of elective surgeries due to a lack of beds and putting pressure on emergency departments to treat patients.

According to the AMA’s latest report card on the public hospital system, the percentage of category two elective surgeries performed on time has dropped to its lowest point, with patients waiting an average of 49 days, which is almost double the average waiting time of 20 years ago.

With health ministers meeting today, the AMA is calling for an urgent injection of funds to support the public hospital system. It wants the federal and state governments to invest A$4.12 billion into public hospitals immediately.

This would allow them to deal with what it says is a “growing and increasingly critical backlog of planned surgeries” until the new National Health Reform Agreement (NHRA) is finalised.

“This year’s report card shows that our hospitals are at breaking point. Capacity within our public hospitals is falling across the board, but it is even more serious when viewed through the lens of an ageing population,” said AMA President, Steve Robson.

“We need to see the next NHRA include greater support for public hospitals to push for improved performance, with performance-based funding designed to incentivise improved patient outcomes,” he said.

Critical minerals projects get support

The federal government will commit nearly A$600 million in loans to help two critical minerals projects under its Future Made in Australia policy.

The government will assist Alpha HPA to establish a high-purity alumina processing facility in Queensland through A$$400 million in loans, with a further A$185 million in loans going to Renascor Resources to develop its Siviour Graphite Project in South Australia.

The funding will come via the government’s A$4 billion Critical Minerals Facility, and the Northern Australia Infrastructure Facility. In announcing the financial support, Prime Minister Anthony Albanese said it made economic sense to do so.

“These two critical-minerals projects will help secure good and secure jobs in manufacturing, and clean, reliable energy,” he said.

In the wake of the Future Made in Australia Act announcement, which will look to boost government support for certain sectors of the economy, the head of the Productivity Commission raised questions about the distorting potential of such policies.

Productivity Commission Chair, Danielle Wood, cautioned that supporting industries that lack a long-term competitive advantage “can be an ongoing cost” as it would divert workers and investment away from parts of the economy where they might generate high value uses.

However, the Treasurer, Jim Chalmers, said support for industries went beyond just the economic benefits, but was also a matter of national security. “This is how we align our national and economic security interests and deliver another generation of prosperity, by making ourselves an indispensable part of the global net-zero economy,” he said.

Big four falling out of favour

The big four consulting firms are falling out of government favour, according to a new survey, with more than half of those questioned saying they would not consider using one again.

According to a brand and reputation study by Beaton Research + Consulting, small-to-medium enterprises and large corporates are also reconsidering their relationships with the big four consultancies.

According to Beaton, the big four have fallen out of favour for the majority of government clients, with more than half of respondents (57 per cent) saying they would not consider using a big four firm again. Most are now considering the so-called “next four” of BDO, Grant Thornton, Pitcher Partners and RSM.

Meanwhile, 26 per cent of smaller clients reported one of the big four as their primary advisor, representing a significant drop from the 54 per cent recorded early last year.

It comes as the sector continues to face ongoing parliamentary and media scrutiny in the wake of the PwC tax scandal. The independent Senator for the Australian Capital Territory, David Pocock, has been relentless in his pursuit of answers from consultants, particularly those working in the defence sector.

Through Senate committee questioning, for example, the first-term senator uncovered a six-figure payment from Defence to KPMG for work it knew had not been delivered. He has also pursued the issue of lobbyist access to Parliament House through passes sponsored by MPs.

Regulator to stay in Armidale

The federal government has dismissed a recommendation that the agricultural sector’s chemical regulator be relocated back to Canberra.

The Australian Pesticides and Veterinary Medicines Authority (APVMA) was moved to the northern New South Wales city of Armidale in 2016 by the then-Agriculture Minister, Barnaby Joyce. Armidale sits in the federal seat of New England, which is held by Mr Joyce.

A review of the move found the regulator had been “captured” by industry interests and faced ongoing complaints of misconduct by staff. While the review recommended the authority be moved back to Canberra, Federal Agriculture Minister Murray Watt said that would not be happening.

Mr Watt said the initial relocation caused significant disruption to the authority and its capabilities, and the government did not want a repeat of that chaos. The authority would, however, remain an independent body, rather than be absorbed into the Department of Agriculture, Fisheries and Forestry.

The decision to keep the APVMA in Armidale has been welcomed by industry, with CropLife Australia chief executive Matthew Cossey telling media that it was wise to not “make the same mistake twice”.

The National Farmers’ Federation also backed the decision for the same reason, saying that a relocation would only cause unnecessary disruption. “Reversing the decision would likely only cause further negative impacts for the organisation’s ongoing services, performance and business,” said NFF chief executive, Tony Mahar.

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