darryl gobbett, baillieu holst chief economist cpa sa division presentation

CPA Australia Business South Australian Division

What Does the Election Result mean for SA Households and

Business

Tuesday 12 July 2016

Corporate Governance Forum Darryl GobbettChief Economist and Adviser

Please read the disclaimer at the beginning of this report.

Disclaimer

Baillieu Holst Ltd has prepared this presentation for the general information for investors. As no account has been taken of the investment objectives, financial situation and needs of any particular person, it does not represent advice specific to any particular person. Investors must decide whether information contained in this document or any recommendations whether express or implied is appropriate in light of their specific investment objectives, financial situation and needs. Investors should consider seeking professional investment advice from a licensed adviser before making an investment decision. Baillieu Holst Ltd makes no warranty as to the accuracy, reliability or completeness of any information contained herein. Except to the extent that any liability under any law cannot be excluded, no liability for any loss or damage which may be suffered by any person, directly or indirectly through relying upon any information or statement in this presentation or any of its attachments is accepted by Baillieu Holst Ltd, its directors employees or agents whether that loss or damage is caused by any fault or negligence on their part or otherwise. This document should not be substituted for legal advice and is provide for information purposes only. Baillieu Holst does not give taxation advice or legal advice


The Economy and Financial Outlook: Issues for Business Management• Output Growth slow and Inflation and Interest rates staying very low here and overseas

– High likelihood of further Australian Cash rate cuts

– US interest rate rises to continue in measured fashion.

• Output growth moderate and early signs of wages growth lifting

– China growth slowing and changing but no recession

• Australian and South Australian spending and Output growth to remain slow– Non Mining investment not lifting as quickly as earlier expected.

– Private sector growth likely to be even slower following Federal election result

• Federal election outcome likely to increase business uncertainty• SA State Budget 2016/17 seeing increased spending, taxes and asset sales

– Increased GST distributions and asset stripping main saviours

– Public sector continues to grow

– Tax reform in SA too hard in absence of Federal change

• Federal action seems some time off due to increased spending, dubious tax forecasts

– New employment handouts but overall support for business being wound back


• Pace of external change accelerating but public policy response lagging– Asset price movements likely to be very divergent

– Business survival and success even more so dependent on own actions

• No real action in Australia on Budget, Tax or Regulatory reform for at least the next 5 years – Western societies showing distrust of political, financial and economic elites– Seen in rise of Mr Trump and European right wing parties, Brexit and Australian election results,

• Many feel left out of economic liberalisation and Post GFC policies, Fear of change and “new” economy

– LNP and ALP have no appetite for reform, Minor parties are anti-reform• Age of Entitlement back with a vengeance• Major risk 2016/17 Federal Budget changes will not get passed

– Danger of cut in Federal Government global credit rating: Flow on to SA and Australian companies• Productivity, Workforce Participation and Industry flexibility issues not a policy focus

– Federal, State or Local

– Longer term impacts on:• Private real Income growth, Spending, Profits and Superannuation returns

• Tax revenues and public sector spending

• Population and workforce growth

The Economy and Financial Outlook:


Economic and Financial Background: Low Growth, Slower Productivity gains, Private Sector deflation

Output Growth, Inflation Adjusted, % pa Cons Price Inflation %

pa

Interest Rates % pa 8 July 2016

Structural Central Govt

Budget% of GDP

1997 - 2006 2014 2015E 2016F 2017F 2017F 3 mo

Interbank10 year

Govt Bonds

2017F

United States 3.3 +2.4 +2.4 +2.4 +2.5 +1.5 0.5 1.36 -3.4

Japan 0.9 0.0 +0.5 +0.5 -0.1 +1.2 -0.10 -0.28 -3.5

Euro Area 2.3 +0.9 +1.6 +1.5 +1.6 +1.1 -0.22 0.27(Germany) -0.9

United Kingdom 3.1 +2.9 +2.2 +1.9 +2.2 +1.9 0.5 0.74 -2.2

China 9.4 +7.3 +6.9 +6.5 +6.2 +2.0 4.35 2.87 -2.6

India 6.6 +7.2 +7.3 +7.5 +7.5 +5.3 6.75 7.39 -6.6

Indonesia 2.5 +5.0 +4.8 +4.9 +5.3 +4.5 6.50 7.28 -2.8

ASEAN 5 na +4.6 +4.7 +4.8 +5.1 +3.8 na na na

Brazil 2.7 +0.1 -3.8 -3.8 0.0 +6.5 14.25 12.26 -7.0

Russia 5.0 +0.6 -3.7 -1.8 +0.8 +6.5 10.50 8.88 -3.0

Australia 3.6 +2.6 +2.5 +2.5 +2.5 +2.4 1.75 1.88 -0.9

World +3.4 +3.1 +3.2 +3.5

Group of 7, 1.7

New & Emerging, 5.9

Source: IMF World Economic Outlook, April 2016; www.tradingeconomics.com


2016/17 Federal Budget Major Financial Projections

13/14 14/15 15/16e 16/17f 17/18p 18/19p 19/20p

Payments -% Growth -% of GDP

+11.825.7

+2.1 25.9

+3.1 25.5

+4.725.8

+3.325.5

+4.725.4

+4.425.2

Receipts -% Growth -% of GDP

+3.523.0

+4.7 23.5

+2.323.5

+6.023.9

+6.324.2

+7.424.8

+6.625.1

Cash Balance (Underlying) - $ billion -% of GDP

-48.5-3.1

-39.9-2.5

-39.4-2.4

-37.1-2.2

-26.1-1.4

-15.4-0.8

-6.0-0.3

Source: Australian Government 2016/17 Budget Strategy and Outlook Budget Paper No. 1


Risks Continue to be of Higher Deficits



Main Revenue ItemsCash Basis, $b and % change

13/14 14/15 15/16e 16/17p 17/18p 18/19p 19/20p

Individuals

Employment/Earnings Growth %Individual Tax as % of Total

163.6+4.7%

0.7/2.548.3%

177.9+8.7%

1.6/2.350.3%

188.4+5.9%

2/2.2551.7%

197.0+4.5%

1.75/2.551.4%

210.4+6.8%

1.75/2.7551.3%

223.9+6.4%

1.25/3.2551.0%

239.77.1%

1.5/3.551.2%

Companies, FBT, RRTs 72.9+0.3%

72.4-1%

70.0-3.3%

74.5+6.4%

82.1+10.1%

90.2+9.8%

96.5+7.0%

Superannuation 6.1 +19.8%

5.9 -3.7%

6.6 +12.9%

7.4+11.3%

9.0+21.4%

10.0+11.1

10.99.0%

Excises and Customs 35.3+3.5%

34.6-2.1%

34.8+0.6%

35.8+2.8%

37.1+3.7%

39.7+7.1%

42.7+7.4%

Goods and Services Taxes 51.4+3.2%

54.5+6.0%

57.8+6.0%

60.95.4%

64.25.4%

67.65.3%

70.74.5%

All Taxes 338.4 353.5 364.5 382.8 410.2 438.8 468.3

Personal Income Tax Bracket Creep and Increased Profits? main source of Revenue Growth



Main Expense Items by Program:Increasing concentration with reducing flexibility Accrual Basis , $b and % of Total Spending

14/15e 15/16e 16/17f 17/18p 18/19 19/20p

Assistance to the Aged 57.6 60.0 63.3 65.7 69.4 72.9

13.7% 13.9% 14.0% 14.1% 14.2% 14.2

Assistance to Families with Children 38.8 38.9 37.6 37.3 39.9 41.6

9.2% 8.9% 8.3% 8.0% 8.2% 8.1%

Medical Services and Pharmaceutical Benefits 28.2 31.5 32.8 33.7 35.0 36.8

6.7% 7.3% 7.3% 7.2% 7.2% 7.2%

Assistance to those with Disabilities 27.7 29.1 33.4 40.5 51.1 52.9

6.6% 6.7% 7.4% 8.7% 10.5% 10.3

Assistance to the States for Public Hospitals 15.5 17.2 17.9 18.9 20.0 21.1

3.7% 4.0% 4.0% 4.1% 4.1% 4.1%Total of Above as % of Total Spending 39.9% 41.0% 41.1% 42.2% 44.0% 44.0%



Budget Forecasts

% change, inflation adjusted 13/14 14/15 15/16e 16/17f 17/18f

Exports 5.8 6.5 6 5 5.5

Imports -1.9 0 0 2.5 3

-Net Contribution to Growth, % GDP 1.6 1.4 1.25 0.75 0.75

Gross Domestic Product 2.5 2.2 2.5 2.5 3

Nominal GDP 4 1.6 2.5 4.25 5

Terms of Trade, % change -3.7 -10.3 -8.75 1.25 0

Current Account Deficit

-$billion

-% of GDP

48.7

3.1

59.6

3.7

78.4

4.75

68.8

4

63.2

3.5


→Export volume growth revised down, Import volume growth revised up→Current Account Deficit revised to be bigger→Overall economic growth rate revised down from 2015/16 Budget forecasts

→Election result and increased uncertainty likely to see further slowing


Budget Forecasts→Economic growth slow with falling Mining Investment just being offset by increased housing investment, exports →Govt growth forecasts revised down from December 2015 MYEFO

→Mining investment falling faster than expected→Non Mining Investment not growing as fast as expected →Private dwelling investment growth to slow more sharply→Public Final Demand growth is lifting with Infrastructure spending

% change, inflation adjusted(Italicised are BH forecasts)

13/14 14/15 15/16e 16/17f 17/18f

Household Consumption 2.5 2.7 3.0 3.0 3.0

New Motor Vehicle Sales, m* 1.12 1.2 1.35 1.40 1.43

Private Investment - Dwellings 5.1 7.9 8 2 1

No. of Private Dwellings Started (‘000)* 178 200 215 220 222

Business Investment – Mining

Business Investment – Non Mining

-7.0

-3.7

-17.3

1.2

-27.5

-2

-25.5

3.5-14

4.5

Private Final Demand 0.9 1 0.5 1.5 2.5

Public Final Demand 1.6 0 2.25 2.25 2.0


*BH forecasts


Budget Forecasts→Employment and Wage Growth slow, with forecast falling Household savings ratio to support

moderate retail spending growth→Labour force participation lower for 19 – 65 year old males, rising for baby boomers→Population and Working age population growth slower than earlier estimated, issues longer term

→Employment growth, housing demand, retail spending, tax etc→Inflation staying lower for longer, Private Sector deflation as part of global phenomenon→Private sector and public sector wages growth slowing

13/14 14/15 15/16e 16/17f 17/18f

Employment, % change to June qtr 0.7 1.6 2 1.75 1.75

Wage Price Index, % change to June qtr 2.6 2.3 2.25 2.5 2.75

Unemployment Rate, % June qtr 5.9 6.1 5.75 5.5 5.5

Labour Force Participation Rate, % June qtr 64.6 64.8 65 65 65

Household Savings Ratio, % June qtr, trend 10 9 8 7 7

Consumer Prices, % change to June qtr 3.0 1.5 1.25 2 2.25



Net Worth continues to improve, Households starting to save less but real Disposable Income and Consumption growth at two decade lows

Source: Reserve Bank of Australia Chart Pack July 2016


Supply side issues and Slowing Wages Growth

Source: Reserve Bank of Australia Chart Pack July 2016

→Issues for:→Household real income growth, particularly with ongoing tax bracket creep→Company revenue growth and profitability→Interest rate outlook


(De)flation Outlook frightening policy makers

Source: Reserve Bank of Australia May 2016 Statement on Monetary Policy and Chart Pack July 2016


Reserve Bank Forecasts• Inflation now forecast to be below 2-3% pa policy range• Economic growth below earlier reduced potential growth rates

• Slower population growth• Low productivity gains

• Cash rate to 1.25% by end 2016

Source: RBA Statement on Monetary Policy May 2016


Markets Expecting Cash Rate Cuts to under 1.5%→RBA wording of Press release 3 May on Cash rate cut to 1.75% indicates another cut is likely

→Surprise at lower than expected inflation outcomes→Stronger $A than desired for transition of the economy→Economy not growing as strongly as expected→BREXIT and election closeness likely to create bias for lower rates for longer

→Strong Australian GDP growth for March Qtr has not changed cash futures outlook substantially


Term Deposit Rates likely lower for less than 12 month, higher for longer terms→Term Deposit rates spreads over wholesale are contracting as banks now have less need to increase overall retail funding.

→Lending rate margins increasing→But should be an increasingly positive yield curve:

→New banking rules mean most banks may have to increase longer term TDs.→Under 12 months rates likely to be at or under the cash rate in late 2016.

Source: RBA Chart Pack July 2016


Non Mining Investment Expectations not Offsetting Lower Mining Investment: Most Output Growth is in Services, historically showing less capital spending

Gross Investment by Major Industry Sector, $b, Current $ 10/11 11/12 12/13 13/14 14/15 15/16

4th Est16/171st Est

Mining 46.9 82.0 94.7 90.4 76.1 56.8 32.8

Manufacturing 12.3 13.2 9.5 9.2 8.6 8.3 7.4

Electricity, Gas & Water 6.2 5.4 5.5 5.8 5.1 5.4 6.6

Construction 5.4 4.7 5.0 4.7 6.3 3.4 2.3

Wholesale & Retail Trade 7.4 7.5 7.4 8.1 9.1 8.9 9.2

Transport, Post & Warehousing

11.6 13.7 11.1 11.2 12.5 9.9 10.6

Rental, Hiring & Real Estate 11.9 10.5 9.8 9.6 12.2 11.4 10.0

Other 17.6 17.9 17.7 19.0 20.8 19.9 19.2

Total 119.3 154.8 160.5 158.0 150.7 124.0 98.1

Source: ABS 5625.0 Private New Capital Expenditure and Expected Expenditure December Quarter, Australia, February 2016


Listed Company Profits Outcomes very Mixed with Weak Outlook



Share Price Gains very Dispersed, Forward Price/Earnings Ratios Up since May 2014Driven by very low interest rates, Search for Cash Incomes and rising payout Ratios

Australia Late 80s NowDividend Yields 4 - 5% 4.3%

Inflation 7% – 8% 1.5% – 2.5%10 Year Govt Bonds 12% – 13% 2.3% - 3%



$A at $US0.75 about right on current commodity pricesShort term dip on changed interest rate expectationsRisk to upside as global commodity supply pulls back


Impacts on:• Living standards while working• Tax needed to support the non-employed• Business profitability

• Capital Investment• Employment• Share portfolio returns

• Public sector size• Superannuation fund size and returns• The $A• Australia’s position in the region• Defence capacity

Issue remains whether Productivity can lift: Or are Living Standard and Budget Expectations in for a Shock?

Source: Reserve Bank of Australia May 2016 Statement on Monetary Policy

The South Australian Outlook– Small, Regional Economy: 1.7 million people

•Smaller than Western Sydney or Brisbane, Irrelevant nationally•Population older & ageing faster, sicker, more obese, less educated and lower skilled

•Driving policy decisions but are these also outcomes of past policies?•Impacts on Housing, retail, tax base, attitudes, national representation

•No Exports means No economic or Population growth•Industry structure & policy makers still adapting from 1960s•No private sector employment growth since 2010

•Manufacturing employment now 30,000, or 30%, lower than mid 2000s peak•Traditional motor vehicle and metal fabrication industries are disappearing•Growth is mainly in Food processing•Losses in SA in most Manufacturing has been faster than in NSW or Victoria

•Growth is principally in Aged care, Social Support and Public sector •More international competition and More opportunities

The South Australian Outlook

• Public finances rely on Federal Support• Lower per capita income, slower & slowing population growth, higher costs

• Large & growing Public Sector, Higher taxes and poor Budgetary outlook • Increased GST and Asset Sales currently reasons for low deficits

• Large & Low Productivity Public Sector, High Deficits, Increasing Tax Burden & Debt• ALP sees big public sector and high taxes as politically acceptable• Liberals not a small government party• Increased intervention and lack of openness in regulatory benefit cost analysis adds costs to business• Commercial property tax changes good start but more reform is needed

• Risk is that there will be less support from Federal Govt and Other States in the future• National Tax Reform likely to reduce income taxes, increase GST• Likely impacts on GST relativities, Special Grants, States’ own taxes

• Don’t criticise the SA Government but it is starting to recognize change is needed• Transparency on Regulatory Impact Statements is poor• Focus is on more efficient regulation, not less regulation • ICAC, Royal Commission on Nuclear Fuel Cycle are beginnings

Sources of SA Employment Change by Sector

Source: ABS Cat. 5220.0 Australian National Accounts: State Accounts 2014/15, released 20/11/2015


Where Growth is occurring and Not: SA Gross Value Added

1989/90 - 1999/00

1999/00 - 2005/06

2005/06 - 2014/15

2014/15 Share of State Gross Value Added

excluding Dwellings,

Current Prices

Health care and social assistance 3.1% 3.9% 3.2% 10.8% Supportive DemographicsManufacturing 1.7% -1.3% -1.1% 8.6% Tough, shrinking, changingFinancial and insurance services 3.9% 3.0% 4.7% 8.5% Oligopoly, funds managementConstruction 2.6% 5.1% 3.2% 7.6% Housing, public infrastructurePublic administration and safety 3.6% 3.1% 3.0% 7.2% Slowing further on Budget restraintsEducation and training 2.0% 1.3% 1.6% 6.0% Should lift on overseas demand with lower $ATransport, postal and warehousing 3.1% 1.9% 3.0% 5.9% Growth with online buying, inbound tourismAgriculture, forestry and fishing -0.8% 7.2% 3.8% 5.8% Overseas demand lifting furtherRetail trade 3.3% 4.5% 2.4% 5.8% Growing but changingProfessional, scientific and technical services 2.9% 4.0% 3.5% 5.8% Change, Outsourcing, RegulationWholesale trade 2.8% 3.4% 3.2% 5.3% As per Retail Trade but slowerMining 1.8% 1.0% 7.4% 4.3% Increasing exports. Investment to rise in 3-4 yearsElectricity, gas, water and waste services -1.3% 4.4% 0.5% 3.5% Waste services main growth area

Average of Annual Rates, inflation adjusted


Economic Forecasts: South Australia

Retail Turnover % (Nominal, year total) 7.9 1.7 0.6 1 -0.4 3 4.4 3 3

New Motor Vehicle Sales (000) 59,400 66,080 62,836 65,340 70,268 70,074 69,262 68,000 70,000

Business Investment, %, Current Prices

- Plant & Equipment 1.1 0.2 -1.3 6 -12.9 0.7 7.8 -8 0

- Non Residential Construction 18.7 -6.8 17.3 18.2 11 -1.5 -0.4 0 -15

- Cultivated Bio Resources & Intel Property -7.4 -2.7 12.4 6.8 5.1 0.6 -3 4 4

Public Investment 34.6 55.6 -12 -5.1 -1.8 -8.5 -17 15 10

Unemployment Rate % (June, Trend), 5.6 5.4 5.2 5.5 6.2 6.7 7.7 8 8

Actuals ABS; forecasts DG

0.7

3

10,798 10,091

10,000 9,750

10,250 10,000

0.5

0.8 0.7

-2 3

0.2 -0.4 0.1 0

8,433 8,447

8,096 8,653

2016/17f

0.8 1.6 1 1

2013/14 2014/15 2015/16f

10,819 10,147

2008/09 2009/10 2010/11 2011/12 2012/13

Employment Growth % (Year to June, Trend) 0.6 1.3 1.6 -0.7

1.7GSP(Total Output) % (Real) 2.7 1.6 2.4 0.6

Private Dwelling Approvals Private Dwelling Commencements

11,777 11,676

11,480 11,061

10,952 10,058

4.6 6.7

Population Growth % (Yr to June) 1.3 1.1 0.8 1 0.9 0.9

Private Avg Weekly Earn % (FTAOT, (Yr to May) 7.4 0.7 4.5 3.2

Recent trends suggest SA’s population growth will be lower than projected:• Running below Projection B assumptions on net overseas migration; and• At or above Projection B assumptions on net interstate migration.19 – 55 age groups therefore likely to be smaller than Projection B.

Net Natural Increase

Net Overseas Migration

Net Interstate Migration

2010 7143 10894 -30382011 7501 10044 -24012012 7369 10915 -30382013 7082 11336 -39442014 7249 10481 -2744

Dec 2014-Sep 2015 6266 10255 -4125

Population Outlook


By 2030 those over 60 will exceed those 0 – 19, or 20 – 39, or 40 – 59• Likely bigger market for Last Home Buyers than First Home buyers• Land, Staffing, Training, Investment and Cost issues for institutional aged care• Health care issues for Baby Boomers wanting to stay mobile longer• Education, Entertainment, Employment, Politics, Tax, Travel

More expected of the public sector but Boomers not willing to pay• Adverse Impact on income taxes and spending taxes of combination of:

• Reduced employment growth and increased part time employment• Low/no productivity growth meaning low/no real per capita income growth

• Impacts across all levels of Govt: Federal, State and Local • Business and Households should expect higher taxes and Public charges

Immediate need for more efficient and effective decisions/implementation of• Taxation• Public Spending and Public Investment• Regulatory burden

Business sector should be applying pressure in these areas for reform

Some Implications of Ageing Population


Housing Construction Activity

Units and Retirement Homes Main Drivers

Food Turnover Diverging

Eating Out lifting again

Household Goods Impacted by Lower Housing Turnover

Clothing Etc: Internet, Ageing Population, Overseas travel

Health Care lifting, Buying Less Newspapers

SA New Motor Vehicle Sales

Private Investment Flat, Public Investment Falling

Sensis Small and Medium Business Index, March Qtr 2016 (released 7 April 2016, Interviews 18 Jan 2016 to 15 Feb 2016)


Business Confidence in SA

Sensis Small and Medium Business Index, March Qtr 2016 (released 7 April 2016, Interviews 18 Jan 2016 to 15 Feb 2016)

Business Confidence in SA

“The SA Government, which has really struggled on this measure for over two years was criticised for high taxation, (19%), payroll tax (11%), poor economic management (17%) and excessive wasteful spending (12%).” (December Qtr 2015 Report)

“The major criticisms of the SA Government, which has been the least popular for over two years, were a lack of incentives or support for small business (14%), poor economic management (13%) and payroll tax (12%).” (March Qtr 2016 Report)


SA Govt Investment Spending ($m)Source: SA Govt Budget Statement Budget Paper No.3 2016/17

$9.782 billion to be invested over next 4 years:• $3.47b in Health and Ageing– mainly buying the new RAH• $2.0b on North-South Road corridor• $783m on other public transport, incl O-Bahn, Torrens Rail, Gawler

rail electrification, tram extension to old RAH site• $500m on education facilities• $238m on Festival Centre precinct, upgrade of Her Majesty’s

Theatre• $1.49b on Contingencies, Capital Slippage and Other?

SA Budget 2016/17: Priorities, Themes & Issues • Quotes from the Treasurer’s Budget Speech

“The 2016-17 Budget speaks to our values and our vision…..Its ambition is to create jobs, develop future industries and ensure our children have the right skills for a transforming, modern economy.”

“ I can now report to the house our budget position is sound.…….this budget records the eighth surplus of this of this government, proving our responsible fiscal management of an economy that has grown for every year of our 14-year governance.”

“Last Budget we announced an unprecedented reform of state taxes….tax reforms that have helped create nearly 6000 more jobs in the state over the past twelve months by removing barriers that were preventing businesses from expanding, from reinvesting and from growing our economy…. This Budget builds on the foundation of last year’s reforms.”

“Our prudent fiscal management, restrained spending and incentives to grow the state’s business sector will do much to address our unemployment issues.”

“…there is no single measure or silver bullet that will address the challenges our state currently faces….But tax cuts are key, innovation is important, education is vital, health is essential and infrastructure is critical.”

Most comprehensive state tax reform in South Australia’s history“

“Jobs are the centre piece”

“Our tax reform package is about rewarding activity, the doers, the risk takers, the small business owners, entrepreneurs, our miners and explorers, the start-ups, new and long established family businesses, our farmers and primary producers, our retailers, our developers, our service industry, corporates large and small and most importantly our manufacturers.Every single business and enterprise in South Australia whether, big or small, can benefit from these changes. This government’s tax reform, stands our state out as a beacon for business investment.“

• Big Picture tax reform is too hard and to be part of National Tax Reform– Payroll Tax, Online gambling tax – No annual land tax on family home and No road tolls

• No mention of Budget Deficits in the Speech– GST relativity changes and national economic recovery are the saviours

SA Budget: Priorities, Themes & Issues

• No new tax reductions – Increase in metropolitan solid waste levy– Introduce new place of consumption tax on online bookmakers– Extension to 30 June 2017 and state wide of of-the-plan apartment stamp duty exemption

• Business Support– Extension to 30 June 2020 of current small business payroll tax rebate (payrolls up to $1.2m) – Employee Job incentives over 2 years

• $10,000 incentive for employers with payrolls of $5m or less• $4,000 incentive for employers with payrolls of $600,000 or less

– Funding for small business Innovation, early commercialisation and venture capital– Additional funding for Economic Investment Fund, Industry Attraction Agency and Industry Participation Advocate

• Science, Technology, Engineering and Maths facilities– $250m at 139 state schools– $250m for private schools through loan scheme

• Infrastructure spending– Buying the new RAH– North South road corridor

• Law and Order and child protection• Limit public sector wage growth to 1.5%pa over next three years

Expectations of National Recovery Central to Deficit Reductions for GST increases

SA GSP continues to decline relative to rest of Australia

Sources:SA Govt 2016/17 Budget Statement Paper No 3

(Shrinking) Surpluses as Far as the Eye can see!?Source: SA Govt Budget Statement Budget Paper No.3 2016/17

2015/16 Budget ($m) 2016/17 Est 2017/18 Est 2018/19 EstNet operating balance 654 727 961Net Debt 6,543 6,227 5,761

Slow Own Revenue Growth, High dependence on Commonwealth, other States

Further Large Dividend received from the Motor Accident Commission after large dividend in 2014/15.

Reduction due to slippage to be carried forward into 2016/17.

Employee expenses revised up, by $200m by 2018/19, due to increases in estimated staff numbers, and despite planned 1.5% pa pay rise limit.

Depreciation and Amortisation revised down with transfer of TAFE assets to RenewalSA and delay of commercial acceptance of new RAH.

Tax Revenue estimates revised down since 2015/16 Budget. By 2018/19, lower by $239m.

Expenses revised up each year compared with 2015/16 Budget. Higher by $194m by 2018/19

Grants rising as share of total revenue from 50.4% in 2014/15 to 54.9% in 2019/20.

Source: SA Govt Budget Statement Budget Paper No.3 2016/17

Main Tax Revenue Sources ($m)Source: SA Govt Budget Statement Budget Paper No.3 2016/17

12/13 13/14 14/15 15/16e 16/17b 17/18e 18/19e 19/20ePayroll Growth %

1,0776.6%

1,0790.2%

1,1143.2%

1,1170.2%

1,1593.8%

1,2043.9%

1,2513.9%

1,3155.1%

ConveyancesGrowth %

778 13.4%

7931.9%

90714.4%

875-3.5%

9023.1%

9181.8%

9392.2%

1,0299.6%

Land Tax (Private)Growth %

347-3.6%

345-0.6%

3470.6%

3562.6%

3662.8%

3783.3%

3892.9%

4023.3%

ESL on Fixed PropertyGrowth %

1030%

1041.0%

19082.7%

21111.1%

2151.2%

2170.9%

2232.8%

2240.4%

Gambling 422 388 388 386 389 406 417 423

Insurances 429 435 446 438 443 460 479 498

Motor VehiclesGrowth %

5457.1%

5677.2%

5975.3%

6142.8%

6251.8%

6422.7%

6623.1%

6823.0%

Other Taxes 403 374 405 409 418 431 439 450

Total Taxation 4,104 4,085 4,394 4,406 4,517 4,656 4,799 5,023

GST Relativity UpdateSource: SA Govt Budget Statement Budget Paper No.3 2015/16

Increased GST share for SA from 2015 Review. SA now gets about $1.5b more pa than if distributed purely on a per capita basis.

Spending by Function ($m)Source: SA Govt Budget Statement Budget Paper No.3 2016/17

Spending becoming increasingly focussed on Communities and Social Inclusion; Education and Child Development; and Health and Ageing. 66.2% of total spending in 2015/1669.7% in 2019/20.

Staffing of SA Government Source: SA Govt Budget Statement Budget Paper No.3 2016/17

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

Employee Expenses $mGrowth %

6,4002.9%

6,7705.0%

6,930 Bud

7,105 actual

+4.9%

7,155 Bud

7,258 actual

+2.2%

7,268 Bud

7,425 actual

+2.3%

7,271 (14/15)7,749 actual

+4.4%

7,347 (14/15)

7,899 (16/17)

1.9%

7,554 (14/15)

8,068 (16/17)

+2.6%8,143 (16/17)

+0.9%8,285 (16/17)

+1.7%

Employee Nos FTE 30 June Growth %

80,254 82,214

+2.4%

81,731

-0.6%

81,161

-0.3%

81,345

+0.2%

78,214 14/15b

81,759 16/17b

+0.5%

77,619 14/15b

81,231 16/17b

-0.6%

77,437 14/15b

81,002 16/17b

-0.3%

78,694 15/16b

80,776 16/17b

-0.3%

na80,926 16/17b

+0.2%

At 30 June 2002 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Employees in SA Public Sector FTE

69,670 76,720 78,211 79,715 81,270 83,885 84,900 84,882 85,727 86,257 85,372 85,628

Employee Persons Per 1000 SA Population

55.1 58.5 59.8 60.3 61.0 62.5 62.2 61.9 62.6 62.4 61.3 61.4

Employee Persons Per 1000 Employed South Australians

121 122 124 125 124 128 127 125 129 129 128 129

Ratio of Public Sector Full Time Adult Ordinary Time Earnings to Private Sector Full Time Adult Ordinary Time Earnings (May)

Victoria

123%

113.3%

119.5%

111.5%

120.4%

111.3%

118.4%

108.2%

117.1%

107.3%

115.4%

108.9%

118.6%

111.3%

118.3%

114.8%

122.1%

114.6%

120.9%

116.5%

117.4%

116.1%

123.2%

119.2%

Employees in SA Public SectorSource: SA Public Sector Workforce Information June 2015 Table 2, ABS cat.6302.0


Mass Middle Class Urbanisation and Ageing in Asia

The Fundamental Drivers of it All



• Increased uncertainty with Brexit – UK and European Union growth likely to be slower, but was to be slow in any case in 2017.

• UK has large current account and budget deficits already

– Main immediate issue is how UK and European financial markets work through impacts of UK credit rating downgrade and bank liquidity

• Plenty of support ready from Bank of England, European Central Bank etc• Likely to keep Western interest rates lower for longer

– Longer term issues• UK breakup: Scotland and Northern Ireland want to stay in Europe• Bilateral and Multilateral Trade issues• European security

– Direct impact on Australia and South Australia should be minimal

Summary


• Australian election outcome adds to uncertainty – We need to get used to more volatile politics, close elections, minority party influences– Loss of faith in political, financial and economic elites not likely to pass soon

• Many feel left out of economic liberalisation and Post GFC policies, Fear of change and “new” economy

– Political Volatility and lack of faith likely to limit required action on regulatory and tax reform– Danger of cut in Federal Government global credit rating: Flow on to SA and Australian companies

• Productivity, Workforce Participation and Industry flexibility issues not a policy focus– This has been the case for last decade at Federal, State and Local Govt levels

– Longer term impacts on:• Private real Income growth, Spending, Profits and Superannuation returns

• Tax revenues and public sector spending

• Population and workforce growth

• Business and management have therefore to take the lead with in-house change

Summary

Thank You and Questions

darryl gobbett, baillieu holst chief economist cpa sa division presentation

Economy & Finance