Sentiment up, reform still needed

Angela Faherty presents the findings from the recent Director Sentiment Index, which shows that sentiment has increased but highlights the need for long-term policy reform.

Director sentiment has risen 4.3 points to -17.5, its highest point since the second half of 2013, according to the latest findings from the Australian Institute of Company Directors’ (AICD) Director Sentiment Index (DSI).

The uptick in confidence has been driven largely by decreased pessimism about the health of the Australian economy and conditions for business. However, directors have expressed a number of concerns about short-termism in policymaking and the ability of the federal parliament to progress long-term reforms and maintain stability over the current term of government.

The survey, which is statistically representative of AICD members, was conducted on 20-28 July, following the announcement of the re-election of the Turnbull Government. The DSI found that directors felt “big issues” such as infrastructure investment, tax reform and budget repair remain the key areas for long-term reform.

Overall, directors continue to rate infrastructure as the number one priority the Federal Government should address in the long term: 85 per cent of directors believe the level of government spending on infrastructure is too low. More specifically, directors identified regional infrastructure (48 per cent), renewable energy sources (43 per cent) and roads as the priorities for further infrastructure investment. Directors have also listed an increase in infrastructure spending as the second most likely measure to lift national productivity (second to less focus on short-termism).

When it came to the nation’s finances, the DSI shows that directors’ concerns have heightened. The federal budget deficit is now rated as the second most important issue for the Federal Government to address in the long-term. Eighty-two per cent of directors believe the government needs to address the issue and deliver a budget surplus in the next ten years.

A comprehensive reform of the taxation system also remains a key priority for directors. Multinational tax arrangements (50 per cent) were cited as the top priority for reform, followed by personal income tax (45 per cent), company tax (45 per cent) and state based taxes (45 per cent).

Reform obstacles

While 44 per cent of directors see a move away from short termism as the key way to lift national productivity, the DSI showed that many doubt the ability of the government to actually deliver on long-term reform, due mainly to poor quality public policy debate, potential senate road-blocks and reduced confidence in the government’s understanding of business.

When asked to identify the main economic challenges faced by Australia, directors identified balance of power issues in the senate as a key concern. Almost 90 per cent of directors feel that the make-up of the senate is likely to negatively affect business confidence, while less than a third (28 per cent) believe that the current parliament will deliver stable government for the next three years.

The DSI shows that directors have also become more pessimistic about the effect of the Federal Government’s performance on both business and consumer confidence, with 41 per cent of directors believing the government’s performance is impacting negatively on business decision-making, and 77 per cent perceive a negative impact on consumer confidence. In addition, only 44 per cent of directors agree that the Federal Government understands business.

Overall, the quality of public policy debate in Australia continues to be viewed negatively, with 85 per cent of directors characterising the quality of debate as either poor or very poor.

Global and local economies

While directors are more upbeat about current economic conditions than in previous surveys, the forecast remains subdued for both Australia and international economies. Directors are less pessimistic about the overall current health of the Australian economy than in the second half of 2015. Despite this improvement, 43 per cent still see the outlook as weak, while 48 per cent of respondents predict this weakness in the domestic economy will continue over the next 12 months.

Casting a wider net, the DSI found that directors have become even more pessimistic about the European economy, with 85 per cent of respondents predicting weak economic conditions. By contrast, directors have stable but subdued views on the US (31 per cent) and Asian (29 per cent) economies.

When it comes to their own businesses, however, the DSI shows that directors remain more optimistic about future prospects. Forty-eight per cent expect growth in their business in the 12 months up to December 2016, with a third expecting a lift in profits. The majority of directors forecast that staffing and investment will remain stable or increase in the coming six months.

Global economic uncertainty was ranked as the most significant challenge facing the economy, a sentiment which has endured since the last survey, followed by balance of power issues in the senate, which was previously ranked eighth. Low productivity growth and China’s economic slowdown were also seen as major challenges.