Photo by Fin Gabriel on Unsplash

When confronted with an ill patient, a physician prescribes a treatment that deals directly with the underlying cause of the disease and with the symptoms of the individual. Sending get-well cards with vouchers to the entire population does not seem like a proper remedy. Unfortunately, public support to business hit by the pandemic in the latest Australian Budget seems more in line with the latter approach.

At the onset of the pandemic, widespread fiscal support was key due to the high degree of uncertainty for the business environment. Currently, though, we have a much better understanding of which industries will not recover partially or fully until the pandemic is over. Industry policy at this stage should focus on those industries whose demand has been greatly affected by COVID-19.

Untargeted business support should be reconsidered

Two key untargeted measures of business support in the new Australian Budget are extensions of two previous policies: (i) the temporary full expensing of investment, and (ii) the temporary loss-carry back.

Through full expensing, businesses with turnover below $5 billion can deduct the full cost of eligible investments in the year of purchase. In addition, costs of improvements to existing assets can also be fully deducted immediately.

Full immediate expensing of investment can be desirable for a number of reasons. First, this policy eliminates distortions between tangible and intangible investments, which has been highlighted in the optimal capital taxation literature. Second, full expensing lowers the user cost of capital – a proxy of the price of employing capital services in a period. This effect not only leads to an increase in investment: As analysed in a recent study, full expensing may well translate into a surge in business dynamism, broadly measured as the rate of firm start-up, exit, and growth.

But despite the aforementioned effects, it is unclear how full expensing will help those COVID-hit industries facing substantial demand uncertainty. Businesses in these sectors are still struggling to survive and not planning to expand and/or invest in the medium run. Therefore, they will not be the main beneficiaries of tax advantages that condition support on investment. Indeed, Australian Bureau of Statistics (ABS) data show that the only industry with a high growth rate of investment in machinery and equipment is the Transport, Postal and Warehousing industry (42.55% quarterly growth in December 2020). This industry drives the aggregate increase in investment in equipment and machinery, while industries such as Professional Scientific and Technical Services, Arts and Recreation, Financial Services and Retail Trade still experience negative growth or modest growth (lower than 2%).

The temporary loss carry-back scheme allows companies with turnover below $5 billion to offset losses against profits made in previous years. For businesses hit by COVID, this could be an appropriate measure. However, for being an untargeted policy, loss carry-back also benefits unproductive businesses which were not affected particularly badly by the pandemic. In fact, recent research shows that loss carry-back measures can increase capital misallocation towards less productive businesses and can lead to large output losses.

It is also worth highlighting that only incorporated businesses are eligible for the temporary loss carry-back in the Budget 2020-21. This is surprising as corporate entities face looser financial constraints than smaller businesses and then it is easier for them to weather the pandemic.

Towards a properly targeted approach

The latest Australian Budget does incorporate some policies to specific COVID-hit businesses. These include a support package of $1.2 billion for the aviation and tourism industries, and a $300 million scheme to reactivate the creative and cultural sector.

These measures are in tandem with similar measures around the developed world. Notably, as part of the American Rescue Act (signed into law in March 2021), the United States Small Business Administration (SBA) has implemented a series of measures to support small businesses in hard-hit sectors. Such measures include a Restaurant Revitalization Fund, which provides grants to restaurants and related businesses experiencing significant revenue losses due to the pandemic. Relatedly, SBA operates the Shuttered Venue Grant, providing grants to operators of live venues, such as theatres and museums. The United Kingdom is no exception to enacting targeted measures towards businesses. In its 2021 Budget, this country announced an extension of reduced value-added tax (VAT) rates in the tourism and hospitality sectors. Business rates holidays have also been extended for retail, hospitality and leisure properties.

However, other types of business support embedded in the Australian Budget are aiming at the wrong sectors. A clear example is the steady support to the booming construction sector, operating through the Home Builder program, the New Home Guarantee, or the increase in the First Home Super Saver Scheme. In fact, ABS data show that private houses dwelling rose by 26.6% in a quarter in December 2020: a 20-year high. While the Government’s argument is the strength of the residential construction sector in creating jobs, public support to housing demand will most likely keep driving up house prices. A more appropriate stabilisation policy to address the current pandemic is to support the bulk of households with housing needs, for example those facing difficulty in paying rent or mortgage.

Relatedly, while the Budget provides explicit support towards digital game developers, it paradoxically bypasses provisions targeted at the higher education sector. Quite the opposite, this sector will actually see a decline in federal grant funding of roughly 9% in 2022 due to inflation.

Support for the higher education sector should be a top priority, given the combination of border closures and a heavy reliance on international students. ABS data on education and training show that 60,000 jobs were lost in private and public tertiary education sector. Besides, the number of underemployed workers increased in 72,000 in December 2020 compared to December 2019 (which is in sharp contrast with a reduction in 9,000 underemployed workers in December 2019, compared to 2018). These numbers relate to the large income losses from the reduction in international student enrolments, which according to Universities Australia was $1.8 billion in 2020.


Overall, new policies are predominantly blunt and are deemed to fail. Immediate expensing, while desirable, would not increase investment in COVID-hit industries with high uncertainty of demand, which are simply struggling to survive and not planning to expand. Loss-carry back increases capital misallocation towards less productive businesses. Other policies are targeting the wrong sectors. More effective policies would target industries whose demand is greatly affected by COVID-19, existing regulations and border closures.


Other Budget Forum 2021 articles

Structural Changes, but No Sustainability Reset, by Miranda Stewart.

This Was an Election Budget on Steroids, by John Hewson.

The Volunteer Workforce Is Key to Achieving Budget Priorities, by Sue Regan.

Looming Tax Cuts Prevent Genuine Expenditure Reform, by Maria Racionero.

Australia’s Planned Patent Box: A Means of Stimulating Innovation? By Sonali Walpola and Tracy Wang.

Could It Pack a Punch? Maybe, but There’s a Lot at Stake: The Reactivation of the Corporate Collective Investment Vehicle, by Alex Evans.

Fiscal Policy in the COVID-19 Era, by Chris Murphy.

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