What the Budget Means for Construction

construction budget

Given pre-commitments to turn a $22.6 billion fiscal deficit back into a surplus, the 2012/13 federal budget was always going to be tough.

Predictably, also, the reaction from key building and industry groups has been mixed, with Master Builders Australia on the positive side welcoming the return to surplus but criticism coming from Housing Industry Association (because of lack of initiative to boost housing supply), the Green Building Council (for scrapping tax breaks for building retrofits) and Australian Industry Group (for the focus upon short term consumption at the expense of long term growth).

On balance, however, despite some notable positives (see below), broken promises regarding the retrofits and also company tax rate reductions mean that this budget is disappointing for the construction industry.

Below is an outline of the key positives and negatives for the industry in the budget.

The Positives

Despite being disappointing overall, the budget does deliver a number of significant positives.

First, the moves to surplus will help to ease pressure on monetary policy and give the Reserve Bank more room to adopt more accommodative interest rate settings than would otherwise have been the case. That’s not to mention the positive message the government’s fiscal discipline relative to international peers sends about Australia as an investment destination.

Related to that, the government’s family payment measures will go some way toward alleviating part of the short-term impact to consumption and the economy associated with some of the tougher fiscal measures.

Outside of macroeconomic considerations, previously announced measures allowing companies which make losses in a given financial year to carry back these losses against any profits made in previous years (and thus claim back some of the taxes paid on profits in those years) are particularly pertinent the building industry given the cyclical nature of the industry, and will be especially important in helping construction firms to survive through lean years.

Then, there are the workforce initiatives, which include more money for training and apprentice support, allocation of 16,000 skilled migration places to regions with skills shortages and incentives to work for groups such as single parents and older Australians. Given the extent of the skills shortage in building and civil construction – the Australian National Engineering Taskforce said recently that its members had estimated that Australia needs 20,000 new engineers each year whereas current domestic graduations provide less than half this number – the long term implications for the industry are clear. Any efforts to address the situation are welcome.

house construction

The Negatives

These positives, however, are outweighed by some severe negatives.

For starters, there are no new initiatives to boost housing supply, improve affordability or reduce the tax burden on housing. In light of current low levels of homebuilding activity and a housing shortage which the government’s National Housing Supply Council last year estimated at 186,000, this is disappointing (albeit not entirely unexpected given anticipated fiscal tightening efforts).

More disappointing still is the scrapping of the government’s previously promised $1 billion Tax Breaks for Green Buildings program – a program which would have allowed businesses a one-off bonus tax deduction of 50 percent for the cost of eligible assets or capital works to improve the energy efficiency of their existing buildings.  Along with helping the environment, the scheme would have delivered an important boost in terms of retrofitting work at a time of weak commercial/non-residential building activity – not to mention the fact that such an initiative was initially part of the package associated with the carbon tax, with all of its impact on building costs.

Finally, at a broader level, there is the scrapping of the previously promised reduction in company tax rates, which will affect companies across all industries, including construction and related industries such as property, architecture and engineering.

These last two points represent broken promises which will directly impact the industry and companies which operate in it.

Because of this, despite the positives outlined above and even taking into account naturally subdued expectations at a time of fiscal tightening, the 2012/13 budget is disappointing for the building and construction industry.

By Andrew Heaton
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