Indeed, Russia’s invasion of Ukraine has pushed energy, agricultural and metal prices even higher.
Of course, that’s bad news for economies that are heavily dependent on energy and food imports.
But Australia is in a different position. As the budget papers noted, “commodity prices are near record high levels, in part due to the Russian invasion of Ukraine.
Temporary bonanza
“Metallurgical and thermal coal spot prices have recently reached highs that are 62 per cent and 53 per cent above previous peaks.”
As the budget papers noted, “the recent strength in export prices will still see Australia’s terms of trade reach a record in 2021-22. This will support strong profitability in the mining and agricultural sectors, with some positive flow through to the broader economy and to revenue.”
Unfortunately, this boost to tax revenues from surging commodity prices is likely to prove a temporary bonanza. Given that they have climbed so far above their long-term averages, it’s extremely likely that commodity prices will fall from here.
And that might inspire a prudent Treasurer to devote some of the extra tax revenue that he’s collected from the latest surge in commodity prices to reinforce the resilience of the Australian economy.
Because despite its strong recovery from the pandemic, the Australian economy is very narrowly based, and depends heavily on a handful of key exports, such as iron ore, coal, agricultural exports and education.
But while Frydenberg’s latest budget pays lip service to the idea of “building a stronger and more productive economy”, this is something of a smokescreen.
He’s clearly more interested in providing massive tax breaks to small businesses – a key Coalition constituency – as an inducement to them to digitalise their operations and spend more on staff training.
Small businesses – those with a turnover of less than $50 million a year – will be able to deduct 120 per cent “of the cost of business expenses and depreciating assets that support digital uptake, up to $100,000 of expenditure per year”.
And Treasury is taking a very broad view of what spending will be eligible for the deduction. As a result, small businesses will be able to claim the generous tax break for their spending on laptops, accounting software, portable payment devices and for their subscriptions to cloud-based services.
What’s more, small businesses can also claim the 120 per cent deduction for the costs they incur in updating their websites, or else for setting up a website for the first time.
Training courses
According to the budget papers, this initiative – which will cost $1 billion over the next year – “will help strengthen business confidence, accelerate digital transformation and create jobs”.
But Frydenberg’s largesse to small business goes even further. He’s also allowing them a 120 per cent deduction for the cost of sending their staff to external training courses, at a cost of some $550 million to the nation’s coffers.
And again, Treasury is taking a liberal attitude. It doesn’t matter whether the training is in hospitality, cybersecurity, or agribusiness. Just as long as it involves some upskilling of employees.
Again, the budget papers defend the scheme, arguing that “more skilled employees will drive productivity gains for small businesses, attract and retain staff in a tight labour market and support their future growth”.
Now, there’s no doubt that small businesses around the country will be rapturous to receive these handsome tax breaks.
But it’s ludicrous to claim that subsidising small businesses to update their websites or to send their staff on training courses amounts to a coherent policy that will deliver productivity improvements or increase the fundamental resilience of the economy.
And this is a danger for an economy whose fate is so closely linked to the price of its major commodity exports, and particularly iron ore.
As the budget papers acknowledge, a sharper than expected slowdown in the Chinese economy, for instance, due to the disruption caused by a widespread coronavirus outbreak, “could push the prices of Australia’s key exports lower than assumed”.
