Good morning and thank you for inviting me to speak once again to this important gathering of Australia’s business and banking community and in particular the many people here from my own area of engagement, Small Business.
My address last year was one of my first in this portfolio.
I have certainly learned a lot since then and I’m always keen to know more.
In many ways, the current global financial circumstances make it easier to keep up to date in that a lot of things keep repeating themselves.
Last year, I spoke about the global and domestic economic situation; the importance of small business to the Australian community and I discussed the assistance measures the Gillard Government was providing.
Today I’ll touch on what has changed in the global economy – and perhaps more appropriately, what hasn’t changed - how these factors are affecting our national economy; and discuss the importance of improving the supply of credit and banking reform more generally.
Importance of Small Business
I know I’m preaching to the converted here when I stress the essential role that small business plays in our national prosperity and in providing and supporting jobs.
All but 5 per cent of the more than two million actively trading businesses in Australia are small businesses.
They supply almost half of industry employment and contribute over a third of industry value added.
Coming from Devonport in Tasmania’s North West, I am acutely aware it’s not just about their economic contribution - small businesses are interwoven into the very fabric of communities and regions in Australia.
Global Economic Conditions
When I spoke here last year, we were recovering from the debilitating effects of the Global Financial Crisis.
It’s been more than three years since the collapse of Lehman Brothers triggered the GFC – but the world is far from a full recovery.
In these past three years, Australia has managed to avoid recession, unlike most of the other advanced economies.
The resilience of our small business sector, assisted by a strong dose of medicine in the form of the Government stimulus package helped Australia avoid the worst symptoms and – most importantly – kept people in jobs.
Economic conditions in the US have remained weak. In 2007, the average US monthly unemployment rate was 4.6 per cent. In the first half of 2011, that rate was 9 per cent.
The proud achievement of this Australian Government is our unemployment rate of 5.2 per cent - the Australian economy has created around 750,000 jobs since Labor was elected in 2007, including 550,000 since the start of the GFC in September 2008.
The old axiom that when America sneezes the rest of the world catches cold is not as true as it once was.
We are now dealing with a new strain of financial virus, the great European debt flu.
It would be difficult to write a script for a TV show with some of the colour and drama of the past few months; and it’s clear that we’re only part way through the series.
Things are moving so rapidly, my remarks today might be out of date by the time I’ve finished talking.
Greece, Italy, Ireland, Portugal and Spain – with fiscal tightening, systemic banking problems, reduced confidence and high unemployment – are all struggling to deal with both the economic and political fall out.
This combination of factors has led to a lowering of the International Monetary Fund’s global growth forecast to 4 per cent in 2012. This is 0.5 percentage points lower than its previous projection.
It’s a further indication of the swing of the global economic pendulum that three quarters of this growth is expected to come from emerging economies and only one-quarter from advanced nations.
Australia is better placed to benefit from this than most advanced economies.
Domestic economic conditions
Reserve Bank figures for the June 2011 quarter showed Australia’s GDP increased 1.4 per cent compared to the June quarter in 2010.
For the year 2010-11, GDP increased by 2.1 per cent, with last summer’s floods disasters estimated to have stripped half of one per cent from our projected growth figure.
A possible sharp economic decline in Europe represents a downside risk for Australia - but our strong trade links with Asia means we are less likely to be directly affected than some other countries.
Around two thirds of all our exports go to Asia. Australia’s direct trade and financial exposures to the euro area are low.
Around 10 per cent of our total trade is with the euro area and Australian banks continue to be among the world’s highest rated and have negligible direct exposure to peripheral European sovereigns, including zero exposure to Greek Government debt.
We can expect some impact, however, from falls in asset prices and weaker household and business confidence.
It must also be said that a continuation of the La Nina weather pattern creates a further risk of repeat flooding and disruptions to coal production.
Among all this news, it’s clear the concerns faced by small and medium enterprises are growing.
The September 2011 Sensis Business Index reveal the three largest concerns as: lack of work or sales; the economic climate and cash flow.
The August Survey of Australian Chamber of Commerce and Industry Survey found the level of interest rates was one of the top five constraints on investments.
Loans to business
RBA figures show the weighted-average interest rates on credit outstanding for loans under $2 million – which are considered as loans to small businesses – increased from 7.1 per cent in September 2009 to 8.3 per cent in June 2011.
One recent positive was the decision by the RBA to lower the cash rate by 25 basis points to 4.5 per cent.
The Government was very keen that these cuts were passed on to borrowers.
The RBA announced its decision on 1 November - effective from 2 November.
There has been recent media coverage noting that banks have been slow to pass interest cuts on to business, and that some banks will not be passing the full cut onto business loans.
The Government is keen to ensure interest rate cuts are passed on in full to borrowers as quickly as possible.
Improving Supply of Credit
Everyone in this room knows adequate availability and affordable cost of finance are essential if small businesses are to successfully weather the risks the current economic uncertainty poses.
As Minister for Small Business, I can also say everyone in Government is also aware of this and when the GFC hit, the Government acted swiftly to ensure our smaller lenders would still be able to make small business loans.
We are also aware the GFC and current banking problems in Europe have made it much harder for smaller lenders to access funding markets on terms competitive with the big banks.
Residential mortgage-backed securities
To counter the dramatically reduced liquidity in residential mortgage-backed securities (RMBS), driven by international capital market developments since mid-2007, the Government has allocated for investment a total of $20 billion dollars to ensure small lenders remain competitive.
As of 4 November, the Australian Office of Financial Management has invested over 14 of this $20 billion.
Also this month, the Senate passed a change to the Banking Act which will ease the future burdens being faced by Australian banks, credit unions and building societies.
That amendment allows them to issue covered bonds in order to access and establish a new off-shore investor base at attractive prices.
This is a key Gillard Government reform to provide cheaper, more stable and longer term funding for our financial system, and improve the flow of credit in our economy.
Covered bonds are already a well-established investment vehicle overseas.
Depending on industry take-up, some expect the major banks will be able to issue around $130 billion worth of covered bonds in the medium term, a substantial part of their wholesale funding.
The ANZ issued the first covered bonds last Wednesday.
This issuance marked the next step in ensuring our banks, credit unions and building societies have the capacity to safely lend for decades to come.
Our banks are very well funded for the period ahead; having reduced the amount of funds they borrow offshore as they move to more stable, longer-term funding.
However, this reform is vital to our banking sector and ultimately will also increase the availability of reasonably priced credit to households and small businesses.
Reduction of Interest Withholding Tax
There is another measure that will provide further support for small lenders to compete with the big banks, particularly in the mortgage market.
This is our decision to reduce Interest Withholding Tax on the funds that smaller Australian financial institutions and locally based subsidiaries of overseas lenders borrow offshore.
From 2013-14, this will drop to 5 per cent, then to zero over two years.
This will remove existing distortions to how financial institutions borrow from overseas, allowing funding choices to be based on commercial considerations, rather than taxation.
Personal Property Security reforms
You’ll also be aware of changes to Personal Property Security or PPS requirements that will promote better efficiency and, potentially, open up even greater access to finance.
As I said last year, I know small businesses have been concerned about the tightening of lending criteria and demands for greater security.
The PPS reform will introduce a single national law and register governing the use of personal property as security.
The main benefit for small businesses is that they have the potential to be able to use more personal property as security. This may result in lower interest lending, on the basis that rates for secured lending are generally lower than those for unsecured lending.
Registration on the PPS Register commences in early 2012.
This is a practical reform directly addressing the question of security.
But it can also be seen in the context of a point I made last year at this conference.
I urged providers of finance to get to know better their small business clients - to “walk a mile in their shoes” - to more realistically price risk. I said then:
“My understanding is that currently lenders who are filling the gap left by the loss of securitisation are adding an extra risk premium because of a lack of knowledge of the specific businesses.”
I know there are some in the financial sector who maintain the banks can’t afford to be generous.
They say the banks’ cost of funding is increasingly related to the wholesale funding market, not the RBA rate and that these costs have increased since the Euro crisis.
The argument goes that it's fair for banks to price for the risk inherent in a business.
These are valid points.
However, it is not a matter of asking banks to be generous, rather to be more realistic about the level of risk in a business.
Added to the fact it took two weeks for some banks to pass on the 25 basis points rate cut – or part of it – to business loans only reinforces the perception banks are taking advantage of small business customers.
Anyone who’s been involved with a small business will know the importance of maintaining a reliable cash flow and the difficulties that interruptions create.
Again the Australian Government has been active on this front starting with the 2009 budget decision to commit $100 million over four years to the Australian Tax Office to assist small businesses experiencing financial distress.
Small businesses, with an annual turnover under $2 million that are facing short-term financial difficulties may be eligible for an interest-free payment arrangement of up to 12 months for their activity statement debts.
On a business relationship level - the Australian Government continues to lead the way in on-time payments to small business, settling 97.7 per cent of invoices within 30 days in 2010-11. That’s up by 0.5 per cent on the previous year.
The latest Dun & Bradstreet Trade Payments Analysis for the September 2011 quarter showed businesses took an average of 53 days to pay their accounts.
The Australian Government is supporting small business by setting an example and assisting in strengthening business cash flows - one of the major aims of Gillard Government policy in this area.
A key benefit of our tax reform policies is the boost to cash flow for small businesses as a result of the increase of the instant tax write-off from $1,000 to $6,500.
The new write-off is not limited to one asset. Businesses will be able to claim the write-off on as many new assets they wish to invest in.
This $1 billion benefit for small business is funded by the Mineral Resources Rent Tax and I again urge the Coalition to reconsider their opposition to the MRRT.
Other tax reform measures that will strengthen business cash flow include:
- The reduction for small businesses of Pay As You Go income tax instalments in the 2011-12 year, where the gross domestic product adjustment method is used.
- The simplification of depreciation pooling arrangements for small businesses.
Of course, incorporated small businesses will benefit from the reduction in the company tax rate from 30 to 29 per cent in 2012-13 – a year ahead of larger companies. This is also funded by revenue from the MRRT.
Business Names Registration
The Australian Government is working with the States and Territories through the Seamless National Economy to introduce a single national business registration system.
This will save businesses operating across borders time in multiple registration processes in each state and territory, as well as significant cost savings in registration fees.
Under the new system, firms will only pay one fee of around $70 to register a business name nationally for three years – a substantial saving considering a firm operating and registering in every State and Territory currently faces a bill of around a thousand dollars.
Together with related initiatives such as the Australian Business Licence Information Service and the Australian Business Account, the benefits of the national business names registration system amount to $1.5 billion over eight years to business, government and consumers.
Advice to Small Business
Much of today’s discussion has been about macro economic issues – but the day-to-day business issues are just as important to this government.
For many owners, the burden of every day survival and trying to grow a business is part of the work load.
The Australian Government has in place an extensive range of assistance and advisory services to make the complexities and intricacies of everyday business a little bit easier.
The Small Business Support Line is a success story that has received around 42,000 calls since its launch in September 2009.
It offers initial advice to small business owners and also puts them in touch with specialist advisers in the areas of finance, cash flow management, retail leasing, diagnostic services, promotional and marketing advice and – importantly personal stress and hardship counselling.
The Government has provided $7.1 million over four years to renew funding to the support line.
Another element of the support line is the Small Business Credit Complaints Clearing house. This was established to refer issues related to credit by small business to the Australian Bankers Association. In turn the ABA passes them directly to senior management of the bank in question.
The clearing house has received 82 complaints, of which 55 have been assessed and completed by the Australian Bankers Association.
The Government is investing $48.25 million under the Small Business Advisory Services program to fund the delivery of business advisory services through 37 Business Enterprise Centres located in suburban, rural and regional areas of Australia.
To date over 160,000 small businesses have been helped and over 300,000 services have been delivered under the SBAS program.
Another service I am particularly proud of is the Superannuation Clearing House.
It is administered by Medicare, it is free, simple to use and available to businesses with fewer than 20 employees.
Since its launch in July last year, 15,000 employers have registered and $120 million has been transferred on behalf of 83,000 employees.
There has been a surge in uptake since a mailout to eligible employers began in September.
I expect this trend to continue as more small businesses become aware of this excellent initiative, which is directly helping ease the red tape burden on small businesses.
It is disappointing, to say the very least, to observe one year since my last address here that the challenges facing the world economy are the most severe since the Global Financial Crisis.
Often it will take a year or more for the effects of quality reforms to become evident.
Major economic reforms can often take many years before their impact is fully realised and understood.
Here in Australia we can judge the merits of policies and reforms from a position of relative economic comfort – in itself a testament to the sound economic policies of recent years.
We cannot be complacent.
This Government is committed to advancing the reform process for the long-term benefit of all Australians.
It’s most important Governments speak and listen to their constituents and we will continue to consult with stakeholders such as yourselves.
Thank you once again for inviting me to address you. Now it’s your turn and I look forward to some questions and comments.