Small business boom, pressures loom

The state’s small business sector is winning the battle against pandemic pressures, with recent data suggesting registrations in Western Australia are well up on any period for the past decade.

More than 3,080 new businesses were registered in WA in June 2021, according to the Australian Securities and Investments Commission.

That’s more than any month in the past 10 years.

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Business registrations usually peak in June as the financial year closes, the data shows, but the previous highest level in that 10-year period had been 2,431 registrations in June 2016.

And as many businesses are opening, business closures are hitting lows.

Only 338 WA businesses entered administration in WA in the year to June, according to ASIC, down 46 per cent on the previous financial year. That period included changes to insolvency laws to provide greater latitude to directors.

All of that comes as state final demand, which measures GDP without trade, grew 3 per cent in the March quarter.

While retail sales have been volatile during a year with three snap lockdowns, the $3.4 billion that did pass through the tills in June (seasonally adjusted) was up 19.1 per cent on June 2019.

Those strong numbers for economic activity are flowing through to the labour force.

Unemployment in WA was 5.1 per cent in June, according to the Australian Bureau of Statistics.

Pressure

But while many of the numbers are positive, significant pressure points loom, with some businesses struggling to hire workers and tight markets for other inputs.

Prices of building materials have lifted, including steel. In tech, there’s a global shortage of silicon computer chips, which is particularly frustrating for businesses needing to buy kit to support employees working from home.

Finding space in Perth for a business is getting tougher, with CBD office vacancies at their lowest level in six years, according to the Property Council of WA.

Oil prices have lifted from about $US36 per barrel in October to highs above $US70/bbl in recent weeks, and June quarter fuel prices reached higher than pre-COVID-19 levels, according to the ABS, pushing up transport costs.

Perhaps the most common concern has been the battle to find skilled workers.

There were 26,300 job vacancies in WA in July, up 63 per cent since before COVID-19, data from the federal Labour Market Information Portal shows.

That indicates many businesses are struggling to fill roles, with extra demands including increases in the Superannuation Guarantee adding to the burden.

In the regions, even those businesses that can find workers may struggle to house them, with Kalgoorlie posting a rental vacancy rate of 0.5 per cent earlier this year.

CommSec wrote in mid-August that the national job market had improved more rapidly than expected, with border closures reducing supply of skilled workers, while wages growth had started to pick up from record lows.

Consumer demand had also contributed to wage growth, with construction and professional services experiencing the highest pay gains over the year to June. 

Bankwest Curtin Economics Centre senior research fellow Daniel Kiely told Business News the biggest change that would alleviate the worker shortage would be opening borders.

“Border closures are really impacting on the labour market, with population growth from overseas migration non-existent at the moment,” Mr Kiely said.

“The health implications of COVID-19 and the border closures are having a huge impact.

“The sooner we get people vaccinated ... will be a massive relief.”

He said there would likely be pressure on wages because of skills shortages, while there were also shortages in materials for some industries and delays in shipping for traded goods because of COVID-19.

Mr Kiely said there was not yet a consensus as to how long cost pressures would last.

“There’s a lot of debate globally around this [inflation],” he said.

“Whether this is a short-term factor because of stimulus packages and additional demand occurring, or whether it is a structural issue remains to be seen.

“While [the consumer price index] has spiked in June and has risen nationally by 3.8 per cent in the year to June 2021, underlying inflation – that is, inflation that excludes one-off price impacts – sits at 1.6 per cent, below the RBA monetary target.”

That meant interest rate increases would be unlikely for now, and lockdowns on the east coast could hold back the national recovery, he added.

“However, the extent to which wages grow on the back of labour shortages will be watched carefully by the RBA in the coming months,” Mr Kiely said.

Budget

The September state budget will offer the government a chance to address some of these issues.

The 2021 financial year was a windfall for the WA Treasury with a royalties jackpot of more than $10 billion supporting a bumper surplus.

For the first time in some years, it seems a contractionary budget will be needed to take the heat out of the economy, instead of one aimed at sparking demand.

The government recently indicated it would seek to do just that.

Transport Minister Rita Saffioti said the government might slow the rollout of its infrastructure program to reduce pressure in construction, although that was soon followed by Health Minister Roger Cook promising an extra $1.3 billion on health infrastructure.

Longer term, some economic reforms advocated by economists in WA are yet to be introduced, including a reduction in payroll tax and an end to energy market restrictions.

Payroll tax is particularly damaging.

Research such as that undertaken for the Henry Tax Review suggests that, for every $100 raised through payroll tax, $40 of economic activity is destroyed, compared to less than $10 for land tax.

It also adds to the pressures for growing businesses trying to hire new workers, as it is levied on a company’s wage bill.

The Chamber of Commerce and Industry of WA said the payroll tax burden in the state was among the toughest in the country at some payroll levels.

A business with about 25 employees would have the highest payroll tax burden in the country, CCI said.

At a payroll of $2 million, a business would pay $40,000 more than an equivalent entity in South Australia, about 156 per cent higher.

With a payroll of $5 million, a business pays about $80,000 more than a SA competitor (47 per cent higher).

“The higher tax burden in WA is a key factor behind WA’s inability to diversify and to scale up key sectors like manufacturing,” a spokesperson told Business News. 

“WA risks losing investment dollars and economic opportunities to other states if it does not improve the competitiveness of its tax system over the coming months. 

“We should not allow WA to fall further behind the eastern states.”

Earlier this year, PwC suggested cutting exemptions to payroll tax to help fund a reduction in the tax rate.

“While the payroll tax is conceptually efficient, the existence of thresholds and exemptions undermines this efficiency and increases complexity for businesses,” the firm said in its ‘Busting myths and fixing the system’ report on payroll tax.

“Payroll tax-free thresholds ... create distortions which reduce output and employment.

“The logical response is to address these distortions by removing exemptions and lowering the rate.”

The burden of the tax results in reduced productivity, lower wages, or higher consumer prices, depending on broader economic circumstances, PwC said.

Power 

One big change not yet implemented is in electricity markets, where the government has long been considering allowing more small businesses to choose their electricity supplier.

That would end Synergy’s monopoly for customers smaller than about the size of a supermarket, or 50 megawatt hours a year.

Energy is about 7 per cent of the cost profile of a manufacturing business, about 3 per cent in hospitality, and 9 per cent in transport and warehousing, the ABS has reported.

CCI said the restrictions against competition increased energy prices for small and medium businesses, with a survey prior to COVID-19 indicating that about three in four businesses supported the policy change.

Evidence from NSW, the UK and New Zealand also suggested competition would reduce power bills, CCI said.

Independent Power Association of WA chair Richard Harris said he understood the state government was considering the change, and other moves to help retailers in large shopping centres.

“[This would help] the small business sector of the economy at a time when they have come under stress from the pandemic and online shopping,” Mr Harris told Business News.

“Lowering the threshold to 20MWh per annum, which shouldn’t affect residential customers, will enable about an extra 20,000 businesses to choose their supplier, and make savings of up to 20 per cent on their power bills.

“These savings will allow those businesses to employ more people and generate more economic activity in WA.”

He said the 50MWh threshold would be particularly problematic for businesses just below that level.

Two pizza shops in the same suburb might have substantially different power bills depending on whether they exceed the threshold or not, affecting competitiveness, Mr Harris said.

One further change to lower power prices would be to alter the system through which metropolitan users subsidised power prices in regional areas, CCI said.

The chamber suggested it be funded through the state’s budget, not through the existing Tariff Equalisation Contribution levy.