Economic Outlook for South Australian Business presentation to Ceda (SA)

Committee for Economic Development of Australia
SA Division
Trustees Briefing
The Business Outlook for South Australia
Thursday 29 September 2016
Corporate Governance Forum
Darryl Gobbett
Chief Economist and Adviser

Please read the disclaimer at the beginning of this report.
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The Economy and Financial Outlook: Issues for Business Management
• Output Growth slow and Inflation and Interest rates staying very low here and overseas
– High likelihood of further Australian Cash rate cuts
– US interest rate rises to continue in measured fashion.
• Output growth moderate and early signs of wages growth lifting
– China growth slowing and changing but no recession
• Australian and South Australian spending and Output growth to remain slow
– Non Mining investment not lifting as quickly as earlier expected.
– Private sector growth likely to be even slower following Federal election result
• Federal election outcome likely to increase business uncertainty
• SA State Budget 2016/17 seeing increased spending, taxes and asset sales
– Increased GST distributions and asset stripping main saviours
– Public sector continues to grow
– Tax reform in SA too hard in absence of Federal change
• Federal action seems some time off due to increased spending, dubious tax forecasts
– New employment handouts but overall support for business being wound back

• Pace of external change accelerating but public policy response lagging
– Asset price movements likely to be very divergent
– Business survival and success even more so dependent on own actions
• Western societies showing distrust of political, financial and economic elites
– Seen in rise of Mr Trump and European right wing parties, Brexit and Australian election results,
• Many feel left out of economic liberalisation and Post GFC policies, Fear of change and “new” economy
– Nationalism and populism as now global issues
• Often stirred up as a response to fears and economic tensions
• Likely we have passed the high point of globalisation and economic and political liberalisation
• No real action in Australia on Budget, Tax or Regulatory reform for at least the next 5 years
– LNP and ALP have no appetite for reform, Minor parties are anti-reform
• Middle Class Revolt: Age of Entitlement back with a vengeance
• Budget “repair” through tax bracket creep and removal of tax “breaks”
– Danger of cut in Federal Government global credit rating: Flow on to SA and Australian companies
The Economy and Financial Outlook:

Some economic and business implications
• Productivity, Workforce Participation and Industry flexibility issues not a policy focus
– Federal, State or Local: Fragmentation of political representation
– Too hard intellectually, too many splinter interest groups.
– Longer term impacts on:
• Private real Income growth, Spending, Profits and Superannuation returns
• Tax revenues and public sector spending
• Population and workforce growth
• SME likely to be focus of Government support. Big business on the outer
• Tax “relief” focussed on middle income earners. Top tax rates unlikely to be reduced.
• Increased infrastructure spending:
– Try to stimulate growth as private sector investment remains weak
– As public substitute for needed policy changes in other areas
• Budget deficits are back in fashion
The Economy and Financial Outlook:

Economic and Financial Background:
Low Growth, Slower Productivity gains, Private Sector deflation
Output Growth, Inflation Adjusted, % pa
(Red = downward revision
Green = upward revision)
Cons Price
Inflation %
pa
Interest Rates % pa
20 September 2016
General Govt Debt, % of GDP
Red = Upward revision since 4/2015
Green = Downward Revision since
4/2015
1997 -
2006
2014 2015E 2016F 2017F 2017F
3 mo
Interbank
10 year
Govt Bonds
2009 2015
2016
proj
2017
proj
United States 3.3 +2.4 +2.4 +2.2 +2.5 +1.5 0.5 1.62 86.0 105.8 107.6 107.0
Japan 0.9 0.0 +0.5 +0.3 +0.1 +1.2 -0.10 -0.05 210.2 248.1 249.3 250.9
Euro Area 2.3 +0.9 +1.6 +1.6 +1.4 +1.1 -0.22
-0.08
(Germany)
78.3 93.2 92.5 91.3
United Kingdom 3.1 +2.9 +2.2 +1.7 +1.3 +1.9 0.25 0.64 65.7 89.3 89.1 87.9
China 9.4 +7.3 +6.9 +6.6 +6.2 +2.0 4.35 2.78 36.9 43.9 46.8 49.3
India 6.6 +7.2 +7.3 +7.4 +7.4 +5.3 6.75 6.82 72.5 67.2 66.5 65.6
Indonesia 2.5 +5.0 +4.8 +4.9 +5.3 +4.5 6.50 7.12 26.5 27.2 27.6 28.4
ASEAN 5 na +4.6 +4.7 +4.8 +5.1 +3.8 na na na na na na
Brazil 2.7 +0.1 -3.8 -3.3 +0.5 +6.5 14.25 11.87 64.9 73.7 76.3 80.5
Russia 5.0 +0.6 -3.7 -1.2 +1.0 +6.5
10.
0
8.14 10.0 17.7 18.4 19.4
Australia 3.6 +2.6 +2.5 +2.5 +2.5 +2.4 1.5 2.00 16.7 36.8 39.1 40.0
World +3.4 +3.1 +3.1 +3.4
Group of 7, 1.7
New &
Emerging, 5.9
75.1 81.3 83.6 83.4
Source: IMF World Economic Outlook, April 2016, WEO Update, July 2016 and Fiscal Monitor, April 2016;
www.tradingeconomics.com

2016/17 Federal Budget
Major Financial Projections
13/14 14/15 15/16e 16/17f 17/18p 18/19p 19/20p
Payments
-% Growth
-% of GDP
+11.8
25.7
+2.1
25.9
+3.1
25.5
+4.7
25.8
+3.3
25.5
+4.7
25.4
+4.4
25.2
Receipts
-% Growth
-% of GDP
+3.5
23.0
+4.7
23.5
+2.3
23.5
+6.0
23.9
+6.3
24.2
+7.4
24.8
+6.6
25.1
Cash Balance
(Underlying)
- $ billion
-% of GDP
-48.5
-3.1
-39.9
-2.5
-39.4
-2.4
-37.1
-2.2
-26.1
-1.4
-15.4
-0.8
-6.0
-0.3
Source: Australian Government 2016/17 Budget Strategy and Outlook Budget Paper No. 1

Risks Continue to be of Higher Deficits

Main Revenue Items
Cash Basis, $b and % change
13/14 14/15 15/16e 16/17p 17/18p 18/19p 19/20p
Individuals
Employment/Earnings
Growth %
Individual Tax as % of Total
163.6
+4.7%
0.7/2.5
48.3%
177.9
+8.7%
1.6/2.3
50.3%
188.4
+5.9%
2/2.25
51.7%
197.0
+4.5%
1.75/2.5
51.4%
210.4
+6.8%
1.75/2.75
51.3%
223.9
+6.4%
1.25/3.25
51.0%
239.7
7.1%
1.5/3.5
51.2%
Companies, FBT, RRTs 72.9
+0.3%
72.4
-1%
70.0
-3.3%
74.5
+6.4%
82.1
+10.1%
90.2
+9.8%
96.5
+7.0%
Superannuation 6.1
+19.8%
5.9
-3.7%
6.6
+12.9%
7.4
+11.3%
9.0
+21.4%
10.0
+11.1
10.9
9.0%
Excises and Customs 35.3
+3.5%
34.6
-2.1%
34.8
+0.6%
35.8
+2.8%
37.1
+3.7%
39.7
+7.1%
42.7
+7.4%
Goods and Services Taxes 51.4
+3.2%
54.5
+6.0%
57.8
+6.0%
60.9
5.4%
64.2
5.4%
67.6
5.3%
70.7
4.5%
All Taxes 338.4 353.5 364.5 382.8 410.2 438.8 468.3
Personal Income Tax Bracket Creep
and Increased Profits? main source
of Revenue Growth

Main Expense Items by Program:
Increasing concentration with reducing flexibility
Accrual Basis , $b and % of Total Spending
14/15e 15/16e 16/17f 17/18p 18/19 19/20p
Assistance to the Aged 57.6 60.0 63.3 65.7 69.4 72.9
13.7% 13.9% 14.0% 14.1% 14.2% 14.2
Assistance to Families with Children 38.8 38.9 37.6 37.3 39.9 41.6
9.2% 8.9% 8.3% 8.0% 8.2% 8.1%
Medical Services and Pharmaceutical
Benefits 28.2 31.5 32.8 33.7 35.0 36.8
6.7% 7.3% 7.3% 7.2% 7.2% 7.2%
Assistance to those with Disabilities 27.7 29.1 33.4 40.5 51.1 52.9
6.6% 6.7% 7.4% 8.7% 10.5% 10.3
Assistance to the States for Public
Hospitals 15.5 17.2 17.9 18.9 20.0 21.1
3.7% 4.0% 4.0% 4.1% 4.1% 4.1%
Total of Above as % of Total
Spending 39.9% 41.0% 41.1% 42.2% 44.0% 44.0%

Budget Forecasts
% change, inflation adjusted 13/14 14/15 15/16e 16/17f 17/18f
Exports 5.8 6.5 6 5 5.5
Imports -1.9 0 0 2.5 3
-Net Contribution to Growth, % GDP 1.6 1.4 1.25 0.75 0.75
Gross Domestic Product 2.5 2.2 2.5 2.5 3
Nominal GDP 4 1.6 2.5 4.25 5
Terms of Trade, % change -3.7 -10.3 -8.75 1.25 0
Current Account Deficit
-$billion
-% of GDP
48.7
3.1
59.6
3.7
78.4
4.75
68.8
4
63.2
3.5
→Export volume growth revised down, Import volume growth revised up
→Current Account Deficit revised to be bigger
→Overall economic growth rate revised down from 2015/16 Budget forecasts
→Election result and increased uncertainty likely to see further slowing

Budget Forecasts
→Economic growth slow with falling Mining Investment just being offset by increased housing investment, exports
→Govt growth forecasts revised down from December 2015 MYEFO
→Mining investment falling faster than expected
→Non Mining Investment not growing as fast as expected
→Private dwelling investment growth to slow more sharply
→Public Final Demand growth is lifting with Infrastructure spending
% change, inflation adjusted
(Italicised are BH forecasts)
13/14 14/15 15/16e 16/17f 17/18f
Household Consumption 2.5 2.7 3.0 3.0 3.0
New Motor Vehicle Sales, m* 1.12 1.2 1.35 1.40 1.43
Private Investment - Dwellings 5.1 7.9 8 2 1
No. of Private Dwellings Started (‘000)* 178 200 215 220 222
Business Investment – Mining
Business Investment – Non Mining
-7.0
-3.7
-17.3
1.2
-27.5
-2
-25.5
3.5
-14
4.5
Private Final Demand 0.9 1 0.5 1.5 2.5
Public Final Demand 1.6 0 2.25 2.25 2.0
*BH forecasts

Budget Forecasts
→Employment and Wage Growth slow, with forecast falling Household savings ratio to support
moderate retail spending growth
→Labour force participation lower for 19 – 65 year old males, rising for baby boomers
→Population and Working age population growth slower than earlier estimated, issues longer term
→Employment growth, housing demand, retail spending, tax etc
→Inflation staying lower for longer, Private Sector deflation as part of global phenomenon
→Private sector and public sector wages growth slowing
13/14 14/15 15/16e 16/17f 17/18f
Employment, % change to June qtr 0.7 1.6 2 1.75 1.75
Wage Price Index, % change to June qtr 2.6 2.3 2.25 2.5 2.75
Unemployment Rate, % June qtr 5.9 6.1 5.75 5.5 5.5
Labour Force Participation Rate, % June qtr 64.6 64.8 65 65 65
Household Savings Ratio, % June qtr, trend 10 9 8 7 7
Consumer Prices, % change to June qtr 3.0 1.5 1.25 2 2.25

Net Worth continues to improve,
Households starting to save less but real Disposable Income and Consumption growth at two decade lows
Source: Reserve Bank of Australia Chart Pack September 2016

Supply side issues and Slowing Wages Growth
Source: Reserve Bank of Australia Chart Pack September 2016
→Issues for:
→Household real income growth, particularly with ongoing tax bracket creep
→Company revenue growth and profitability
→Interest rate outlook

(De)flation Outlook frightening policy makers
Source: Reserve Bank of Australia August 2016 Statement on Monetary Policy
RBA Chart Pack September 2016

Reserve Bank Forecasts
• Inflation now forecast to be below 2-3% pa policy range
• Economic growth below earlier reduced potential growth rates
• Slower population growth
• Low productivity gains
• Cash rate to 1.25% by end 2016, 0.75% in 2017

Markets Expecting Cash Rate Cuts to under 1.5%
→RBA wordings of 2 August and 6 September indicated room for further cuts
→Surprise at lower than expected inflation outcomes, expected to remain “quite low … for some time”
→Stronger $A than desired complicates transition of the economy
→Economy not growing as strongly as expected
→BREXIT and election closeness likely to create bias for lower rates for longer
→Tightening lending standards reducing impact of lower cash rates
→Strong Australian GDP growth for March Qtr has not changed cash futures outlook substantially

Term Deposit Rates likely lower for less than 12 month, higher for longer terms
→Term Deposit rates spreads over wholesale are contracting as banks now have less need to increase overall retail funding.
→Lending rate margins increasing
→But should be an increasingly positive yield curve:
→New banking rules mean most banks may have to increase longer term TDs.
→Under 12 months rates likely to be at or under the cash rate in late 2016.
Source: RBA Chart Pack September 2016

Non Mining Investment Expectations not Offsetting Lower Mining Investment:
• Most Output Growth is in Services, historically showing less capital spending
• June qtr estimate for 2016/17 looking “better” than earlier estimates
Gross Investment by Major Industry Sector, $b, Current $
10/11 11/12 12/13 13/14 14/15 15/16 16/17
3rd Est with
2015/16 realisation
ratios
Mining 46.9 82.0 94.7 90.4 76.1 53.5 39.6
Manufacturing 12.3 13.2 9.5 9.2 8.6 8.5 8.9
Electricity, Gas, Water & Waste 6.2 5.4 5.5 5.8 5.1 5.3 6.9
Construction 5.4 4.7 5.0 4.7 6.3 3.4 3.7
Wholesale & Retail Trade 7.4 7.5 7.4 8.1 9.1 9.4 10.5
Transport, Post & Warehousing 11.6 13.7 11.1 11.2 12.5 10.5 11.4
Rental, Hiring & Real Estate 11.9 10.5 9.8 9.6 12.2 12.6 12.0
Other 17.6 17.9 17.7 19.0 20.7 24.3 22.0
Total 119.3 154.8 160.5 158.0 150.7 127.5 115.0
Source: ABS 5625.0 Private New Capital Expenditure and Expected
Expenditure December Quarter, Australia, February 2016

Listed Company Profits Outcomes very Mixed with Weak Outlook
Chart Pack September 2016

Share Price Gains very Dispersed,
Forward Price/Earnings Ratios Up since May 2014
Driven by very low interest rates, Search for Cash Incomes and rising payout Ratios
Australia Late 80s Now
Dividend Yields 4 - 5% 4.3%
Inflation 7% – 8% 1.5% – 2.5%
10 Year Govt Bonds 12% – 13% 1.8% - 2.5%
Source: Reserve Bank of Australia August 2016 Statement on Monetary
Policy and Chart Pack September 2016

$A forecast range $US0.75 - $0.78 to end 2016
Short term dips as Australian and US interest rate expectations change
Risk now to upside as global commodity supply pulls back

Impacts on:
• Living standards while working
• Tax needed to support the non-employed
• Business profitability
• Capital Investment
• Employment
• Share portfolio returns
• Public sector size
• Superannuation fund size and returns
• The $A
• Australia’s position in the region
• Defence capacity
Issue remains whether Productivity can lift:
Or are Living Standard and Budget Expectations in for a Shock?
Source: Reserve Bank of Australia May 2016 Statement on Monetary Policy

The South Australian Outlook
– Small, Regional Economy: 1.7 million people
•Smaller than Western Sydney or Brisbane, Irrelevant nationally
•Population older & ageing faster, sicker, more obese, less educated and lower skilled
•Driving policy decisions but are these also outcomes of past policies?
•Impacts on Housing, retail, tax base, attitudes, national representation
• No Exports means No economic or Population growth
• Industry structure & policy makers still adapting from 1960s
• No private sector employment growth since 2010
•Manufacturing employment now 30,000, or 30%, lower than mid 2000s peak
•Traditional motor vehicle and metal fabrication industries are disappearing
•Growth is mainly in Food processing
•Losses in SA in most Manufacturing has been faster than in NSW or Victoria
•Growth is principally in Aged care, Social Support and Public sector
• More international competition and More opportunities

The South Australian Outlook
• Public finances rely on Federal Support
• Lower per capita income, slower & slowing population growth, higher costs
• Large & growing Public Sector, Higher taxes and poor Budgetary outlook
• Increased GST and Asset Sales currently reasons for low deficits
• Large & Low Productivity Public Sector, High Deficits, Increasing Tax Burden & Debt
• ALP sees big public sector and high taxes as politically acceptable
• Liberals not a small government party
• Increased intervention and lack of openness in regulatory benefit cost analysis adds costs to business
• Commercial property tax changes good start but more reform is needed
• Risk is that there will be less support from Federal Govt and Other States in the future
• National Tax Reform likely to reduce income taxes, increase GST
• Likely impacts on GST relativities, Special Grants, States’ own taxes
• Don’t criticise the SA Government but it is starting to recognize change is needed
• Transparency on Regulatory Impact Statements is poor
• Focus is on more efficient regulation, not less regulation
• ICAC, Royal Commission on Nuclear Fuel Cycle are beginnings

Sources of SA Employment Change by Sector

Source: ABS Cat. 5220.0 Australian National Accounts: State Accounts 2014/15, released 20/11/2015
Where Growth is occurring and Not: SA Gross Value Added
1989/90 -
1999/00
1999/00 -
2005/06
2005/06 -
2014/15
2014/15 Share
of State Gross
Value Added
excluding
Dwellings,
Current Prices
Health care and social assistance 3.1% 3.9% 3.2% 10.8% Supportive Demographics
Manufacturing 1.7% -1.3% -1.1% 8.6% Tough, shrinking, changing
Financial and insurance services 3.9% 3.0% 4.7% 8.5% Oligopoly, funds management
Construction 2.6% 5.1% 3.2% 7.6% Housing, public infrastructure
Public administration and safety 3.6% 3.1% 3.0% 7.2% Slowing further on Budget restraints
Education and training 2.0% 1.3% 1.6% 6.0% Should lift on overseas demand with lower $A
Transport, postal and warehousing 3.1% 1.9% 3.0% 5.9% Growth with online buying, inbound tourism
Agriculture, forestry and fishing -0.8% 7.2% 3.8% 5.8% Overseas demand lifting further
Retail trade 3.3% 4.5% 2.4% 5.8% Growing but changing
Professional, scientific and technical services 2.9% 4.0% 3.5% 5.8% Change, Outsourcing, Regulation
Wholesale trade 2.8% 3.4% 3.2% 5.3% As per Retail Trade but slower
Mining 1.8% 1.0% 7.4% 4.3% Increasing exports. Investment to rise in 3-4 years
Electricity, gas, water and waste services -1.3% 4.4% 0.5% 3.5% Waste services main growth area
Average of Annual Rates, inflation
adjusted

Economic Forecasts: South Australia
Retail Turnover % (Nominal, year total) 7.9 1.7 0.6 1 -0.8 3 4.4 3.8 3
New Motor Vehicle Sales (000) 59,400 66,080 62,836 65,340 70,268 70,074 69,262 70,381 70,000
Business Investment, %, Current Prices
- Plant & Equipment 2.2 3.4 -3.8 7.9 -13.7 2.1 9.7 -4.1 0
- Non Residential Construction
- New Buildings 15.9 -18.6 18.1 37.4 4.9 3.3 9.4 -19.8 0
- New Engineering Construction 20.5 1.5 32.5 -12.1 23.4 -4.6 -2.8 1 0
- Cultivated Bio Resources & Intel Property -7.5 -1 12.4 6.8 5 0.6 -4.9 8.5 8
Public Investment 34.7 55.6 -12 -5.1 -1.8 -8.5 -18.2 10.4 5
Labour Force Participation Rate % (June, Trend) 63.3 63.2 63.5 62.7 62.7 62.2 62.4 61.9 61.8
Unemployment Rate % (June, Trend), 5.6 5.4 5.2 5.5 6.2 6.7 7.7 6.8 7
Actuals ABS; forecasts DG
4.6 6.7
Population Growth % (Yr to June) 1.3 1.1 0.8 1 0.9 0.9
Private Avg Weekly Earn % (FTAOT, (Yr to May) 7.4 0.7 4.5 3.2
2012/13
Employment Growth % (Year to June, Trend) 0.6 1.3 1.6 -0.7
1.7GSP(Total Output) % (Real) 2.7 1.6 2.4 0.6
Private Dwelling Approvals
Private Dwelling Commencements
11,777
11,676
11,480
11,061
10,952
10,058
2008/09 2009/10 2010/11 2011/12 2016/17f
0.8 1.6 1.25 1
2013/14 2014/15e 2015/16f
10,820
10,179
0.2 -0.4 0.1 0.9
8,453
8,479
8,096
8,653
0.5
2.5
11,121
10,290
11,764
10,148
11,500
10,200
0.5
0.8 0.6
-0.2 6

Recent trends suggest SA’s population growth will be lower than projected:
• Running below Projection B assumptions on net overseas migration; and
• At or above Projection B assumptions on net interstate migration.
19 – 55 age groups therefore likely to be smaller than Projection B.
Population Outlook
Net
Natural
Increase
Net
Overseas
Immigration
Net
Interstate
Immigration
Total Increase
No. (% to June)
2010/11 +7,070 +9,168 -2,614 +13,624 (0.76%)
2011/12 +7,494 +11,315 -2,424 +16.421 (1.00%)
2012/13 +7,363 +10,849 -3,973 +14,239 (0.86%)
2013/14 +7,192 +11,052 -2,968 +15,276 (0.91%)
2014/15 +6,472 +10,765 -3,763 +13,474 (0.80%)
2015/16F +6,346 +9,258 -5,725 +9,879 (0.58%)
Source: ABS cat: 3101

By 2030 those over 60 will exceed those 0 – 19, or 20 – 39, or 40 – 59
• Likely bigger market for Last Home Buyers than First Home buyers
• Land, Staffing, Training, Investment and Cost issues for institutional aged care
• Health care issues for Baby Boomers wanting to stay mobile longer
• Education, Entertainment, Employment, Politics, Tax, Travel
More expected of the public sector but Boomers not willing to pay
• Adverse Impact on income taxes and spending taxes of combination of:
• Reduced employment growth and increased part time employment
• Low/no productivity growth meaning low/no real per capita income growth
• Impacts across all levels of Govt: Federal, State and Local
• Business and Households should expect higher taxes and Public charges
Immediate need for more efficient and effective decisions/implementation of
• Taxation
• Public Spending and Public Investment
• Regulatory burden
Business sector should be applying pressure in these areas for reform
Some Implications of Ageing Population

Units and Retirement Homes Main Drivers

Food staples and Alcohol Price Weakness

Household Goods Impacted by Lower Housing Turnover

Clothing Etc: Internet, Ageing Population, Overseas travel

Health Care lifting, Buying Less Newspapers

Private Investment Flat, Public Investment Falling

Sensis Small and Medium Business Index, June Qtr 2016
(released 28 July 2016, Interviews 14 April 2016 to 9 May 2016)
Business Confidence in SA

“The SA Government, which has really struggled on this measure for over two years
was criticised for high taxation, (19%), payroll tax (11%), poor economic management
(17%) and excessive wasteful spending (12%).” (December Qtr 2015 Report)
“The major criticisms of the SA Government, which has been the least popular for over
two years, were a lack of incentives or support for small business (14%), poor
economic management (13%) and payroll tax (12%).” (March Qtr 2016 Report)
“The main reason the SA Government fails to appeal to SMBs is a lack of incentives or
support for small business (15%), followed by a belief that it is only concerned with big
business (12%). “(June Qtr 2016 Report)

SA Govt Investment Spending ($m)
Source: SA Govt Budget Statement Budget Paper No.3 2016/17
$9.782 billion to be invested over next 4 years:
• $3.47b in Health and Ageing– mainly buying the new RAH
• $2.0b on North-South Road corridor
• $783m on other public transport, incl O-Bahn, Torrens Rail, Gawler
rail electrification, tram extension to old RAH site
• $500m on education facilities
• $238m on Festival Centre precinct, upgrade of Her Majesty’s
Theatre
• $1.49b on Contingencies, Capital Slippage and Other?

SA Budget 2016/17: Priorities, Themes & Issues
• Quotes from the Treasurer’s Budget Speech
“The 2016-17 Budget speaks to our values and our vision…..Its ambition is to create jobs, develop future industries and
ensure our children have the right skills for a transforming, modern economy.”
“ I can now report to the house our budget position is sound.…….this budget records the eighth surplus of this of this
government, proving our responsible fiscal management of an economy that has grown for every year of our 14-year
governance.”
“Last Budget we announced an unprecedented reform of state taxes….tax reforms that have helped create nearly 6000
more jobs in the state over the past twelve months by removing barriers that were preventing businesses from
expanding, from reinvesting and from growing our economy…. This Budget builds on the foundation of last year’s
reforms.”
“Our prudent fiscal management, restrained spending and incentives to grow the state’s business sector will do much
to address our unemployment issues.”
“…there is no single measure or silver bullet that will address the challenges our state currently faces….But tax cuts are
key, innovation is important, education is vital, health is essential and infrastructure is critical.”

SA Budget: Priorities, Themes & Issues
• No new tax reductions
– Increase in metropolitan solid waste levy
– Introduce new place of consumption tax on online bookmakers
– Extension to 30 June 2017 and state wide of of-the-plan apartment stamp duty exemption
• Business Support
– Extension to 30 June 2020 of current small business payroll tax rebate (payrolls up to $1.2m)
– Employee Job incentives over 2 years
• $10,000 incentive for employers with payrolls of $5m or less
• $4,000 incentive for employers with payrolls of $600,000 or less
– Funding for small business Innovation, early commercialisation and venture capital
– Additional funding for Economic Investment Fund, Industry Attraction Agency and Industry Participation Advocate
• Science, Technology, Engineering and Maths facilities
– $250m at 139 state schools
– $250m for private schools through loan scheme
• Infrastructure spending
– Buying the new RAH
– North South road corridor
• Law and Order and child protection
• Limit public sector wage growth to 1.5%pa over next three years

Expectations of National Recovery Central to Deficit Reductions for GST
increases
SA GSP continues to decline relative to rest of Australia
Sources:
SA Govt 2016/17 Budget Statement Paper No 3

(Shrinking) Surpluses as Far as the Eye can see!?
2015/16 Budget ($m) 2016/17 Est 2017/18 Est 2018/19 Est
Net operating balance 654 727 961
Net Debt 6,543 6,227 5,761

Slow Own Revenue Growth, High dependence on Commonwealth, other States
Further Large Dividend received from the
Motor Accident Commission after large
dividend in 2014/15.
Reduction due to slippage to be carried forward
into 2016/17.
Employee expenses revised up, by $200m by
2018/19, due to increases in estimated staff
numbers, and despite planned 1.5% pa pay rise
limit.
Depreciation and Amortisation revised down
with transfer of TAFE assets to RenewalSA and
delay of commercial acceptance of new RAH.
Tax Revenue estimates revised down since
2015/16 Budget. By 2018/19, lower by $239m.
Expenses revised up each year compared with
2015/16 Budget. Higher by $194m by 2018/19
Grants rising as share of total revenue from
50.4% in 2014/15 to 54.9% in 2019/20.

Main Tax Revenue Sources ($m)
12/13 13/14 14/15 15/16e 16/17b 17/18e 18/19e 19/20e
Payroll
Growth %
1,077
6.6%
1,079
0.2%
1,114
3.2%
1,117
0.2%
1,159
3.8%
1,204
3.9%
1,251
3.9%
1,315
5.1%
Conveyances
Growth %
778
13.4%
793
1.9%
907
14.4%
875
-3.5%
902
3.1%
918
1.8%
939
2.2%
1,029
9.6%
Land Tax (Private)
Growth %
347
-3.6%
345
-0.6%
347
0.6%
356
2.6%
366
2.8%
378
3.3%
389
2.9%
402
3.3%
ESL on Fixed Property
Growth %
103
0%
104
1.0%
190
82.7%
211
11.1%
215
1.2%
217
0.9%
223
2.8%
224
0.4%
Gambling 422 388 388 386 389 406 417 423
Insurances 429 435 446 438 443 460 479 498
Motor Vehicles
Growth %
545
7.1%
567
7.2%
597
5.3%
614
2.8%
625
1.8%
642
2.7%
662
3.1%
682
3.0%
Other Taxes 403 374 405 409 418 431 439 450
Total Taxation 4,104 4,085 4,394 4,406 4,517 4,656 4,799 5,023

GST Relativity Update
Increased GST share for SA from 2015
Review. SA now gets about $1.5b more
pa than if distributed purely on a per
capita basis.

Spending by Function ($m)
Spending becoming
increasingly focussed
on Communities and
Social Inclusion;
Education and Child
Development; and
Health and Ageing.
66.2% of total
spending in 2015/16
69.7% in 2019/20.

Staffing of SA Government
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Employee Expenses
$m
Growth %
6,400
2.9%
6,770
5.0%
6,930 Bud
7,105 actual
+4.9%
7,155 Bud
7,258 actual
+2.2%
7,268 Bud
7,425 actual
+2.3%
7,271 (14/15)
7,749 actual
+4.4%
7,347 (14/15)
7,899 (16/17)
1.9%
7,554 (14/15)
8,068 (16/17)
+2.6%
8,143 (16/17)
+0.9%
8,285 (16/17)
+1.7%
Employee Nos FTE
30 June
Growth %
80,254 82,214
+2.4%
81,731
-0.6%
81,161
-0.3%
81,345
+0.2%
78,214 14/15b
81,759 16/17b
+0.5%
77,619 14/15b
81,231 16/17b
-0.6%
77,437 14/15b
81,002 16/17b
-0.3%
78,694 15/16b
80,776 16/17b
-0.3%
na
80,926 16/17b
+0.2%
At 30 June 2002 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Employees in SA Public Sector
FTE
69,670 76,720 78,211 79,715 81,270 83,885 84,900 84,882 85,727 86,257 85,372 85,628
Employee Persons Per 1000 SA
Population
55.1 58.5 59.8 60.3 61.0 62.5 62.2 61.9 62.6 62.4 61.3 61.4
Employee Persons Per 1000
Employed South Australians
121 122 124 125 124 128 127 125 129 129 128 129
Ratio of Public Sector Full Time
Adult Ordinary Time Earnings to
Private Sector Full Time Adult
Ordinary Time Earnings (May)
Victoria
123%
113.3%
119.5%
111.5%
120.4%
111.3%
118.4%
108.2%
117.1%
107.3%
115.4%
108.9%
118.6%
111.3%
118.3%
114.8%
122.1%
114.6%
120.9%
116.5%
117.4%
116.1%
123.2%
119.2%
Employees in SA Public Sector
Source: SA Public Sector Workforce Information June 2015 Table 2, ABS cat.6302.0

Investment that leads to lower Costs, increased Output & Exports
– Increased real per capita incomes
– Stronger population growth through less population loss interstate
» Increased retail spending and new home buyer activity
» Better public sector finances and possibility of tax cuts
– Growing sustainable workforce provides better support for ageing population
Focus on regional SA, not urban commuters
– Eyre Peninsula rail, energy and water and ports
– Sealing of Strzelecki Track
– SE Drainage Scheme
– Kangaroo Island water transport links
– Nuclear Waste repository
– Base Load electricity and micro grids
– Water for agriculture, food processing not urban consumption
– Rail/Road Bypass of Adelaide
Establish a SA Productivity Commission to determine priorities
– Get more innovative on funding infrastructure
– Look at tax mix
– Regulation load
– Cost of Electricity and Water
Manufacturing Job Losses require new Focus

•Move to a broad based Land Tax
– Residential transfer costs becoming a substantial drag on turnover
– Increased turnover and consolidation to lift new developments and civil construction
• SA Government asset sales
• Set time and price targets for public sector land release as part of City boundary
implementation
• Review local zoning issues
• Reduce “gold plating” and “future proofing” requirements
• Reduce Size and Cost of SA Public Sector to save $800m pa
• Cut number of Ministers to 10 or less
• Reduced regulation should result in cost savings
• Bring SA Public pay relativities to average 115% of Private Sector (now 120%)
• Reduce SA Govt Full Time Equivalent (FTE) staff numbers to 2007 levels
How to Fund this

Public Policy should focus on SA’s strengths and advantages
– Recognise we cannot generally compete in mass consumer markets
• Cost structures, scale required, R&D
– We can compete in Agriculture, Mining, Health and Medical research,
Defence technology and services:
• Associated manufacturing and services:
– Ingham’s announcement is a good example
– Tertiary Education and Speciality Tourism, eg wine, Kangaroo Island
– Intellectual capital:
• NGOs, Water industry, Land titles, Waste management, Ageing population eg.
– Size of Adelaide:
• Private and Public Decision makers very close together
– SME focus and recognise importance of local procurement
• Immediate employment and industry development
Some other Issues

High prices and instability will be with us for at least a decade
– Response to combination of past poor decisions over last thirty years
• Antiquated, High cost and Centralised Base load
–Port Augusta brown coal stations actually lasted longer than expected
–Now reliance of Pelican Point and uncertain gas future supply
• Rush to renewables
–Generally more expensive than gas or coal
–Subsidised competition drives out base load
–Fall off in renewables’ generation then requires fall back to (smaller) base load
–Prices then jump to draw in local and interstate capacity
»In combination with limited gas supply
»Costs of drawing electricity from east of Melbourne to Olympic Dam
• Constraints on interconnector investment
–To improve sale price of SA generators in 1990s
–Base load is now effectively Victorian brown coal generation
–That is to be cut back as Victorians aim for more renewables
SA Electricity Issues

Indicative Average Variable and Fixed Costs
Source: Retail electricity price history and projections- Public AEMO (Jacobs Australia Pty Ltd, Melbourne 23/6/2016)
Existing Thermal Plant Average Variable Cost
$MWh
Fixed Operational and Maintenance Costs
($MW per year)
Brown Coal SA 24 - 31 $61,500
Brown Coal Vic 8 - 15 $114,800 (Loy Yang B) - $156,415 (Hazelwood)
Black Coal NSW 20 - 25 $54,735
Gas – SA 50 - 150 $10,250 (Pelican Point) - $43,563 (Torrens Island A & B)
Gas Peaking - SA 120 - 200
Oil – SA 250 - 315
Thermal New Entry Options Average Variable Costs
$MWh (gas $42/MWh)
Fixed Operational and Maintenance Costs
($MW per year
Capital Cost $/MW
Generic SA – Gas Turbine 48 $17,000 $1.1m
Generic SA – Combined Cycle GT - CS 45 $54,000 $2.6m
New Entry Costs South Aust – Renewable Variable Operating and
Maintenance and Fuel Costs
$MWh
Long Run Marginal Cost
$/MWh
Capital Cost per $MWh
sent out
Wind 7.7 80 - 191 2.1m - 4.0m
Biomass 43.8 50 - 107 0.4m – 3.9m
Geothermal 24.1 138 - 141 7.2m - 7.4m
Solar 5.5 482 – 1,017 6.2m – 11.8m

Forecast Trends in Supply Chain Components
Source: Final Report 2015 Residential Electricity Price Trends (Australian Electricity Market Commission, Sydney, 4 Dec 2015)
Victoria
South Australia
International Residential c/KWh
2015
Source: OECD
USA 18
Canada 12
Japan 36
UK 31
Germany 54

The Real Scary Bit
Source: South Australian Electricity Report (Australian Energy Market Operator, August 2015)
Some other comments from the Report:
• Following the Heywood Interconnector transfer capacity
increase scheduled for completion in mid 2016, as well as the
scheduled closure of South Australian coal generators in 2017,
there is an increase in net interconnector imports into the state
and an increase in gas generation.
• Toward the end of the outlook period (2015-16 to 2024-25),
net interconnector imports decrease due to reducing levels of
available generation support from Victoria, while gas
generation increases further.
Some Issues:
• Where is the new gas generation capacity assumed being
built?
• Where is the base-load capacity being created for increased
electricity demand for:
• Mineral and Agricultural production, transportation
and processing; and
• Electrification of the train networks and expansion of
the tram network?
• What is the role of nuclear power generation in reducing
generation costs and increasing stability of supply?

Mass Middle Class Urbanisation and Ageing in Asia
The Fundamental Drivers of it All

Focus on strengths and advantages and recognise change is constant
– Don’t try and do everything
– What part of the value chain is most profitable, sustainable and creates
transferable personal and business skills?
• Design
• Financing
• Logistics
• Making
• Management
• ?
– Recognise people, industries, jobs, businesses & business models change
• What is the point of the business: Today and Tomorrow?
• Is the value proposition sustainable and saleable?
• Is it a business or a well paid job?
Some other Issues for Businesses

• Australian election outcome adds to uncertainty
– We need to get used to more volatile politics, close elections, minority party influences
– Loss of faith in political, financial and economic elites not likely to pass soon
• Many feel left out of economic liberalisation and Post GFC policies, Fear of change and “new” economy
– Political Volatility and lack of faith likely to limit required action on regulatory and tax reform
– Danger of cut in Federal Government global credit rating: Flow on to SA and Australian companies
• Productivity, Workforce Participation and Industry flexibility issues not a policy focus
– This has been the case for last decade at Federal, State and Local Govt levels
– Longer term impacts on:
• Private real Income growth, Spending, Profits and Superannuation returns
• Tax revenues and public sector spending
• Population and workforce growth
• Business and management have therefore to take the lead with in-house change
Summary

Economic Outlook for South Australian Business presentation to Ceda (SA)

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