Budget 2022: A turning point as challenges mount for small businesses

The 2022-23 federal budget crystallises what many in the business community are already feeling: times are turning for the worse. 

“We now confront the prospect of a third global downturn in a decade and a half,” said Treasurer Jim Chalmers on Tuesday, announcing his budget.

The 2022-23 budget marks a turning point that will usher in a more challenging environment for small and medium businesses. After all the tumult of recent years, many businesses were finally feeling a measure of normalcy as 2022 chugged along. Input prices were rising, but at the same time, spending was strong. In many sectors business customers and consumers alike were willing to absorb price rises to buy what they needed. The big challenges managers faced were securing supply and retaining staff.

But as 2022 ends, times will change. The government is withdrawing some of its spending from the economy just as consumers are going to do the same. More money is going into paying down debt – mortgages, business loans, etc – leaving less for spending.

The result is GDP growth will fall. In nominal terms it will fall into the negatives, as the next chart shows. These numbers are much worse than the ones presented by former Treasurer Josh Frydenberg back in March. That downgrade will hurt.

The fall in growth is a result of both domestic policies and a global downturn. Growth is falling in China and the US is expected to enter recession. But that is not the only concern. Australia is beset yet again by natural disasters.

 “As we were finalising this budget, floods were once again tragically taking lives, wrecking homes, shutting businesses, disrupting livelihoods, and pushing up the cost of living,” Treasurer Chalmers said on Tuesday.

The impact of floods is a particularly brutal one – destroying crops and thereby shrinking output while lifting prices for food.

Labour market problems

Unemployment is also expected to rise, from 3.5% to 4.5%. We’re not talking about a real recession, so the number of jobs in the economy isn’t going to shrink, but it will grow much more slowly. New graduates and anyone who loses their job are going to find it more difficult to secure a new job and spend some times in the unemployment lines. That will not be a positive development for sentiment.

The government is also planning to spend less on advertising, consulting, labour hire, travel and legal. It’s a big buyer and the cuts will amount to $3.6 billion over four years. Hard news for firms whose customers include the federal government.

The primary influence on this budget – the first one from the new government – is inflation. So Treasurer Chalmers repeated, time and again. The goal of this budget is to limit economic activity until the pressures for price rises dissipate. The same goal is shared by the Reserve Bank of Australia. The inflation fight is now a pincer movement. On the supply side this should create a measure of relief for some businesses – some input prices could abate. But on the demand side it could mean fewer customers knocking on the door.

If there’s good news, it’s not in the macroeconomic environment, but in the details, including that childcare should become cheaper and more widely available. That will help ease pressures around hiring, making more women available to work.