Is it really the right time to lower the heat on Australia’s hot economy?

As the pandemic kicked in there were fears of an unprecedented collapse of the economy. Now, just over two years later, the Reserve Bank says the economy is too hot. 

The implications of adjustments to interest rates will have far reaching effects, and even more pronounced if that is happening alongside the winding back of stimulus measures.

It has to come to an end at some point, but the heavy vehicle industry is asking for a stepped approach for current tax incentives. The ongoing supply chain issues are presenting some big challenges in ensuring delivery by present deadlines.

There’s no doubt that inflation is stinging, and the Government and our financial regulators need every available control at their disposal to have any chance of taking pressure off, but is this week’s base interest rate rise the right lever to pull?

Just as demand looked likely to fall off a cliff, the Government worked closely with HVIA and other industry bodies, to develop and implement tailored mechanisms to stimulate business,

The Government’s Temporary Full Expensing, Backing Business Investment accelerated depreciation and instant asset write-off schemes all hit the mark and, arguably, each came just at the right time.

Anecdotally, numerous fleet operators have confessed to their suppliers that their orders would have been delayed had it not been for the tax incentives.

The depreciation incentives are a powerful tool for the Government to have at its disposal. They allow businesses to write of capital purchases in the current financial year, rather than over the life of the asset as is prescribed in tax legislation.

For any business struggling for cashflow, that provides welcome relief; equity on the company balance sheet is effectively freed up for further investment or even operational expenses.

The flow-on effect is extraordinary, with both operators and their chain of suppliers able to continue, and that means jobs are protected.

The whole community benefits when new equipment hits the road, not least because of the improvements to safety technologies and new vehicles’ improved environmental credentials.

Every piece of new equipment serves to bring down the average age of the Australian fleet; even operators of the oldest equipment are able to take steps in the right direction, accessing newer used equipment.

However, the magic pudding has a use-by date.

While the stimulus measures assist business, they effectively reduce tax income for the government. That means all of Australia is paying the price for that incentive, so it should only be used when it is really needed.

Heavy vehicle industry suppliers are currently frustrated because, while their customers have been given the appetite to spend, and in near-record numbers, they are struggling to fulfill the orders.

The ongoing supply chain issues mean materials, components and in some cases whole vehicles are simply not being produced – or completed – fast enough.

That’s not simply an Australian problem. It is the same all over the world. The frustration varies from supplier to supplier, and often differs from week to week, but what we do know is that vehicles are sitting in parking bays waiting for one or two crucial components before they can be delivered.

Manufacturers have had to revisit their processes and even their designs. It would be a tragedy if any vehicle was produced with fewer safety components, simply to expedite its delivery, but that is the current reality.

So, the industry accepts that slowing down the demand, while not a concept that sits well with anyone, is necessary for both the Government’s ability to responsibly manage the economy, and to allow the supply chain to correct itself – like a very cumbersome ship stuck in a major shipping canal (anyone?).

But it is one thing to wind back these incentives. It is another altogether to start winding up the cost of finance.

That isn’t just going to hurt mortgage holders, who are already being hammered at the fuel bowser, at the supermarket, through energy bills and pretty much every other regular expense.

For business it’s going to sting too. Suddenly existing equipment on variable loans will be costing more, and the cost of upgrading becomes that little bit harder and less attractive.

Of course we will all step up, and we will tighten our belts to play our part in getting Australia through this.

But we need to know that our regulators are making these decisions with the full implications taken into consideration.

Our advice to the Reserve Bank Governor also applies to our next government: Things are running hot, for sure, but don’t let the steam fog your lenses.