Civil Contractors Federation Port Lincoln 11 November 2015

©
Baillieu Holst Ltd 1
Darryl Gobbett
Chief Economist and Adviser
dgobbett@baillieuholst.com.au
Turning a Poor Economy into a Good Economy
Wednesday 11 November 2015
Civil Contractors Federation (SA)
Eyre Peninsula Regional Economic Summit
Port Lincoln Hotel
Port Lincoln SA

©
The Global and National Trends: Implications for SA
Global economy looking better than expected
- Spending, Output and Profits higher than 2007 peaks
- Most major and developing economies growing
- Public Sector deficits shrinking faster than expected – Australia is an exception
- Inflation and wages growth staying very low
Capital markets recovery continues, perhaps too exuberantly
Interest rates to stay very low with negative real Bond yields
Accelerating Pace of Technological, Demographic, Economic, Industrial &
Financial Change
- Increasingly severe questioning of what adds value in an organisation or
business?
- How sustainable is the value added proposition?
- How able and prepared are:
- Board, Management, Employees, Suppliers, Investors, Governments etc
- Is Adaptivity now more important than Strategic Planning?

©
Global Growth Uneven, Moderate but Continuing
Source: IMF World Economic Outlook, October 2015
Over 75c+ of each $1 of global growth is now from Emerging Economies due to greater size even as growth slows
Output Growth, Inflation Adjusted, % pa
200
9
2010 2011 2012 2013 2014 2015F 2016F
United States -2.6 +2.4 +1.8 +2.8 +2.2 +2.4 +2.6 +2.8
Japan -6.3 +4.5 -0.8 +1.4 +1.6 -0.1 +0.6 +1.0
Euro Area -4.1 +2.0 +1.4 -0.7 -0.5 +0.9 +1.5 +1.6
China +9.2 +10.4 +9.2 +7.7 +7.8 +7.4 +6.8 +6.3
India +6.8 +10.1 +6.8 +3.2 +6.9 +7.2 +7.3 +7.5
Indonesia +5.7 +6.2 +6.5 +6.2 +5.3 +5.0 +5.2 +5.5
ASEAN 5 +1.7 +7.0 +4.5 +5.4 +5.2 +4.6 +4.6 +4.9
Brazil -0.6 +7.5 +2.7 +1.0 +2.7 +0.1 -3.0 -1.0
World Output -0.5 +5.1 +3.8 +3.1 +3.4 +3.4 +3.1 +3.6
Inflation: Advanced Economies
Emerging Economies
+0.1
+5.2
+1.5
+6.1
+2.7
+7.2
+2.0
+6.1
+1.4
+5.9
+1.4
+5.1
+0.3
+5.6
+1.2
+5.1
$US 6month LIBOR 1.1% 0.5% 0.5% 0.7% 0.4% +0.3% +0.4% +1.2%

©
Overseas Monetary Policies Remain Very Stimulatory
Aim of most Central banks is to Increase Inflation to 2%
Cash Rates:
Financial Repression: Force savers to spend
Cash and Bond Rates at record low levels
- Official Cash*: ECB +0.05%; Japan 0.1% Bank of England 0.5%, USA 0.25% *
- 10 Year Govt Bonds*: UK 1.78%, Germany 0.45%, France 0.80%, Japan 0.29%,
Keep retail deposit and loan interest rates very low: USA eg
- Mortgages*: 30 Year fixed 3.79%, variable 3.36%; New car loan 5 years at 2.52%
- *CMA 0.14% (>$50,000), 5 year CD 2.25%, 10 year Bonds 2.04%
Quantitative Easing to continue in Europe and Japan.
– Buying long term public and private debt
– Additional offset to Budget deficit reductions
Bond Yields also staying low:
Public deficits falling globally
Inflation expectations very weak.
P 4
* Wall Street Journal Market Data Centre, 28/10/2015

©
Middle Class Spending, $USb equivalents, 2009 Purchasing Power
2009 2030
North America and Europe 13,740 17,174
Asia Pacific 4,952 32,596
Rest of World 2,586 5,910
Total 21,278 55,680
Source: OECD Development Centre Working Paper No 285,
The Emerging Middle Class in Developing Countries Jan 2010
Growth Driven by Emerging Economies’ Urbanisation & Middle
Class Households

©
$A consistent with weak Commodity prices but High on
relative Inflation
Source: Reserve Bank of Australia Chart Pack October 2015

©
The Australian Economy: The Federal Government’s Forecasts
% change, inflation adjusted
(Italicised are DG forecasts)
10/11 11/12 12/13 13/14 14/15f 15/16f 16/17
Household Consumption 3.1 3.2 2.0 2.5 2.5 2.75 3.25
New Motor Vehicle Sales, m* 1.001 1.03 1.14 1.12 1.2 1.35 1.45
Private Investment - Dwellings 3.0 -3.6 -0.1 5.1 6.5 6.5 4.5
No. of Private Dwellings Started (‘000)* 154 141 159 178 200 215 220
Business Investment – Mining
Business Investment – Non Mining
34.9
3.2
74.7
1.7
13.6
-9.7
-7.0
-3.7
-15.5
2.0
-25.5
4.0
-30.5
7.5
Private Final Demand 3 6.2 2.8 0.9 1.25 1.25 2.25
Public Final Demand 3.4 2.3 -1.3 1.6 1.25 1.5 1.5
Source: Australian Government 2015/16 Budget Paper No. 1
* DG Forecasts

©
The Australian Economy: The Federal Government’s Forecasts
10/11 11/12 12/13 13/14 14/15f 15/16f 16/17f
Employment, % change to June qtr 2.2 0.5 1.2 0.7 1.5 1.5 2.0
Unemployment Rate, % June qtr 4.9 5.25 5.6 5.9 6.25 6.5 6.25
Labour Force Participation Rate, % June qtr 65.5 65 65.1 64.6 64.75 64.75 64.75
Household Savings Ratio, % June qtr, trend
*DG forecast
11.4 11.5 10.5 10 9* 9* 9*

©
Influence of Commodity Prices on Profits
Source: ABS Cat 5206, Australian National Accounts June Qtr 2015, 2/9/2015

©
RBA Forecasts for Inflation and Growth: November 2015
$A still higher than earlier expected, Inflation still at lower end of the 2-3% range
Output Growth forecast for 2016 and Unemployment peak down on May forecasts
Impact of slower population growth since 2012
Cash rate on hold well into 2016
Source: RBA May 2015 Statement on Monetary PolicySource: Reserve Bank of Australia Statement on Monetary Policy November 2015

©
Quick View of the 2015/16 Federal Budget
The Coalition has given up on Spending Austerity
Last year:
-“..the Budget we announce tonight is the first word and not the last word on Budget
repair. There is much work that still needs to be done.”
This year:
•“So today we have taken steps to continue repairing the Budget with sensible savings and
a prudent approach to spending. We are directing funding to areas such as small business,
child care and infrastructure, which will boost growth and create jobs.”

©
Quick View of the 2015/16 Federal Budget
Budget Deficits expected to be reduced principally through increased
personal tax
• Personal Income Tax rising as % of Total revenue and GDP. Spending steady as % of GDP.
• Australians facing some of highest income tax rates globally.
• Tax reform seems more likely with PM Turnbull & Treasurer Morrison. Tax White Paper due
in 2015.
• Spending and Tax mix leading to big problems in 2020s if no substantial change
Seeming reliance on future good luck and Asia growth
• Productivity, Workforce Participation and Industry flexibility issues not a real focus
• Continued risk of becoming the white trash of Asia
Federal Budget issues will have an amplified impact on SA public sector
finances.

©
Risks Continue to be of Higher Deficits and Debt
Source: Australian Government 2015/16 Budget Strategy and Outlook Budget Paper No. 1

©
Main Revenue Items
Cash Basis, $b and % change
12/13 13/14 14/15e 15/16e 16/17p 17/18p 18/19p
Individuals
Employment/Earnings
Growth
156.3
+5.7%
1.2%/2.9%
163.6
+4.7%
0.7%/2.5%
176.6
+7.9%
1.5%/2.5%
189.6
+7.4%
1.5/2.5%
203.1
+7.1%
2%/2%
217.6
+7.1%
234.8
+7.9%
Companies, FBT, RRTs 72.7
-0.3%
72.9
+0.3%
74.2
+1.9%
74.5
+0.4%
80.3
+7.8%
86.5
+7.7%
92.8
+7.3%
Superannuation 7.7
+1.6%
6.1
+19.8%
6.1
+0.7%
9.1
+47.9%
10.5
+16.0
11.2
+6.5
11.8
+4.9
Excises and Customs 33.6
+3.2%
35.3
+3.5%
33.8
-4.3%
34.3
+1.5%
35.7
+4.1%
37.0
+3.6%
38.8
+5.0
Goods and Services Taxes 49.8
+5.8%
51.4
+3.2%
54.3
+5.6%
57.3
+5.6%
61.2
6.9%
64.8
5.8%
68.5
5.7%
All Taxes 326.4 338.4 351.5 370.1 396.4 422.8 452.5
Bracket and Super Creep

©
Individuals Tax Contribution
12/13 13/14 14/15e 15/16e 16/17p 17/18p 18/19p
Individuals
% change pa
Employment and
Earnings Growth
Individuals tax as % of
Total Commonwealth
Revenue
Individual Tax Growth as
% of change in Total
Revenue
$156.3b
+5.7%
+4.1%
44.5%
38%
$163.6b
+4.7%
+3.2%
45.4%
79%
$176.6b
+7.9%
+4.0%
46.8%
77%
$189.6b
+7.4%
+4.0%
47.6%
63%
$203.1b
+7.1%
+4.0%
48.1%
55%
$217.6b
+7.1%
+4.0%
48.0%
47%
$234.8b
+7.9%
+4.0%
48.1%
50%

©
Company Tax Rates and Take also High
Source:OECD.org /ctp/tax-policy/revenue-statistics-tables
Company Tax as
% of GDP

©
Increasing concentration of Spending with reducing flexibility
Accrual Basis, $b and % of Total Spending
14/15e 15/16f 16/17f 17/18p 18/19
Assistance to the Aged 57.6 60.7 63.1 65.5 69.4
13.7% 14.0% 13.9% 13.9% 13.9%
Assistance to Families with Children 38.8 38.1 37.1 38.2 39.9
9.2% 8.8% 8.2% 8.1% 8.0%
Medical Services and Benefits 28.2 29.5 30.7 31.8 33.6
6.7% 6.8% 6.8% 6.7% 6.7%
Assistance to those with Disabilities 27.7 29.5 34.2 43.0 53.1
6.6% 6.8% 7.6% 9.1% 10.6%
Assistance to the States for Public
Hospitals 15.5 16.4 17.4 18.1 18.8
3.7% 3.8% 3.8% 3.8% 3.8%
Total of Above as % of Total Spending 39.9% 40.1% 40.4% 41.7% 43.0%

©
Net Worth has improved again
But Households likely to remain Big Savers
Source: Reserve Bank Chart Pack May 2015

©
Spending and Borrowing likely to be in line with Income growth

©
Wages Growth Slowing Further:
Helping global competitiveness
Slowing retail spending and PAYG and Payroll Tax growth and capacity to pay other
taxes

©
Wages Growth Expectations Also Falling
Source: Reserve Bank of Australia Statement on Monetary Policy November 2015

©
Inflation, and Interest Rates Staying Low
Sources: Reserve Bank of Australia Statement on Monetary Policy, Nov 2015

©
Growth moderate with interest rates, wages growth and inflation
staying very low
• Increasing global demand for quality income producing investments
• Deflationary impact of global changes makes cost pressures on business more dire
• Constraints on growth of public sector revenue
Sharp drop in commodity prices likely to have bottomed out
Some offset from lower $A, but new investment in mining has dried up
Dec 2005 Dec 2010 Oct 2015
- Gold price per oz $A 699 1,383 1,574
- Copper per tonne $A 6,238 9,006 7,348
- Iron ore price per tonne $A 38 166 74
- Wheat price per tonne $A 191 262 233
• $A costs, Australian regulation, investor fears on a global scale
• Impacts on profits, employment, taxes, investment, confidence, regional house prices
• Seems a better time for exploration and capital works investment than in boom-times

©
$A in low $US0.70s still higher than policy makers want
- In relation to Productivity, Sense of Entitlement, Industry costs
Issue of how the domestic economic and industrial structural change
progresses
-Households still big savers, wages growth slowing, housing demand growth
slower
-Business non-mining investment not lifting as fast as hoped
-Public Infrastructure and Exports, including Tourism, Food and Education, likely
areas of growth
-For SA, questions are how quickly our business and public sector adapt?
-To date, indications are we are doing it less well than the other States

©
Tax mix increasingly seen as problem for growth, productivity and public
finances
- Federal, State and Local
- Company, Personal and Property level
- Risks that the concerns over “compensation” & “fairness” will delay/prevent the
necessary reforms
- Protecting each slice of the cake is likely to result in the cake being smaller than
otherwise
- Outcome will be increased tax take in any case
- SA business would do better out of reforms that reduce State and Local taxes

©
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 and policy makers still adapting from 1960s, let
alone for 21stC challenges
•No private sector employment growth since 2010
•Manufacturing employment soon to be 30,000, or 30%, lower than mid 2000s peak
•Traditional motor vehicle and metal fabrication industries are disappearing
•Losses in SA in most Manufacturing has been faster than in NSW or Victoria
•Growth is principally in aged care, the public sector and associated social support
More international competition and More opportunities

©
Sources of SA Employment Change by Sector

©
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 and policy makers still adapting from 1960s, let
alone for 21stC challenges
•No private sector employment growth since 2010
•Manufacturing employment soon to be 30,000, or 30%, lower than mid 2000s peak
•Traditional motor vehicle and metal fabrication industries are disappearing
•Losses in SA in most Manufacturing has been faster than in NSW or Victoria
•Growth is principally in aged care, the public sector and associated social support
More international competition and More opportunities

©
Public finances rely on Federal Support
Lower per capita income, slower population growth, higher costs
Large Public Sector, Higher taxes, High Deficits & Growing Debt for decades
Large and Low Productivity Public Sector, High Deficits, Increasing Tax Burden & Growing
Debt
- ALP sees big public sector and high taxes as politically acceptable
- Liberals not a small government party
Likely less support from Federal Govt and Other States
- Tax Reform expected 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

©
Where we are headed: SA Population Projections
Net Natural
Increase
Net Overseas
Migration
Net Interstate
Migration
2010 7,143 10,894 -3,038
2011 7,501 10,044 -2,401
2012 7,369 10,915 -3,038
2013 7,057 11,434 -3,944
2014 7,100 10,403 -2,744
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.

©
Implications for the Economy, Business and Public Sector
Prime working age population 20–59 years projected to rise 37,200 to
2021 (0.4% pa)
- If we slow overseas immigration, Working Age population likely to fall over next decade
- To get your organization’s employment to grow you will need:
– Increased workforce participation, ie more old people and more females working
» Participation of Males is trending down: late 70s peak 80% to current 68%
» Females has risen from late 70s 45% to current 56%
– Ongoing higher productivity growth – against recent national trends of no or negative
growth
– Increasing overseas sourced workers and outsourcing
Ageing population
- 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, Land 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

©
Metropolitan Home Prices Flat, Activity Should Lift
Auction clearance rates (REISA)
Sept 2015 71%
June 2015 66%
March 2015 61%
Dec 2014 59%
Sept 2014 66%
June 2014 63%
March 2014 61%
March 2013 55%
March 2012 41%
March 2011 48%
March 2010 64%
For 2015/16
•Employment flat to lower, population growing
•Interest Rates on hold
•Vacancy rates should steady
•High land costs continue
•Funding constraints on investment housing
•Dominance of the big banks impacting competition
•First Home Buyer Affordability and overall confidence
are the big issues

©
Regional House Prices weakening and Turnover Down
Source: REISA Market Update Sept Qtr 2015

©
Residential Building Activity Needs the First Home Buyers to
Return

©
Could be Some Loan Size Fatigue for FHB

©
Food Turnover

©
Retail Turnover

©
SA New Motor Vehicle Sales

©
SA Budget: Priorities, Themes & Issues
Quotes from the Treasurer’s Budget Speech
“Most comprehensive state tax reform in South Australia’s history“
“Jobs are the centre piece”
“Our tax reform package is about rewarding activity, the doers, the risk takers, the small business owners,
entrepreneurs, our miners and explorers, the start-ups, new and long established family businesses, our farmers and
primary producers, our retailers, our developers, our service industry, corporates large and small and most
importantly our manufacturers.
Every single business and enterprise in South Australia whether, big or small, can benefit from these changes.
This government’s tax reform, stands our state out as a beacon for business investment.“
Big Picture tax reform is too hard and to be part of National Tax Reform
• Payroll Tax, Online gambling tax
• No annual land tax on family home and No road tolls
No mention of Budget Deficits in the Speech
• GST relativity changes and national economic recovery are the saviours

©
Tax changes are broad but not deep
From 1/7/2015
• Abolish Share Duty and Stamp Duty on non-real property transfers
• Expand stamp duty concession for exploration tenements to include retention tenements
• Expand eligibility criteria for corporate reconstruction relief
• Abolish River Murray Levy and Hindmarsh Island Bridge Levy
• Extend small business payroll tax rebate to 2015/16
• Increase land tax thresholds from $316,000 to $323,000.
From date of assent of changes to Stamp Duties Act
• Expand stamp duty exemption for farms transferred between family members
• Extend definition of family groups to include defacto couples
• Provide exemptions to replace a number of ex-gratia stamp duty relief schemes
From 1 July 2016 reduce by 1/3 stamp duty on non-residential real property transfers with
further 1/3 reductions from 1 July 2017 and 1 July 2018
From 1 July 2018, abolish stamp duty on:
• Non-residential real property transfers
• Transfers of units in unit trusts
• Transfers of mining leases and tenements

©
Targeted economic stimulus funding including Spending on attracting tourists,
investors and conventioneers
• Upgrade arts centres in Whyalla, Port Pire, Mt Gambier and Renmark
Electric and Hybrid cars to be preferred CBD mode of transport
Northern Economic Plan
• Northern Food Park - $2m
• Ageing social housing stock renewal - $25m
• Upgrade schools and children’s centres - $10m
• New road for Gawler East housing development - $55m
$10.8 b investment program over 4 years – mostly already committed
• $260.8m on health capital works new funding
• Addition and bringing forward funds for Housing Trust refurbishment and new builds -
$65m
New cost of living concessions for pensioners and low income earners - $36m pa
Children at risk – reforms spending

©
Expectations of National Recovery Central to Deficit Reductions
for GST increases
SA GSP continues to decline relative to rest of Australia
Sources:
SA Govt 2015/16 Budget Statement Paper No 3
Aust Govt 2015/16 Budget Paper No.1

©
Now Surpluses as Far as the Eye can see!?
Source: SA Govt Budget Statement Budget Paper No.3 2015/16

©
How is this So?
Large Dividend received
from the Motor Accident
Commission ($852.7m)
Otherwise Net
Operating
Balance would
have been in
deficit by
around $850m
Above Budget Employee expenses
as FTE grew instead of falling.
Depreciation expenses fell due to
realignment of depreciation and
amortisation budgets!!

©
Adverse Impact on Unfunded Super of very low interest rates

©
Main Revenue Sources: Taxes ($m)
10/11 11/12 12/13 13/14 14/15 15/16b 16/17f 17/18f 18/19f
Payroll
Growth %
951
5.7%
1,010
6.2%
1,077
6.6%
1,079
0.2%
1,114
3.2%
1,172 bud
1,184
6.3%
1,253
5.8%
1,323
5.6%
1,388
4.9%
Conveyances
Growth %
794
0.5%
686
-13.6%
778
13.4%
793
1.9%
907
14.4%
925 bud
910
0.3%
932
2.4%
934
0.2%
948
1.5%
Land Tax (Private)
Growth %
352
-1.4%
360
2.3%
347
-3.6%
345
-0.6%
347
0.6%
352 bud
358
3.2%
372
3.9%
384
3.2%
395
2.9%
ESL on Fixed Property
Growth %
99
6.5%
103
4.0%
103
0%
104
1.0%
190
82.7%
190 bud
207
8.9%
211
1.9%
218
3.3%
223
2.3%
Gambling 404 411 422 388 388
404 bud
408 419 442 451
Insurances 371 399 429 435 446 441 457 475 493
Motor Vehicles
Growth %
495
6.7%
509
2.8%
545
7.1%
567
7.2%
597
5.3%
618
3.5%
637
3.1%
658
3.3%
680
3.3%
Other Taxes 365 376 403 374 405 417 432 446 460
Total Taxation 3,831 3,854 4,104 4,085 4,394 4,543 4,713 4,880 5,038

©
Payroll Tax:
• To grow around 3% pa in real terms: Employment growth of 1% pa and Wages growth 2-3% pa
• Bracket creep on nominal wages growth is biggest contributor
• Longer run impact as employment is more SME, contract, self employed
Property Taxes
• Impacted by phasing out of duty on transfers of non-residential real property
• Property values expected to grow broadly in line with long term growth in nominal household incomes
• Land values relevant to Land Tax: 4% for 16/17, 3.3% for 17/18 and 3% for 18/19
• Property transfers expected to grow “moderately” and return to long term trends
Gambling affected by slower than expected gaming revenue
• Is there recognition that Digital economy and changing attitudes increase non-taxed gambling?
Insurance taxes impacted by slower than expected growth in general
insurance premiums
• US insurance industry view that autonomous cars will cut car insurance revenue
Motor vehicle taxes growing about in line with population
• Assisted by increased share of 3 month registrations
• Stamp duties lower on transfers as new and used car prices fall
• Longer term impact of ageing population, autonomous cars, electric vehicles, attitudes to car ownership
Tax Forecast Issues

©
Tax Effort
You will all be pleased to know
“ In terms of tax revenue per
capita, South Australia is a
relatively low tax
jurisdiction…”
and this will improve further
with the tax reforms
announced

©
Main Revenue Sources: Other ($m)
10/11 11/12 12/13 13/14 14/15e 15/16 bud 16/17est 17/18 est 18/19
est
Current Grants
GST Revenue Grants
% change
4,296.1
+6.0%
4,239.2
-1.3%
4,463.1
+5.3%
4,618.2
+3.5%
4,986.3
+8.0%
5,517.5
+10.7%
6,077.0
+10.1%
6,460.2
+6.3%
6,648.4
+2.9%
National Partnership
Grants
571.8 726.6 592.5 563.5 555.8 464.8 446.8 369.8 613.6
Specific Purpose Grants 1407.7 1,430.8 1,476.2 1,485.7 1,643.9 1,768.6 1,850.8 1,914.4 1,994.4
S.P. Grants for on-passing 735.8 863.3 689.1 729.6 770.1 815.1 866.3 908.9 948.8
Other Cont & Grants 164.4 157.1 153.4 245.1 141.8 142.1 143.1 144.0 144.7
Capital Grants
National Partnership
Grants
734.7 995.8 156.8 68.8 100.0 348.4 448.6 325.9 184.6
Specific Purpose Grants 115.7 117.4 118.9 103.6 93.3 93.9 94.7 95.5 96.3
Other Capital Cont &
Grants
221.3 68.5 37.4 40.1 11.5 11.8 8.1 8.1 8.1
Total Grants 8,247.5 8,601.7 7,870.9 7,854.6 8,302.8 9,162.3 9,935.3 10,226.7 10,638.9

©
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.

©
Main Revenue Sources: Sales of Goods and Services ($m)

©
Main Revenue Sources: Other ($m)
Source: SA Govt Budget Statement Budget Paper No.3 2015/16 Royalties below budget in 2014/15
due to lower than expected iron ore
and oil and natural gas prices.

©
Spending by Function ($m)
Share of Total 14/15 15/16 18/19
Comm & Social Incl. 8.2% 8.2% 9.2%
Educ & Child Dev. 21.6% 22.0% 23.3%
Health & Ageing 35.2% 34.9% 35.3%
Env, Plann, PIR, State Dev.,Tourism 20.6% 20.5% 18.0%
Total Spending increasingly focussed on less flexible areas
and away from industry support.

©
Investment Spending ($m)
Source: SA Govt Budget Statement Budget Paper No.3 2015/16 $10.8 billion to be invested
over next 4 years:
• $3.3b in health – mainly
buying the new RAH
• $1.4b on roads: mainly
North-South Road corridor
• $353m on public transport
• $216m on education
facilities
• $197m on Festival Centre
precinct
• $1.7b on water
infrastructure
• This seems to be SA
Water’s normal capital
spend

©
Staffing General Government
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18
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)
7,512 (15/16)
+1.2%
7,347 (14/15)
7,609 (15/16)
1.3%
7,554 (14/15)
7,804 (15/16)
+2.6%
Employee Nos FTE 30 June
Growth %
80,254 82,214
+2.4%
81,731
-0.6%
81,161
-0.3%
80,018 14/15b
81,665 15/16b
+0.6%
78,214 14/15b
80,146 15/16b
-1.9%
77,619 14/15b
79,060 15/16b
-1.4%
77,437 14/15b
79,024 15/16b
0%
At 30 June 2002 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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 85,371
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
Employee Persons Per 1000
Employed South Australians
121 122 124 125 124 128 127 125 129 129 128
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%
121.8%
(14/15)
116.1
118.0%
(14/15)
Employees in SA Public Sector
Source: SA Public Sector Workforce Information June 2014 Table 2, ABS cat.6302.0

©
Summary
Budget outlook saved by increased GST relativities
• Recognition of economic weakness now and to come
Tax changes are welcome but hardly scale of what was expected
• Lack of recognition of cost to employment and profits of Payroll Tax
• Most of SA’s taxes unlikely to provide real growth
• Dependence on GST and kindliness of other States and Feds is a risk
Spending
• Increasing rigidity with growing real spending on Health and Education
• Health facing demand increases faster than population growth and rising real costs per patient
• Public service employment continues to grow
• Patterns of spending reducing flexibility and capacity for tax reform and industry support
Risk of Credit rating being cut.
• Being saved only by Federal Govt backing
The SA economy is struggling with structural and cyclical changes
• The focus has to be outward, being more competitive and adaptive, strongly lifting productivity
• Budget not brave enough on those issues

©
Economic Forecasts: South Australia
Retail Turnover % (Nominal, year total) 7.9 1.7 0.6 1 -0.4 3 4.4 2.5 3
New Motor Vehicle Sales (000) 59,400 66,080 62,836 65,340 70,268 70,074 69,262 68,000 70,000
Business Investment, %, Current Prices
- Plant & Equipment 0.1 1.7 -1.5 9 -17.5 -2.2 1 -8 0
- Non Residential Construction 18.7 -6.8 17.6 13.5 15.1 -1.3 2 0 -15
- Cultivated Bio Resources & Intel Property -7.4 -2.7 12.4 6.8 4.9 3.5 0 4 4
Public Investment 33.6 54.9 -12.5 -5.7 -2.5 -3 -25 15 10
Unemployment Rate % (June, Trend), 5.6 5.4 5.2 5.5 6.2 6.7 7.7 8.25 8
Actuals ABS; forecasts DG
0.7
2.5
10,798
10,091
10,000
9,750
10,250
10,000
0.4
0.9 0.7
-0.2 1.5
0.2 -0.4 0.2 -0.7
8,433
8,447
8,096
8,653
2016/17f
1.3 1 0.5 1
2013/14 2014/15e 2015/16f
10,819
10,147
2008/09 2009/10 2010/11 2011/12 2012/13
Employment Growth % (Year to June, Trend) 0.6 1.3 1.6 -0.7
0.9GSP(Total Output) % (Real) 2.3 1.1 2.4 1.5
Private Dwelling Approvals Private
Dwelling Commencements
11,777
11,676
11,480
11,061
10,952
10,058
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

©
SA Jobs growth: Change is Happening
Source: ABS
Average Employment
May 2013 - Feb 2015
Growth since
2005/07
Hospitals 30,200 0%
Medical and Other Services 34,200 29%
Residential Care Services 22,800 38%
Childcare Services 8,400 53%
Other Social Assistance 17,800 20%
Food Product and Beverage Manufacturing 23,900 20%
Specialised and Other Machinery and Equipment Manufacturing 5,100 21%
Other Transport Equipment Manufacturing 3,600 81%
Adult, Community and Other Education 7,700 50%
Pre School Education 3,400 40%
School Education 34,900 7%
Tertiary Education 17,500 10%
Legal and Accounting Services 14,200 25%
All SA Employment 802,900 8%

©
South Australian Growth: Where from and to?
Gross Value Added, ABS Cat 5220.0
1989/90 -
1999/00
1999/00 -
2005/06
2005/06 -
2013/14
2013/14 Share
of State Gross
Value Added
excluding
Dwellings,
Current Prices
Health care and social assistance 3.1% 3.9% 3.2% 10.1% Supportive Demographics
Manufacturing 1.7% -1.3% -0.1% 9.1% Tough, shrinking, changing
Financial and insurance services 3.7% 3.2% 5.0% 8.4% Oligopoly, funds management
Construction 2.9% 5.1% 4.7% 8.4% Housing, public infrastructure
Public administration and safety 3.6% 3.2% 1.8% 7.1% Slowing further on Budget restraints
Agriculture, forestry and fishing -0.5% 7.2% 7.2% 6.1% Overseas demand lifting further
Professional, scientific and technical services 2.9% 4.0% 4.5% 5.9% Change, Outsourcing, Regulation
Education and training 1.9% 1.4% 1.8% 5.9% Should lift on overseas demand with lower $A
Retail trade 3.3% 4.5% 2.4% 5.7% Growing but changing
Transport, postal and warehousing 3.0% 2.6% 2.6% 5.6% Growth with online buying, inbound tourism
Wholesale trade 2.8% 3.4% 3.1% 4.8% As per Retail Trade but slower
Electricity, gas, water and waste services -1.3% 4.4% 0.8% 4.4% Waste services main growth area
Mining 1.8% 1.0% 6.5% 4.1% Increasing exports. Investment to rise in 3-4 years
Average of Annual Rates, inflation
adjusted

©
Business Confidence in SA
Sensis Small and Medium Business Index, September Qtr 2015 (released 29/10/2015, Interviews
Aug 3-31)

©
Sensis Small and Medium Business Index, September Qtr 2015 (released
29/10/2015, Interviews Aug 3-31)
June Qtr 2015 Report
September Qtr 2015
Report

©
What Do We Want?
- More business activity
– Stronger population growth
– Increased retail spending and new home buyer activity
– Increased exports, including Tourism and Education
– Better public sector finances with more focus on SME and Investment
- Lower costs, Increased productivity and lower regulation
- Leading to increased profitability and higher investment spending
When Do We Want It?
• As Soon as Possible, Please. Business and Private Employment are Drowning Not Waving
• Improve Business Confidence and attitudes to the SA Government
Action to:
• Reduce SA Taxation on Business and cutback on regulatory load
- Removal of Stamp Duty on Commercial Property is a good first step
• Increase SA Government capacity to help fund Infrastructure Spending
- Bring SA Budget sustainably back into surplus to reduce further tax increases
• Business to increase skilling and look outward
- Growth comes from what we sell to others, not to ourselves
How to get from a Poor Economy to a Good Economy?

©
Remove Stamp Duty on Residential Property transfers and move to a
broad Land Tax
• Currently raises estimated $600m*
• Move to a Broader Land or Property Tax in order of 0.5% to 0.6%.
- Residential SA Non Taxed Site Value $96b
- Total Private Property Site Values $187.8b
- Council Rates revenue $1.303b (2013/14)**
Why?
• It would be more efficient, ie less costly to households and businesses to operate
• Ageing population and other changes suggests other taxes will be on the decline
- Residential property turnover seems to be structurally lower than in 1990s
- Insurance, Gambling and Licenses likely to be flat to lower
• Get prepared for GST relativities & other Federal Grants to not be so much in SA’s favour
- If national GST growth stays 2-3% pa, expect increased opposition from other States to SA’s large share
- Federal Tax reform would likely result in increased GST revenue but lower PAYG and Company Tax
- Therefore reduce capacity for C’Wealth Govt own spending and transfers
• Stimulate turnover in established housing market and likely result in higher new housing construction activity
- Spinoffs to increased civil construction
• Use to cut other State Government taxes
What Should Be Done ASAP
*SA Govt State Tax Review Discussion Paper, April 2015
**ABS cat 5506

©
Cut number of Ministers to 10 or less
• 11 in SA Ministry in 1975: Govt then ran ETSA, E&WS, SAR, Commodity Boards, a SAHT
that built houses, SA Lotteries, 3 urban racetracks, TAB, 2 banks, regulated building
societies, owned ports, etc.
• Ministers & Population per Minister: SA 14 @ 120,800 avg; NSW 22 @ 348,000 avg; QLD
15 @ 316,700 avg
Bring SA Public pay relativities to average of 115% of Private Sector
• To be in line with Victoria, instead of current 120%+ ratio. Save $300m pa
Reduce SA Govt Full Time Equivalent (FTE) staff numbers to 2007 levels.
• 79,715 FTE (2007) or 46.891 FTE per 1000 SA Population at est June 2015 population
• 2014 50.651 FTE/1000, 2007 50.754 FTE/1000, 2002 46.091 FTE/1000
• Return to 2002 FTE Productivity levels
• Fall of 6% from current 85,000 FTE to 79,715 FTE. Save $422m pa
Add in 9% plus savings on super for additional $60m savings
Apply $800m savings to: See next Slide
Reduce Size and Cost of SA Public Sector to Cut Payroll Tax

©
Apply $800m savings to:
• Provide incentives through Payroll Tax System for Business Investment
- Total Payroll Tax $1,184m 2015/16 Budget
- For individual businesses have stepped increases for 5 years in the Payroll Tax thresholds
in proportion to investment undertaken
- Would provide biggest incentives to SMEs
- Immediate incentive for employment increase and assist productivity
- Assist supplier firms to increase employment
• Reduce costs to business of Apprenticeships; Restructure TAFE; Support private VET;
• Reduce “gold plating” and “future proofing” of urban infrastructure requirements
• Assist local Councils and Communities to develop local power and water infrastructure, to
get “off grid”
• Add to public Infrastructure Spend: Budgeted at around $1,100m pa excl New RAH & SA
Water capex; and
• Reduce Debt
Using the Savings

©
Focus on SA’s strengths and advantages
• Agriculture, Mining, Health and Medical research, Defence; and associated
manufacturing
• 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
• What part of the value chain is most profitable and sustainable?
- Design
- Financing
- Logistics
- Making
- Management
- ?
Some other Issues

©
Get Costs down and Productivity Up
• Wages and Interest rates will remain higher than for major overseas competitors
- SA is not a low cost environment
• SA needs to increase productivity to at least Australian averages:
- Education, Training and Skilling; Employer and Employee attitudes
- Workplace and Govt practices and policies, eg penalty rates and procurement
- Recognise this is a business responsibility. Govt does not see this as a problem
- SA population is getting more receptive for need to change
• Increase pressure for lower cost regulation and less regulation:
- Sunset clauses
- Formal Cost/Benefit of new regulations and why existing ones should be retained
- Private sector Review Group should set itself up
- Regulated Energy and Water costs far too high to be globally competitive
- Reduce excessive Infrastructure cross subsidisation & Renewables subsidies
- Consider how can industry get “off grid”
- Construction sector and Local Government opportunities
Some other Issues

©
Social and Political
• Political disengagement, Increased cynicism about leaders - business and political
• More rapidly changing attitudes of age & social groups re entitlements (more) and
responsibilities (less)
• Impacts on and from Clients, Customers, Employment, Ownership, Regulation of:
- Ageing and Increasing longevity of population; and
- Increased workforce participation of Females, Non-Europeans and Disabled
• Tax and Public sector charges high for the foreseeable future
- Impacts on business expansion/survival
- But unlikely own-source revenue will be growing fast enough to meet spending
expectations
- Likely increased conflict between tax payers and public spenders
• SA ALP Government support for small business is shrinking
- Needs change of focus on costs, taxes and recognise State’s role in export infrastructure
• The Liberals are not a small G government party
• Federal/State relationship changes will likely be adverse
Change and Disruption for SA Organisations

©
Technology - Digitisation
• Means high expectations now of information/communication/value exchange
- On line, Real time, low/no cost, anywhere, anytime, fast
• Creates new opportunities and threats.
- Do you or your organisation exist if you are not on the first page for a search engine?
- What is your value proposition if “information” or “access” is ubiquitous or no longer geographically
limited?
- How secure is your organisation, its information, client records, business case information etc?
- What is the relevance of regulation, rules, common practice, fee structures, revenue sources etc?
• Crowdfunding:
- Capital, eg Kickstarter, Indiegogo, Quirky, Tilt, Venturecrowd, Pozible
- Charities, eg Crowdrise
• Crowdsourcing:
- Designcrowd, 99 Designs, Kaggle (data analysis), Freelancer (ASX listed 2014, $20m net cash)
• Online “markets”: Airbnb, Uber, Airtasker, Linkedin
• Where is your location/information/presence and is it protected:
- Cloud, Fog, Internet of things

©
Other Thoughts
• 3D Printing of literally everything is now happening
- Houses, Cars, Food, Bones, Organs, Clothes
- Mass customisation on demand
- Issues for logistics, design and Intellectual Property, Economies of scale, Emerging
economies development
• Bio sciences
- Brain plasticity: What if we all stay mentally healthy into our 100s!
- Genetics: individual based medicines and gene splicing; new “factories” – concerns at
heroin producing yeasts
• Very cheap energy
- US unconventional gas is global game changer for the next few decades.
- Ongoing increased efficiencies in traditional energy use
- Solar getting cheaper, More Nuclear coming, Electric and Hydrogen cars, Electricity
storage at home
• Autonomous cars
- Likely safer, faster, cheaper and more efficient
- Impacts on tax, public transport, car parks, transport networks etc
- If cars are software platforms, what is the “value add” and skill needs in the car industry?

©
Issue remains whether Productivity can lift
Or are Living Standard Expectations in for a Shock?
Source: Australian Government Tax Discussion Paper 2015
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

©
Some thoughts on Nuclear Fuel Cycle
• Drilling each year 5 - 10 3,000 – 4,000m holes at 5m diameter each
could be an ongoing industry
- Geology, Machinery, Logistics, Port, Rail, Roads, Communication, Education, Training etc
• SA will likely need new baseload electricity generation
– More than enough capacity overall at 5,900MW but baseload capacity is falling
– Planned closures remove 1,505MW gas and coal fired plants by end 2017.
» Bring forward of Port Augusta closures increasing electricity cost quotes (40%)
» AEMO 2015 Report suggests Reliability Standard Breaches from 2019/20
– Drier Eastern States’ climate increase likelihood of Port Stanvac desal plant use
increasing: 57MW
– Potential Yorke and Eyre Peninsula mining developments could add 1000MW demand
– Shifts locus of SA baseload demand to Eyre Peninsula
– Baseload power increasingly dependent on long haul from Eastern Victoria
– Despite (because of?) increased renewables SA is increasing net importer of electricity
– Cost of Transmission losses, Risk of Interconnector performance

©
Rising Imports as Renewables Displaced Base Load.
Source: South Australian Electricity Report, August 2015, Australian Energy Market Operator
AEMO Medium Scenario
Imports decline as Victorian supply situation tightens
15% of Total SA Consumption
Imports rose while SA
consumption fell 9% between
2010/11 and 2014/15

©
Forecast Relative Energy Costs:
High dependence on the assumptions
Source: Australian Energy Technology Assessment, 2013 Model Update, Dec 2013, Bureau of Resource and Energy Economics, Australian Government

©
• Varying Views on Current and Future Costs of various energy
Sources
– More than enough capacity overall at 5,900MW but baseload capacity is falling
– Planned closures remove 1,505MW gas and coal fired plants by end 2017.
» Bring forward of Port Augusta closures increasing electricity cost quotes (40%)
» AEMO 2015 Report suggests Reliability Standard Breaches from 2019/20
– Drier Eastern States’ climate increase likelihood of Port Stanvac desal plant use
increasing: 57MW
– Potential Yorke and Eyre Peninsula mining developments could add 1000MW demand
– Shifts locus of SA baseload demand to Eyre Peninsula
– Baseload power increasingly dependent on long haul from Eastern Victoria
– Despite (because of?) increased renewables SA is increasing net importer of electricity
– Cost of Transmission losses, Risk of Interconnector performance

©
Summary
Pace and Breadth of change is creating increasing threats and opportunities
• Change is accelerating and complexity is increasing
• You will likely not know your most serious new competitors
• Geography and regulation will give little protection
Challenges to Organisations’ “Value Add” and Reasons for Existence
• If Kodak, Nokia and Australian car manufacturing can all disappear, what are your plans?
Risk Management and Governance will become even broader concepts
• Do you need to stress test your ability to adapt?
• Do you understand the potential collateral damage/benefits new technologies can bring?
• What are the challenges of clients, supply chains, competitors, owners etc from different cultures?
The SA economy is struggling with structural and cyclical changes
• The focus has to be outward, on being more competitive and adaptive and on strongly lifting
productivity
• How do we each fit with those requirements?

©
Disclaimer
This document has been prepared and issued by:
Baillieu Holst Ltd
ABN 74 006 519 393
Australian Financial Service Licence No. 245421
Participant of ASX Group
Participant of NSX Ltd
Disclosure of Potential Interest and Disclaimer
Baillieu Holst Ltd (Baillieu Holst) and/or its associates may receive commissions, calculated at normal client rates, from transactions involving
securities of the companies mentioned herein and may hold interests in securities of the companies mentioned herein from time to time. Your
adviser will earn a commission of up to 55% of any brokerage resulting from any transactions you may undertake as a result of this advice.
When we provide advice to you, it is based on the information you have provided to us about your personal circumstances, financial objectives and
needs. If you wish to rely on our advice, it is important that you inform us of any changes to your personal investment needs, objectives and
financial circumstances.
If you do not provide us with the relevant information (including updated information) regarding your investment needs, objectives and financial
circumstances, our advice may be based on inaccurate information, and you will need to consider whether the advice is suitable to you given your
personal investment needs, objectives and financial circumstances. Please do not hesitate to contact our offices if you need to update your
information held with us. Please be assured that we keep your information strictly confidential.
No representation, warranty or undertaking is given or made in relation to the accuracy of information contained in this advice, such advice being
based solely on public information which has not been verified by Baillieu Holst Ltd.
Save for any statutory liability that cannot be excluded, Baillieu Holst Ltd and its employees and agents shall not be liable (whether in negligence or
otherwise) for any error or inaccuracy in, or omission from, this advice or any resulting loss suffered by the recipient or any other person.
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied,
is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of
publication and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned
in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive
or adverse effect on the price or income of such securities or financial instruments.
Baillieu Holst Ltd assumes no obligation to update this advice or correct any inaccuracy which may become apparent after it is given.

Civil Contractors Federation Port Lincoln 11 November 2015

Recommended

Recommended

More Related Content

What's hot

What's hot (18)

Viewers also liked

Viewers also liked (18)

Similar to Civil Contractors Federation Port Lincoln 11 November 2015

Similar to Civil Contractors Federation Port Lincoln 11 November 2015 (20)

Civil Contractors Federation Port Lincoln 11 November 2015