The year that was

The beginning of the pandemic in 2020 — along with the subsequent raft of new compliance and support payments that tested small businesses and their tax professionals — evolved in the past 12 months to become a battle against global economic forces which for many, seem out of their control.

Here are some of the major economic issues that have confronted Australia and the world over the past 12 months.

Global minimal tax

There was an international collaboration this year on the world tax front when the G20 finance ministers and Central Bank governors met in Bali, Indonesia to put in place the next steps of the two-pillar international tax scheme. At the end of the meeting, the G20 Ministers made a commitment to implement the agreement on the G20/OECD BEPS 2.0 two-pillar international tax package, with a call for action to finalise Pillar One, including by signing the Multilateral Convention in the first half of 2023, and to complete the negotiations that would allow the development of the Multilateral Instrument for implementation of the Subject to Tax Rule under Pillar Two.

More than 130 countries — including Australia — signed the agreement, whose goal is to deter multinational companies from stashing profits in countries where they pay little or no taxes.

The sweeping agreement was overseen by the Organisation for Economic Co-operation and Development (OECD) and updates more than 100 years’ worth of international taxation rules to cope with changes brought by digitalisation and globalisation.

“The agreement will make our international tax arrangements fairer and work better,” OECD secretary-general Mathias Cormann said.

The most important feature is a global minimum tax of at least 15 per cent, a key initiative pushed by US President Joe Biden and Treasury Secretary Janet Yellen.

 Inflation

In the past two years, inflation rates have doubled in 37 of 44 advanced economies according to analysis by Pew Research Centre.

Israel has a 25-fold increase, while Turkey’s inflation rate in the first quarter of 2022 was 54.8 per cent, which makes Australia’s prediction of just above 7 per cent seem like a drop in the bucket.

There are exceptions, including Indonesia (4.94 per cent), Saudi Arabia (2.2 per cent) and Japan (0.5 per cent).

In 37 of these 44 nations, the average annual inflation rate in the first quarter of 2022 was at least twice of what it was in the first quarter of 2020. In 16 countries, first-quarter inflation was more than four times the level of two years prior.

In Australia, inflation is expected to peak around 7.75 per cent later this year; although a year ago, the Reserve Bank of Australia (RBA) was predicting that it would only be around 1.75 per cent.

RBA governor Philip Lowe said in September that the starting point for understanding the unexpected surge in inflation is the big lift in energy prices stemming from Russia's invasion of Ukraine, and various problems in the production of energy around the world.

In a speech to the Anika Foundation, he said that an analysis by the European Central Bank suggests that around three-quarters of the surprise inflation in the European area reflects unexpected developments in the markets for oil, gas, and electricity.

According to the World Economic Forum (WEF), the global inflation rise is being driven by food and energy costs in the wake of the COVID pandemic and has been exacerbated by the Russian invasion of Ukraine.

UBS chief economist, Paul Donovan, describes the current spike as “historical”, but is confident that it will not stay at such high levels for much longer.

He says the rapid rise in the inflation rate around the world was provoked by the extraordinary demand for goods in 2021 as countries emerged from lockdowns, shops opened, and people were able to go out and buy stuff with money saved during weeks of economic inactivity.

According to the International Monetary Fund (IMF), global inflation was generally moderating when the pandemic began, and the downward trend continued into the early months of the crisis.

However, surging prices since late 2020 pushed inflation higher and the average global cost of living has risen more in the 18 months since the start of 2021, than it did during the preceding five years combined.

In its latest World Economic Outlook in July, the IMF predicts inflation to reach 6.6 per cent this year in advanced economies and 9.5 per cent in emerging market and developing economies. Those predictions have already been surpassed with the UK now sitting at around 9 per cent and some predicting it could reach 14 per cent, and the US at around 8.5 per cent.

Most countries have raised interest rates rapidly over the past few months in an attempt to dampen their economies and rein in inflation; the IMF said this is most likely to take effect in 2023.

Labour shortages

In August, the Australian Bureau of Statistics (ABS) said there were around 480,000 unfilled jobs nationally. With an unemployment rate of just 3.4 per cent, businesses were finding it difficult to find staff.

The September Jobs and Skills Summit has proposed a number of solutions to try and mitigate the crisis in the immediate term, as well as making wholesale changes to policy to ensure it doesn’t happen again.

But Australia isn’t alone in a chronic skills shortage.

At the beginning of the pandemic, businesses had to close down, retrench or furlough their staff. And when they began to re-open, many employers found that significant numbers of their former workers were unwilling to return.

Some chose to retire, others had new jobs; but around the world, employers found that they were short-staffed and had to offer inducements like higher wages to recruit and retain their workers.

In January 2022, the US Bureau of Labor Statistics revealed that 4.5 million Americans left their jobs in November 2021 — the highest level since the agency began tracking this data in 2000.

The OECD — which includes 38 member countries — found that 20 million fewer people are working now compared to before the pandemic.

A recent survey conducted for the Bertelsmann Foundation reported that 66 per cent of company decision makers in Germany, Europe's largest economy, said they are currently short of skilled workers, an increase from 2020.

In Australia, 40 per cent of employees said they plan to look for a new job within the next six months. And in Singapore, 49 per cent of employees surveyed as part of Microsoft's 2021 Workplace Work Trend Index said that they are considering leaving their employers this year.

A report by Korn Ferry, a global organisational consultancy, revealed that by 2030, there will be a global human talent shortage of more than 85 million people, or roughly equivalent to the population of Germany. If left unchecked, in 2030, that talent shortage could result in about $8.5 trillion in unrealised annual revenues.

 The report predicted that if policies aren’t implemented to retain, retrain and recruit workers in 2030, Russia could have a shortage of up to six million workers and China could be facing a shortage twice as large. The United States could also be facing a deficit of more than six million workers, and Japan, Indonesia, and Brazil, could have shortages of up to 18 million skilled workers. 

Unemployment

Unemployment around the world seems to be on a downward trajectory with two-thirds of OECD countries reporting jobless rates below or equal to pre-pandemic levels.

It sounds like good news, but there is a negative aspect to low unemployment which is being reflected in the worldwide skills shortage and pressure on wages growth.

In Australia, the job market tightened further in August with 35,000 more workers finding jobs, but the unemployment rate stayed at its 48-year low of 3.4 per cent.

RBA governor Philip Lowe said unemployment is expected to decline further before the central bank’s most aggressive rate rising cycle in almost three decades caused the economy to cool from the end of this year.

However, he is not expecting any increase in the unemployment rate until December 2024, when it could rise to around 4 per cent.

NAB head of market economics, Tapas Strickland, told The Australian Financial Review in September that a larger fall in unemployment to 3.2 per cent would suggest that the RBA needs to remain aggressive, and should retail also be strong, argued that the RBA would need to do more front-loading of hikes.

According to the WEF, this year, 90 per cent of OECD countries reported an increase in employment and the proportion of working-age people in the workforce is at its highest level since 2019.

In the US, unemployment is sitting at around 3.6 per cent; in Canada, the unemployment rate continues to trend down.

When the war in Ukraine started, employment and the proportion of working-age people in the workforce were at their highest levels since these datasets began in 2005 and 2008 respectively, the OECD said.

The OECD Employment Outlook 2022 said that while labour markets remain tight in most OECD countries, lower global growth means employment growth is also likely to slow while major hikes in energy and commodity prices generates a cost-of-living crisis.

Since April 2020, OECD countries have created about 66 million jobs and the OECD unemployment rate stabilised at 4.9 per cent in July 2022 — 0.4 points below its pre-pandemic level recorded in February 2020.

The number of unemployed workers in the OECD continued to fall in July and reached 33 million — 2.4 million less than before the pandemic.

However, in several countries, labour force participation and employment rates are also still below pre-crisis levels and employment is growing more strongly in high-pay service industries, while it remains below pre-pandemic levels in many low pay, contact-intensive industries.

Tight labour market conditions mean that companies across the OECD are confronted with unprecedented labour shortages. In the European Union, almost three in 10 manufacturing and service firms reported production constraints in the second quarter of 2022 due to lack of labour.

Energy crisis

The French government was proposing to turn off the lights on the Eiffel Tower; the European Bloc was talking about mandated electricity grid shutdowns at peak times; and in Australia, the Gas Supply Guarantee for the country’s east coast — the industry’s mechanism to ensure that gas supply can meet peak demand in the National Electricity Market — has been activated twice since June 2022.

The exorbitant cost of energy — blamed for the most part on the Ukraine conflict and Russia’s withdrawal of its own gas supply from the European bloc — is hitting businesses, industries and consumers hard with talk of hundreds of thousands of people falling into energy poverty before the year is out.

The Australian government, like many others, is facing increasing pressure to intervene in the gas market. As the world’s largest liquefied natural gas (LNG) exporter, Australia’s choices will have significant global impacts. Australia’s major LNG consumers — China, Japan and South Korea — are awaiting a decision from the Australian government. They imported 85 per cent of Australia’s LNG exports in 2021.

Despite being one of the world’s largest coal and LNG exporters, Australia still faces an energy sector crisis. The Australian Energy Market Operator (AEMO), responsible for operating the gas and electricity market, made history when it suspended the national electricity market on 15 June 2022.

And as power prices hit a record high in June and July, Australia’s national energy regulator warned that costs may remain elevated for several years.

Despite consumers worldwide suffering financially — and physically — from the sky-high energy costs, major oil and gas companies continue to report record profits.

United Nations Secretary-General António Guterres, said that the combined profits of the largest energy companies in the first quarter of this year are close to US$100 billion.

Soaring energy prices around the world could make widespread blackouts more common, even in wealthy nations.

For the first time in decades, the western world is preparing for widespread and rolling energy shortages. The US, UK, and EU have all been squeezed by Russia's invasion of Ukraine, and subsequent soaring costs for electricity and fuel.

Governments around the world are trying to find solutions to either cap energy prices or to reduce its use. But with winter approaching in the Northern Hemisphere, it’s yet to be seen if the cost of heating homes will be out of reach of the general public, let alone how it will impact the cost of doing business.

In the UK, Prime Minister Liz Truss announced — while only on her third day in office — that the government will cap households’ annual energy bills at £2,500 starting October 1, mitigating some of the effects of soaring costs. The British government will pay the remainder of the bill, and while the government hasn't announced the entire cost of the measure, it's likely to be one of the priciest economic interventions the UK has seen in decades.

Suffering from an unprecedented energy crisis, the European bloc is increasingly desperate to prevent price surges from hammering the economy. After meeting in Brussels in August, ministers called for steps to skim off energy companies’ profits, while there were no concrete measures to force a reduction in demand.

And in the US, the government expects that the price of electricity will continue to rise into 2023, which is why it is now providing more than US$8.3 billion to help families and individuals with their home energy costs, through the low-income home energy assistance program (LIHEAP).