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The claim
The Coalition has accused the government of laying waste to the manufacturing industry, citing an increase in the number of company insolvencies on Labor's watch.
In a January 16 opinion piece published in The Australian, Deputy Opposition Leader Sussan Ley blamed Prime Minister Anthony Albanese's "lack of an economic plan, failed industrial policies and distracted priorities" for turning manufacturing in Australia into an "industrial graveyard".
"Today manufacturing insolvencies are about three times higher than the same period just two years ago. We are making less things here, not more," she said.
So, have manufacturing company insolvencies tripled in the past two years due to the policies of the Labor government?
RMIT ABC Fact Check takes a closer look.
The verdict
Ms Ley's claim is not the full story.
Insolvency figures released by the Australian Securities and Investment Commission (ASIC) show there was a threefold increase in the number of manufacturing insolvencies recorded in the first six months of 2023-24 compared to the same period in 2021-22, rising from 85 to 243.
However, the deputy opposition leader failed to mention the effect of the pandemic, and some of her own party's policies, on the statistics.
As experts told Fact Check, much of the recent increase was due to the ending of pandemic-related measures that were helping businesses remain open.
These included JobKeeper payments and temporary insolvency protections, instituted under the former Coalition government, that helped push the number of manufacturing insolvencies down to a decade low in 2020-21 and 2021-22.
Since then, the Australian Taxation Office has embarked on a large-scale operation to collect unpaid taxes. Meanwhile, interest rates have also risen from pandemic-era lows, increasing borrowing costs for businesses.
Experts said the insolvency figures cited by Ms Ley should not be viewed in isolation, noting several other measures that could be used to gauge the health of the sector.
Capital expenditure increased by 15 per cent over the year to September 2023, for example. At the start of financial year 2022-23 there were 90,720 operating manufacturing businesses in Australia, up from 86,075 a year earlier.
Source of the claim
When a company can't pay its debts when they are due, it becomes insolvent. Someone from outside the business is then appointed to save, sell or wind up the company.
In her article, Ms Ley said manufacturing insolvencies had tripled under Labor, claiming that:
"Just halfway into the 2023-24 financial year, 243 manufacturing businesses have already become insolvent. In 2021 across the same [six month] period this number was in the double digits."
A spokesman for Ms Ley's office told Fact Check that her claim was based on data released by ASIC, the country's corporate, markets, financial services and consumer credit regulator.
To assess the number of companies filing for insolvency, Fact Check has used ASIC's data on the first time a company enters external administration or has a controller appointed.
What the data shows
In the first half of the 2023-24 financial year, 243 manufacturers filed for insolvency. As noted by Ms Ley, this represents a nearly threefold increase on the 85 manufacturing insolvencies recorded in the first half of 2021-22.
The latest number is also the highest recorded in the first half of a financial year for ten years, according to the ASIC data.
By contrast, the 85 insolvencies in the first half of 2021-22 was the second-smallest number in that time, behind only 2020-21.
The full financial year insolvency figures show that the number of manufacturing insolvencies fell consistently from a decade-high of 472 in 2013-14, the earliest year for which data is available, to reach a low of 107 in 2020-21.
The number of insolvencies has risen in both years since, reaching 458 in 2022-23. This year's figures are on track to near, match or beat the 2013-14 record.
The across-the-board decline in insolvencies from 2013 occurred as conditions improved in the wake of the global financial crisis, said John Winter, the chief executive officer at the Australian Restructuring Insolvency and Turnaround Association (ARITA), a professional association for insolvency specialists such as accountants and lawyers.
"Even though conditions got tougher during the GFC, we never went into recession. [We had] 38 years of uninterrupted growth up to the start of the [pandemic]."
Comparisons and COVID-19
Andreas Cebulla, an associate professor at the Australian Industrial Transformation Institute at Flinders University, said it was misleading to compare insolvencies in the first half of 2023-24 to the same period two years ago because it overlooked the important effect of the COVID-19 pandemic on the operating environment for companies.
"At that time, which was approaching the tail end of the COVID-19 pandemic, legislation was in place which made it less likely a company might be deemed insolvent (e.g. by increasing the threshold at which creditors could issue a statutory pay demand)," he told Fact Check in an email.
"It was also a time when the JobKeeper allowance was (at least for part of the period) available, again assisting businesses in keeping their operations running.
"Together these measures contributed to a marked decrease in businesses entering administration, about halving numbers," Dr Cebulla said.
Between March and September 2020, the Coronavirus Economic Response Package Omnibus Act 2020 temporarily shielded company directors from personal liability for trading while insolvent, lifted the threshold at which creditors could issue a statutory demand (from $2,000 to $20,000) and increased the time companies had to respond to such a demand from 21 days to six months.
These measures were later extended to the end of 2020, following amendments to the Corporations Regulations 2001 and Bankruptcy Regulations 1996.
A September 2020 Treasury statement said the government's temporary measures had led to a 46 per cent decrease in the number of companies going into external administration from March to July 2020 compared with the same period a year earlier.
However, as the temporary relief expired, the number of companies being put into external administration was expected to increase significantly, the statement said.
Alan Duncan, director of the Bankwest Curtin Economics Centre at Curtin University, told Fact Check: "The withdrawal of … stimulus measures has been one of the factors that contributed to the increase in insolvencies now compared to two years ago."
"The fact that insolvencies have risen doesn't come as a surprise, but this isn't restricted to the manufacturing sector alone," he said.
From January 1, 2021, a more permanent change to insolvency laws came into force with the Corporations Amendment (Corporate Insolvency Reforms) Act 2020. The new act was touted as Australia's largest corporate insolvency reform in 30 years.
Then-treasurer Josh Frydenberg said the changes would give small businesses struggling to emerge from the effects of the pandemic more flexibility to save their businesses or shut down more efficiently, meaning they would "be more open to enter into the insolvency process sooner".
The bigger picture
The RBA's October 2023 Financial Stability Review notes that company insolvencies overall "have increased from the very low levels seen during the COVID-19 pandemic".
The ASIC figures for the six months to 2023 show that company insolvencies were more frequent among businesses in construction (27.7 per cent), accommodation and food services (15.2 per cent) and retail (7.0 per cent), with manufacturing accounting for 4.9 per cent of all insolvency appointments over the same period.
That was not so different to the same period two years earlier, when manufacturing accounted for 3.7 per cent of all insolvencies. (Of the 2,269 insolvencies in the six months to December 2021, construction accounted for 25 per cent, accommodation and food services 14.6 per cent and retail 5.9 per cent.)
The RBA's stability review said the overall increase in insolvencies since the pandemic partly reflected higher interest rates directly affecting business operations, especially for smaller businesses, as well as the resumption of the ATO's debt collection activities relating to unpaid taxes.
Collectable debt owed to the tax office increased by $18.3 billion, or 69 per cent, between June 2019 and June 2022, according to the ATO's annual report for 2021-2022.
"The ATO pretty much stopped doing enforcement on bad debts for two years and that removed the catalyst for directors to confront that they weren't viable," said Mr Winter at ARITA.
In a submission to a recent parliamentary inquiry into corporate insolvencies, the ATO said it issued 7,523 company debt recovery notices (Director Penalty Notices) between July and September 2022 compared to only 125 over the same period in 2021.
By December 2022, it was issuing an average of 150 notices each business day. This compared to 52 during the 2019 financial year, before the pandemic.
Zombies, insolvencies and other measures
Insolvencies can, of course, indicate important shifts in an economy, said Dr Cebulla. But they are only one and often one small indicator of the condition of any sector.
"Some (economists) would argue that firm exits need not be a bad thing, notably if they are 'Zombie firms', poorly managed, loss-making, surviving on loans (and investor hype)," he said, noting that it was important to consider both sides of the ledger.
"Each year, we have about 10 per cent to 15 per cent of manufacturing businesses entering or exiting the industry — these percentages are typically lower than the average across all industries," Dr Cebulla said.
He noted that there were 90,720 operating manufacturing businesses in Australia at the start of 2022-23, up from 86,075 a year earlier and 83,426 in 2020-21.
Other measures examined by Fact Check show that some companies have enjoyed a post-COVID bounce in the return to more normal trading conditions.
Australian Industry statistics published by the ABS show that manufacturing earnings — earnings before interest, tax, depreciation and amortization, or EBITDA — increased by $7.6 billion, or 17.8 per cent in 2021-22 as COVID-19 restrictions eased, following a 6.9 per cent increase of $2.8 billion in 2020-21.
In November 2023, according to the ABS, manufacturing businesses saw turnover increase 5.1 per cent from the same month in the preceding year but fall 0.1 per cent from October.
Over the year to June 2022, wages and salaries increased in the manufacturing industry by 5.6 per cent ($3.4 billion).
ABS trend data reveals that from May 2022, when the Albanese government took charge, to November 2023, the most recent figures available, the number of manufacturing jobs rose by 9.2 per cent, from 853,300 to 931,900. That's not to say the industry does not face problems, however.
Manufacturing's share of the nation's output declined from 14.9 per cent in June 1990 to 5.7 per cent in June 2023, according to the RBA's comparison dashboard.
It is the only key sector of the economy to decline so precipitously in the period. Mining, and service sectors like finance, health and education, have all increased in the same time.
"It's certainly the case that manufacturing businesses have been doing it tough over the past couple of years," Professor Duncan said.
"Global economic conditions have been challenging from a combination of factors — including energy prices, supply chain constraints, costs of living pressures and rising interest rates."
Looking forward
Diana Mousina, deputy chief economist at AMP, said forward-looking indicators such as purchasing managers' indexes and capital expenditure were also important measures of how the sector was faring in addition to insolvencies.
"Company insolvencies relative to historical norms are one gauge of the health of any sector, including manufacturing, but there are also other things to look at," she said.
ABS figures show that the manufacturing industry increased total capital expenditure on a seasonally adjusted basis by 15 per cent from the September quarter in 2022 to the comparable quarter in 2023. On a quarter-to-quarter basis, capital expenditure for the sector rose 3.1 per cent from the June 2023 quarter, according to the ABS.
Purchasing managers' index (PMI) surveys are closely watched by central banks, financial markets and business decision makers as monthly indicators of economic trends on forward-looking measures such as orders, prices, employment and inventories.
Ms Mousina said: "I would say that manufacturing activity overall is still constrained in Australia, but this is after very strong growth after the pandemic and is slowly recovering."
Principal researcher: Maria Petrakis
Sources
- Sussan Ley, Anthony Albanese's doctrine is driving industry into a graveyard, The Australian, January 16, 2024
- Australia Institute, Post-COVID Manufacturing Renewal Represents Potential $50 Billion Boost to Economy, July 28, 2020
- Australian Bureau of Statistics, Manufacturing Jobs, Australian Labour Account, September 2023, Dec. 8, 2023
- ABS, Labour Force, Australia, Detailed, December 2023, January 25, 2024
- ABS, Counts of Australian Businesses, including Entries and Exits, Aug. 22, 2023
- ABS, Monthly Business Turnover Indicator, November 2023, January 23, 2024
- ABS, Mining Turnover Continues to Rise in November, January 23, 2024
- ABS, Australian industry, 2021-22 financial year, May 26, 2023
ABS, New capital expenditure in mining rises 5.6% in the September quarter, November 30 2023
- ASIC Insolvency Statistics (Current), Series 1
- ASIC, Insolvency Statistics up to July 31, 2022
- Coronavirus Economic Response Package Omnibus Act 2020
- Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020
- Corporations Amendment (Corporate Insolvency Reforms) Act 2020
- Department of Industry, Science and Resources, Resources and energy quarterly: December 2023
- Grant Thornton, State of Australian Manufacturing, Sept. 2023
- House of Representatives Standing Committee on Industry, Science and Resources' Inquiry, Submissions
- IMF, Policy Responses to COVID, July 2, 2021
- OECD, OECD Economic Surveys: Australia
- Parliamentary Joint Committee on Corporations and Financial Services, Corporate insolvency in Australia, July 2023
- Productivity Commission, Australian manufacturing industry, Submission to the Senate Economics References Committee Inquiry into the Australian Manufacturing Industry, September 16, 2021
- Reserve Bank of Australia, Composition of the Australian Economy Snapshot, January 4, 2024
- RBA Quarterly Financial Stability Review Oct 2023
- Senate, The Australian manufacturing industry, February 2022
- S&P Global PMI Press Releases
- Sovereign, smart, sustainable, Driving advanced manufacturing in Australia, House of Representatives, House Standing Committee on Industry, Science and Resources, March 2023
- Treasury, Insolvency Reforms Fact Sheet
- Worrall, L, Gamble, H, Spoehr, J, 2022. The Circular Economy — International Lessons and Directions for Australian Reindustrialisation. Adelaide: Australian Industrial Transformation Institute, Flinders University of South Australia.