Budget Pain or Not – Why the Australian Economy is Still Set for a Collapse

Last night, Tony Abbot gave a speech at the Sydney Institute which was all about softening the electorate up for some budget pain. He made the comment, not unreasonably, that the budget was a time to think about how fiscal policy changes affect not just you, but the country as a whole. Not exactly JFK, but the sentiment was there.

But it was a hollow remark. It’s a message the government would do well to heed itself. Instead of making some ballsy attempts at tax reform, the government will simply aim to target savings in the most politically palatable way. It’s pretty standard stuff from weak leaders.

Middle class welfare in the form of Family Tax Benefit B looks like the first victim, followed by the Disability Pension and the Carers Payment. And in three years’ time, changes to pension eligibility and indexation will come into force.

Rorts like negative gearing, which sees taxpayers subsidising property speculators in the billions, look too hot to handle from a political perspective. And the costly and extravagant paid parental leave scheme looks like remaining in place.

But this budget just looks like it will be more tinkering at the edges. The problem facing the Australian government is that its projected revenues could well fall short of expectations in the next few years. Treasury has forecast a mild decline in the terms of trade (which have a big bearing on the tax take) but the risk is that China’s economy slows quicker than expected, pushing down bulk commodity prices and lowering the government’s revenues.

And then there’s the drop off in mining investment (set to have its full impact on the Australian economy in 2015) which will also crimp government revenues. Meanwhile, spending promises (including some still left over from the Labour years) continue unabated.

The bottom line is that governments find it all but impossible to make deep spending cuts. Come next week, they will put in place a ‘plan’ to get back into surplus, but it will be so far into the future as to make it meaningless.

We’ll continue churning out deficits as long as foreigners keep lending to us. And while the big central banks keep printing money, it will provide the liquidity to lend to ‘less bad’ government credits like Australia.

The problem with this happy state of affairs though is that at some point the market will pull the pin on us. Due to some problem back home, or a loss of confidence in the system somewhere, our overseas creditors will demand a higher return in order to keep the funds flowing.

That’s pretty much what happened in 2008. The higher return came in the form of a lower dollar and higher interest rates. The Reserve Bank of Australia and the government had to step in with guarantees to lower the perceived risk and get the foreign flow of money to continue.

Regards,

Greg Canavan+
for The Markets and Money Australia

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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