More Budget Insanity by the Australian Government

This idea of a budget levy is really ruffling feathers. And so it should…

The older you get, the more budgets you see, the more political leaders you witness sweeping through the system trying to sell us their gibberish, which makes you realise that none of them give a hoot about the long term welfare of this country. Yet as an electorate we’re continually seduced by the words and ideas of these two-bit salesman. Sadly, we get what we deserve.

And here we go again. Before we get to the latest rubbish, check out the government’s spending and revenue forecasts.

According to the mid-year budget estimates, government spending is set to increase just 1.4% next financial year, 4.4% in 2015/16 and 4.8% in 2016/17. That’s not bad given the ageing population and inbuilt spending promises. But it’s still a spending increase. So how do they plan to reduce the budget deficit? By projecting optimistic revenue forecasts! The Australian government is expecting to grow its tax take by 3.7% next financial year, 7.6% in 2015/16 and 6.6% in 2016/17.

That’s a tad optimistic, don’t you think?

Here’s a forecast for you. Spending will be higher and revenue less than the government expects. As a result, deficits will be higher. That’s no great shame in a time of weak Australian economic growth, but the fact is that Australia has a structural deficit. That is, we run one in the good times and the bad. Without genuine tax reform, it will only get worse.

So what does Tony Abbott do? He wants to introduce a deficit levy (not a tax, mind you, a levy) on higher income earners to mitigate short term budget damage. This idiotic strategy will alienate his supporter base and do nothing to improve the budget’s structural problems.

Let’s be clear here. The government overspends and gets into a spot of financial bother…and then wants to steal from those with the greatest resources to help it out. Gee, that’s a confidence boosting ploy for the country. Nice work, libs.

To show you how utterly incompetent government is at managing their finances, check this little stat out, sent over this morning by Dan Denning. From Bloomberg:

‘Twice as many civil servants than mining workers were hired in Australia’s 10-year resources boom, enlarging the bureaucracy and inflating public spending. Cutting back is now a priority for a government seeking budget savings.

‘In the 10 years through June 2013, 375,000 public sector workers were taken on compared with 173,200 mining workers, according to government data compiled by Bloomberg. Even as the mining boom boosted growth and tax receipts, the ballooning government wages bill added to strains on the budget and helped push sovereign debt to a record A$318 billion ($294 billion).’

Congratulations Australia, you’re run by a bunch of fiscally incompetent clowns. Unless we start kicking up more of a stink about this, it will only get worse.

And it is getting worse. Abbott’s proposing a short term levy instead of long term reform. More than likely, such a levy will only add to the budget’s long term structural problems. Increasing taxes in a fragile Australian economy will affect confidence and growth, furthering impacting revenue growth. Result: higher deficits.

In 2010, the Henry tax review outlined a whole host of areas where Australia could improve its taxation system to make it more equitable and efficient. Very few of the recommendations have been implemented by either government. Now with the structural deficit issue widely known, we have an opportunity to have a genuine debate about tax reform. And what does Abbott do?

Ironically, any such levy on ‘high’ income earners probably won’t get through the Senate and become law. Why? The Greens and Labor will block it. Don’t even ask us to explain that one. ‘Australian politics’ is all we can come up with.

Anyway, if you’re miffed about this doltish and economically infantile behaviour, send an email to your sitting Liberal minister and let them know your displeasure. This is an unpopular move within the party, so let them know if you think it stinks…which it does.

Surprisingly, the market didn’t tank yesterday because of these budget proposals. China cracking down on iron ore related financing and a broker downgrade of the banks were enough to bring in the sellers.

The iron ore story is well known. It’s fed an historic infrastructure and housing boom in China’s economy… a boom that is now starting to go bust. Property prices are starting to fall in the Middle Kingdom and nominal GDP growth (a crucial metric when it comes to debt servicing in a Ponzi economy) is now at the lowest level since 2008. It came in at 7.9% year on year in the first quarter compared to 9.7% in the fourth quarter of 2013.

If it keeps falling, there will be big trouble.

That’s why we think iron ore is on its way to US$80/tonne. Yet in recent weeks, the major miners have rallied on the basis of production increases and eternal and widespread confidence in the Chinese authorities to make everything better…

‘(Reuters) – Selling insurance against a financial crisis should not be difficult, five years after the last one nearly wrecked the global economy.

‘But when it comes to China, the world’s second-largest economy, the probability of a full-blown crisis is apparently so remote that hardly anyone will buy an insurance policy against it, no matter how cheap.’

See, nothing to worry about. In recent days though the rally has petered out as the market realises that production increases won’t compensate for large price falls.

Until tomorrow…


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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