The Australian Government’s Deficit Numbskullery

How much will this deficit numbskullery by the Australian government cost investors? That’s the question we left off with in yesterday’s Markets and Money. Today we provide the answer: about 30%, give or take.

What’s happening in Australia to retirement savers is not much different from what just happened in Cyprus. In Cyprus, savers were forced to pay for the mistakes of bankers. Here, the savers will pay for the mistakes of the politicians. But before we soil you and ourselves with political talk, let’s turn to North Korea.

We may have to survive more blustering from North Korea. Seriously, what is going on there? The North Koreans have announced they’ll restart their nuclear reactor at Yongbyon. The plant there, capable of generating weapons-grade plutonium, was shut down in 2007 as part of deal where the country received economic aid in exchange for disarming.

Are the latest actions the sign of a regime on its deathbed, desperate to bluster its way to a deal which ensures its own continuation before it collapses? Are the Chinese using North Korea as a proxy to show that the US is both incapable and not interested in protecting its allies in the region? Or is Kim Jong-un just bat$%@! crazy like his father before him? Stay tuned.

Speaking of US imperial weakness, Ronald Reagan’s former budget director has set the internet alight with an article in the New York Times titled Sundown in America. David Stockman would know a thing or two about the danger of running budget deficits, having presided over a few of his own. But he pulls no punches in his latest blast at America’s feckless fiscal leaders:

‘Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 per cent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 per cent per year; and the payroll job count has crept up at a negligible 0.1 per cent annually. Real median family income growth has dropped 8 per cent, and the number of full-time middle class jobs, 6 per cent. The real net worth of the “bottom” 90 per cent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.’


Stockman goes on to argue that the Fed has created another enormous bubble and that when this one bursts, there won’t be a bailout. Instead, the government will have to turn to other sources to pay for its deficits and spending. And where do you think it will turn? It will turn wherever the money is, whether it’s in pension funds or bank accounts.

Do you think what happened in Cyprus can’t happen in America and wouldn’t ever happen in Australia? The fundamental issues are the same: governments borrow and spend, taking ‘revenues’ for granted. When ‘revenues’ fall due to lower economic growth (which is not responsive to lower interest rates), the spending remains. You have a deficit.

Australia has a budget deficit now. One way the Australian government wants to reduce that deficit is to change the tax rules on what it calls high-income savers. This amounts to a ‘budget bailout’ by raiding the retirement accounts of self-funded retirees. That’s not much different than what happened in Cyprus, where lifetime savings were given a ‘haircut’ of 40% in the cause of ‘saving’ the financial system.

Here in the Australian economy, last year’s budget stipulated that if you earn over $300,000 and plan on funding your own retirement, your contributions to your own retirement will be taxed at 30% now instead of 15%. The Australian government is also considering taxing the earnings on your retirement savings at twice the current rate, from 15% to 30%.

All this is done in the name of ‘sustainability.’ But that word is a polite mask for theft. That is, for the Australian government to keep spending your money on the people and things it prefers, it must either take more of your money or cut spending. Guess what it’s going to do?

It will eliminate ‘concessions,’ or the amount of your own money it allows you to keep. Using the word ‘concessions’ to describe the tax rate on self-funded retirees is also a transparent attempt to turn the tables on savers. A ‘concession’ is something that someone gives to you. As such, it can be taken away. Using the word ‘concession’ implies both generosity to begin with and the moral authority to change the rules for ‘the greater good’.

What is wrong with this picture? Do the clowns in Canberra really think you can use words like ‘sustainability’ and ‘concessions’ and ‘fabulously wealthy’ to disguise simple greed and arrogance? This isn’t just class warfare. It’s war on common sense and economic liberty. But beware a sneak attack from an unexpected quarter! More on that tomorrow.


Dan Denning
for Markets and Money

Dan Denning
for Markets and Money

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From the Archives…

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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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