The Deficit Tax That Won’t Go Away

In Australia, this deficit tax isn’t going away:

PM, Hockey push ahead on debt tax’ is the front page headline on today’s Financial Review. The article says that 72% of people view the proposed tax as a broken promise, which has seen support for the government plummet.

In our view, the ‘broken promise’ bit is a non-issue. That’s what government’s do. They promise stuff to get into government and then back track, lie and renege when they gain power. It’s been happening for as long as ‘democracy’ has existed.

But instead of being annoyed, we’re meant to thank them for it. The Sydney Morning Herald quotes PM Abbot giving a sales pitch to middle Australia on the Today show this morning:

No one likes difficult decisions. Governments don’t like difficult decisions… but you’ve just got to make hard decisions at a time like this, otherwise our country is doomed to years of economic stagnation and I think in the long run, the voters will thank us for doing what is absolutely necessary.

Sorry Tony, this is an easy decision. The hard decision would be to p*iss off a whole bunch of vested interest groups (who no doubt fill Liberal party coffers) by going after genuine long term tax reform. Stop pretending you’re doing something difficult. We don’t buy it. It’s just easier to irk voters rather than special interest groups that provide financial support.

As we said last week, our issue with the deficit levy is not that it’s a lie, it’s just dumb policy. It will be costly to implement and administer, and do nothing to address the structural spending and tax issues inherent in our current tax structure. This is a perfect opportunity to bring about long lasting tax reform, but instead we’re heading down dumb street, again.

This is all happening while our manufacturing sector is in deep recession. And today we get news that the services sector is not far behind. The services sector slipped 0.3 points in the Performance of Services Index (PSI) in April to 48.6 points (a reading below 50 indicates contraction). From the media release:

The soft result this month was evident in the sales, new orders and employment subindexes, which were all below 50 points (indicating contraction). In particular, the sales sub-index of the Australian PSI®fell sharply in April to 44.6 points, the lowest reading since August 2013.

But don’t worry. Australia’s finance/debt/property Ponzi economy continues to deliver the confidence necessary to keep things going. Westpac announced increased cash earnings of 8% year-on-year this morning. ‘Core’ earnings (earnings before tax and impairment charges) came in a little lower at 5% year-on-year growth.

But it wasn’t enough to keep shareholders happy. Westpac shares are lower in early trade. 5% underlying growth clearly isn’t enough to justify current lofty prices, especially when there’ll be no more interest rate tailwinds for the time being.

While the banks are struggling at these levels, the market is giving the iron ore miners some much needed love today. Perhaps it’s the news that shipments from Port Headline continue to grow, indicating solid Chinese demand for Australia’s largest export.

Exporting ever larger amounts into a market clearly on the brink of a property bust (which China is) wouldn’t be getting us too excited. Our hunch is that this is a short covering (minor) rally…and selling in the iron ore sector will pick up again before too long.


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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