Australia’s Economic Future: ‘Group Hug…or Human Shield?’

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As you know, I regularly get stuck into politicians and central bankers in The Daily Reckoning. That’s because, for the most part, they’re a bunch of self-centred and self-serving phonies. I know of no other profession where people label themselves ‘right’ and ‘honourable’, yet behave, for the most part, in complete contradiction to these terms.

But today we should give them the benefit of the doubt. Well, not all of them, and not because there’s a sudden emergence of right and honourable behaviour…but because the need for political survival is shifting the political debate.

This is a good thing. Politicians can either pretend that nothing is wrong or they can look on the horizon and see what’s coming. If they see a storm approaching, they’d do well to warn you about it and make arrangements to stay safe.

What am I going on about?

Well, in the past two days, both the PM and Treasurer have made some interesting announcements. The PM discussed reforming the tax structure as it relates to the system of Federation. And yesterday, Treasurer Joe Hockey said that both monetary policy and fiscal policy have reached their limits and that further growth can only come through structural reform.

Now, you and I both know this to be true. But for a politician to announce it is a pretty big deal. It means they finally realise they can’t carry on with a policy of continual short term stimulus measures in the hope of getting to the next election.

They realise that Australia’s economy faces some very difficult headwinds from China over the next few years and long term structural reform is the only way of dealing with it. You can tell that China is a concern because Hockey specifically repeated the mantra that China’s growth will continue to be strong. He said:

The Chinese economy’s growth, at about 7.3 per cent, is still strong, -certainly off a much-bigger base than was previously the case when growth was higher.

The fact is that China is the second-biggest economy in the world. It is our biggest trading partner and growth will continue to be strong in China.

In contrast, according to an article in the Financial Times, China’s interest bill on its huge debt levels is set to hit US$1.7 trillion this year, larger than the economies of South Korea or Indonesia. While it’s true that this interest bill represents an income stream to some, the economy absolutely requires ongoing strong growth to pay the interest.

Yet that isn’t happening…even at a 7.3% growth rate on a ‘much bigger base’. Research from bank Standard Chartered estimates that one-third of new debt issued in China goes towards paying off existing debt. That’s Ponzi-like and should be a major concern.

Joe and Tony might not let on, but they certainly know about the fragile nature of China’s debt-based growth model. This is why they are scrambling belatedly to generate a national debate about tax and structural reforms that will prove painful to some sections of the community.

Tony Abbott raised the issue of changing the mix between federal and state taxation, bringing the prospect of increasing the tax rate on the GST. It’s true that the current structure of Federation is inefficient when it comes to taxes. The federal government collects the tax and distributes it while the states provide the bulk of the services, like education, hospitals, policing etc.

It makes more sense for the states to collect the taxes if they have expenditure responsibility anyway. And while you probably shouldn’t get your hopes up, doing so would potentially lead to smaller government at the federal level. At the very least, it should create a more efficient tax collection structure.

A cartoon in the Financial Review yesterday summed up Abbott’s motivation perfectly. The caption read, ‘Abbott and the states…group hug…or human shield?

It certainly looks as though the government is taking this path because their budget is in tatters. Given the current budget outlook, without large scale spending reforms, deficits will get much worse in the years ahead.

Handing some budget responsibility over to the states is a way around this issue. Politically, it’s easier than ending tax perks that largely affect the Coalition voter base. Things like negative gearing, capital gains tax concessions and low tax on super and pensions.

The main problem with Australia’s tax and regulatory system right now is that it rewards speculation and punishes productive investment. That’s not a way to generate strong, long term employment and wealth creation.

I mean, employers over a certain size pay payroll tax (tax on employment) and then the employees are hit with another set of taxes (tax on individual enterprise). One of the only ways for employees to minimise their income tax is to go into debt to buy a property, turn it into an income loss, and make up for it via a capital gain…which attracts a concessional tax rate!

Meanwhile, savers and the non-indebted pay full tax rates on already low returns.

I’m not assuming this latest little political dialogue is some sort of panacea for Australia. But when politicians talk about creating a national debate and structural reform, it pays to be engaged and informed.

The risk is that special interest groups will hijack the debate for their own ends…which is how democracy mostly works anyway. If you’re interest group is too small, you just don’t get a look in.

But there is always hope. At election time, it’s what makes us vote one lot out and bring in another — who are basically the same. It’s what Obama ran his whole 2008 campaign on!

But hope is not a strategy. Hoping politicians do the right thing (for whom, anyway?) is asking to be disappointed. Still, you can afford to get a little excited about recent events. It shows that the pollies might be finally starting to take the risks looming for the Aussie economy seriously.

Greg Canavan+
For The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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5 Comments on "Australia’s Economic Future: ‘Group Hug…or Human Shield?’"

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Nathan Chattaway
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Greg, Interesting developments brewing. What would be wrong with completely abolishing Income and Fringe Benefits taxes and introducing a higher Goods and Services tax? This gives a simpler and fairer model of taxation, and knocks the wind out of the financial parasite institutions. Abolish Government funded pensions and “social security”, mandatory Superannuation, Government student loans, public education and public health. Break up the mega-sized local government entities back to village council/shire size and relax development restrictions back to “do not harm your neighbours freedom to enjoy their property”. A Government should exist primarily to establish and enforce law and order… Read more »
Darren DeGuernon
Guest

Nathan

Your input is spot on if you adhere to a total libertarian view, however I fear most Australians would be to afraid to embark on a path of social and personal responsibility. Let alone the colour of either political party hack to give up their pig in the trough mentality. I feel that when Australians wake up from their slumber of what price of freedom has been taken from them, will it be to late? and then possibly they will stand up and take on the state to reclaim a model of the system you propose.

Vicissidude
Guest

On the right track Nathan.

However, it should be possible to create a society NOT based on coercion.

Coercive taxation (such as GST or income tax) is just theft; plain and simple.

One small group in society should not have a legal right to steal while the majority get sent to prison for it.

Woody
Guest

Greg
I think and know that there really are lots of great solutions to our current world crisis!
The question is, who thinks that there is a problem? I don’t think that politicians have any ones interest except their own. It shows in the way they debate and speak to one another. I think my HOPE has been lost.

toenee
Guest

You are a trippin’ man.

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