More Budget Insanity by the Australian Government

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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…

Regards,

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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3 Comments on "More Budget Insanity by the Australian Government"

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Little Jim
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So you’re saying that if you were a senator, you would vote to pass this monumentally bad idea?

Harquebus
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What we need is real currency, not this worthless fiat rubbish that we are using today. Any rate multiplied by zero is still zero.
Peak oil mates, peak oil.

Jason
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Australia, as China’s little pet dachshund, will go down the toilet when its aging, collapsing birth rate, corrupt, ponzi/fiat flooded Chinese master goes belly up. Then there shall be the peak oil issue, this ends the ‘Black-haired, brown-eyed world’.

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