No great surprises on the market front. With the holiday season approaching everything is holding pretty steady.
This morning CNN Money led with this headline: ‘Alan Greenspan calls the job of being America’s top central banker “torture”’.
We weep for you Alan.
What about the torture inflicted on the poor savers by his successors near zero interest rate policy? What about the torture yield hungry investors are going to face when a good chunk of those junk bonds they’ve been forced to invest into blow up next year?
When things do go pear-shaped, investors will have another sort of torture in mind for America’s top central banker. Hung, drawn and quartered comes to mind.
Speaking of headlines, an experienced journalist once told me to keep an eye on the page six stories because they can end up on the front page.
The thinking is that there’s either not enough ‘meat’ or public interest in the story to warrant front page billing…yet.
But sometimes the topic gathers momentum or new data is revealed, and the story works its way into a major headline.
There’s a few stories of late that aren’t on the front page, but as the economic squeeze turns into a vice I expect they’ll become front and centre in the public consciousness.
These stories are threads in the Great Credit Contraction tapestry.
The voluntary and involuntary reduction in household credit (on a global basis) is playing havoc with the policymakers economic growth model…the one that relies entirely on people going deeper and deeper into debt, year after year. Baby Boomers heading for or already in retirement are the primary drivers behind this global debt reduction trend.
Media reports about half of Australian families paying no NET income tax do not come as a surprise. When you add back welfare receipts against income taxes paid, it’s a zero sum (or less) game for 50% of Australians.
That’s a staggering number, but hardly an overnight occurrence. This trend has been in play for some time. But with budgets under increasing pressure for far longer than we are being told, the public needs a little softening up. The trend has to change. More taxes and less expenses. With health and welfare accounting for 54 cents in every tax dollar collected, these two areas are obvious targets for the not-so-sharp budget razor gang.
But there’s no appetite out there in voter land for any politician who even has a thought bubble about taking a blunt cut-throat to entitlements. Once given, hard to remove.
Some of these non-tax paying households include age pensioners. Older pensioners (those in their 80s and 90s) generally receive far more in welfare then they contribute to the tax system. And as a society we have sufficient compassion to say ‘fair enough’.
However, will we (society) be so generous of spirit in the coming years to the swelling ranks of boomer retirees? This demographic is retiring with access to tax free account based pensions AND recipients of full or partial age pensions, while they sit in expensive homes (that are exempt from the assets test).
Then you read about workers in their 20s and 30s having to do the majority of heavy (tax) lifting in the coming years to repair the budget. This will not sit well with the younger generation…especially as they try to enter the expensive housing market created by the boomers.
And if I was in their ranks, I’d be seriously annoyed at having to pick up the tab left behind by the boomer generation.
Generational conflict is coming.
Boomer retiree benefits such as tax free super pensions and the asset test exemption of the family home are living on borrowed time.
I’ve been reading plenty of articles about the release of the Productivity Commission report into workplace laws. The report has put penalty rates up for public discussion. In a modern, competitive and globalised economy the question is being asked about whether penalty rates are still applicable.
The arguments for and against go pretty much along party lines — employer groups are obviously in favour of cutting back penalty rates and unions are firmly against it. No surprises there.
Obviously employees whose pay-packets benefit from time and a half and double-time penalties are none too keen to see the rates reduced. They have living expenses to meet and have cut their cloth according to an expected level of income.
Two of my daughter’s worked in the hospitality industry while going through university. They loved Sunday shifts — ‘Dad we get paid double-time’ and I said to them, ‘Wait till you are on the other side as an employer and see how much you love it.’ That changed their tune.
Personally I think penalty rates belong in the museum. They’re part of an antiquated workplace model. That comment will likely bring a flurry of emails along the lines ‘it’s alright for you to say that’, however the harsh reality is business cannot afford overly-expensive labour costs.
Penalty rates are part of a much broader picture. In a competitive (deflationary) world, revenues are under constant pressure. Expenses need to be contained. Landlords want higher rents (more on this later), insurance premiums continue to rise above inflation, payroll taxes etc. Reducing costs are an ongoing challenge. Can we do with smaller premises, fewer workers, do we open on a Sunday, can we employ more technology to drive efficiencies? These are some of the questions constantly being asked by businesspeople I know.
Due to the political argument — much like Work Choices — that can be mounted against the removal or reduction penalty rates, my guess is they will stay in place…for now.
Unions will naturally beat their chest in triumph. In reality all they’ve done is fast track their members’ temporary or permanent exit from the workforce.
Higher labour costs simply makes the employer’s decision that much easier when those ingenious tech heads provide them with a low cost business solution. Pink slips all round as the new technology (that works 24/7, doesn’t take sick leave, maternity leave or holidays) is brought online.
Then I read about the proposed land tax hike in Western Australia. Landlords are in the run to help plug the State Government’s budget black hole. According to the article in The Australian: ‘…increasing the land tax on investment properties is backfiring as traditional Liberal voters — mainly self-funded retirees and small business owners — flood their local members with complaints about the impost.’
The WA Treasurer explained that the land tax increase — the third in as many years — was necessary due to the collapse in tax revenues from a declining iron ore price.
There are a few issues woven within this story. Firstly can landlords pass on the land tax increases to their commercial, industrial or residential tenants? Possibly. But in most cases leases are already in place so any increases will have to wait until the expiry of the contract. Will there be pushback from the tenants, especially in light of flatlining wages or business revenues?
Secondly, if self-funded retiree landlords cannot recover all the land tax increase, do they curtail their spending? If they do, this means less spending at the small business owner’s premises, who is faced with higher land taxes and needs to look at their staffing costs…especially those on penalty rates. Redundant staff spend less in the economy and so the screws get tightened.
Thirdly, why did the WA government squander the riches generated from the boom? Because that’s what governments do. The belief is governments lock in permanent promises on temporary income. Or do they?
Here’s a couple of extracts from the ABS and Budget Office on the level of tax revenue collected by the Federal Government since 2008/09…a mere seven years ago
Source: Australian Bureau of Statistic
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Source: Government Budget Office
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Since 2008/09 the Federal Government has seen tax revenues increase from $280 billion to $405 billion — an extra $125 billion A YEAR in taxes.
The government collects 45% more in taxes this year than it did seven years ago and yet we have a ballooning deficit issue.
These numbers dispel the myth about ‘temporary’ income. The tax take looks pretty permanent to me. What happens is the bean counters actually factor in an even bigger tax grab to justify the politicians’ overstated spending.
Local, State and Federal government DO NOT have a tax problem, they have a spending problem.
Politicians of all stripes buy votes. And we find ourselves on this spiral — more taxes, more expenditure, requiring even more taxes, which results in even more expenditure and around we go again.
In the glory days when the private sector was prepared to go further and further into debt to fund economic growth, this stupidity was being masked.
With the debt-dependent growth model grinding to a halt, governments are taking aim at soft targets — those perceived as rich. Or they’re floating ideas of harder options — like reducing the number of households that pay no NET tax.
Governments are in a bind. People will not surrender easily what they’ve been promised and factored into their budgets. People will only pay so much tax before they say enough is enough.
This is the situation Greece found itself in. Western governments are all on the same staircase as Greece…just on different floors.
What will be the eventual front page story from all these threads?
Economy Melts Down. Government forced to cut expenditure. Austerity measures imposed.
For The Daily Reckoning