The Deficit Tax That Won’t Go Away

Castaway in bureaucracy

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+
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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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2 years 5 months ago
I am surprised the bribe-bloated, corrupt politicians have not yet dreamed up a ‘take a dump tax’ whever some uses the toilet. Not one politician on this planet is capable of managing the economy. They let their idotic ideology get in the way along with the need to bow and scrape to the selfish vested intrest that bankroll their venal political parties. None shall survive the Second Great Depression. If I were a politician, I’d put down the bulging brown paper bag and pick up a copy of ‘Chronicle of the Twentieth Century’ and read the sections covering 1929 to… Read more »
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