This article is likely to challenge some of your beliefs. I apologise in advance for any offence taken. I mean none. These are my views on the issues confronting Australia and I accept any political party is unlikely to endorse them, or society in general.
My father has painstakingly created our family tree. My four siblings and I are sixth generation Australians. Our Scottish ancestors arrived in this wonderful country in the early 1800s.
By today’s standards, the early generations were prolific letter writers. Fortunately Dad has managed to salvage some of the correspondence. In one particular letter my great, great grandfather was explaining to his father how he needed to relocate to outback Queensland to secure employment and how this prolonged absence (three years) would cause his wife and young family a degree of hardship.
There were no unemployment benefits, rent assistance or family allowance payments for my great great grandfather to fall back on. If he injured his back on the new job or from falling off his horse, there was no disability pension to be claimed.
Were our ancestors tough, or was it they simply had no other option than to draw on the resilience within and do what had to be done?
Each of the five generations before me made their own small contribution to the betterment of our country.
The sacrifices and solid foundations laid by these generations have been crucial to Australia being one of the most blessed nations on earth.
But what is the legacy today’s generations is going to leave to the yet unborn members of our family trees?
If the venom, vitriol and disappointment being expressed about the recent (not so tough) budget are any indication, I’m concerned we’ll be viewed as greedy, self-centred, petulant and narcissistic. Little chance of us being described as ‘tough’ and ‘pioneering’. More likely it’ll be ‘soft’ and ‘precious’.
The Government is being slammed in the opinion polls because something like 74% of people believe they’ll be worse off from the budget. Bill Shorten surges ahead as the preferred Prime Minister because he says ‘there, there don’t you take any notice of that cold and mean ol’ Mr Abbott’.
Someone takes away the ‘lollies’ and we chuck a tantrum. How pathetic are we as a society, to act in such a childish manner? It’s disappointing but not surprising that the level of public debate has been lowered so far.
Over the past three to four decades, people have gladly traded their votes for the party handing out the most ‘pieces of silver’. Entitlement (to a share of another person’s income) long ago replaced gratitude.
Depending upon your particular area of self-interest, an argument can always be created to justify why the budget is ‘harsh’. No one likes having something promised to them (benefits, income, earlier retirement, free medical, subsidised education etc.) taken away.
The reality is:
Left unchecked, public sector debt would continue to grow with annual budget deficits.
Welfare and healthcare dependency is increasing annually with wave after wave of baby boomers moving into retirement. Those on pensions are living much longer than our forefathers ever imagined. No one is voluntarily offering to pay more taxes to support entitlement spending.
If you were Treasurer what would you do? Sure some would say we would wipe out all the polly’s perks. Yes this plays well to the crowd, but it’s not a real solution. A few million in ‘feel good’ cuts is not going to solve a $400+ billion (and growing) debt.
If you’re serious you have to look at the budget’s big ticket items — health and welfare. Over the next four years — even with the announced ‘cuts’ — expenditure in these two areas is forecast to grow $40 billion per annum.
Alternatively you can raise income. Which in the case of government income is derived from taxes, levies, excises etc.
Or a combination of both. But as you are now the newly installed Treasurer you must come up with a plan to rein in the budget deficit and reversing the trajectory of public debt. No wimping, no fudging, no creative accounting — you need to deliver honest measures to achieve these twin outcomes. Not as easy as it looks when you are charged with the responsibility.
It is easier to carp from the sidelines than it is to actually step up to the plate and solve the problem.
Households and businesses have to live within their means and borrow prudently. Failure to do so means bankruptcy. Why is it that when it comes to Government, these same principles seem to be ignored by the majority of people? This does astound me.
Why is it important we have an adult conversation about how we as a nation tackle the twin problem of deficit and debt?
Below is a graph (courtesy of Hoisington Management) of private and public debt in a number of countries since 2008 (GFC) and 2013.
The GFC was a result of a global credit bubble in the private sector bursting. The private sector has (with the exception of China) begun to modestly deleverage. To fill the void, public sector debt has increased. We now have the situation where the cumulative debt (private and public) in the global system is greater than what it was in 2008.
The one and only reason this increased debt level can be accommodated is due to aggressive interest rate suppression from central banks. But debt levels cannot grow to the sky.
How much debt can be serviced by sub-1% interest rates before the system collapses? Japan is likely to provide this answer in due course.
While central banks can control short term rates with official cash rates and bond buying programs, the market controls the longer end (five, 10 and 30-year bonds).
At some point interest rates will normalise (rise) either through inflationary pressures or from the risk of sovereign default. When this happens, governments with excessive levels of debt will be in a world of pain. Welfare, health, education and defense spending will be subjected to brutal cuts…think of Greece.
The Global Financial Crisis was a banking sector crisis backstopped by Government.
GFC Mark II is likely to be a Government debt crisis backstopped by nothing…the end of the debt guarantee line will have been reached.
As a country it is preferable to take our medicine early and voluntarily. The alternative is to continue on the path of pandering to every bleating interest group and have the markets eventually force draconian measures to be taken on government expenditure.
Sadly, the latter is likely to be the outcome.
On the surface of it, Australia’s lower than average debt levels should mean we’ll weather GFC Mark II a little better than most.
However, a hard or even a not-so-soft landing in China, coupled with Japan possibly ‘hitting the debt wall’ means our economy is going to feel the fallout from our trading partners.
As a society we need to regain some of the mental toughness our forefathers displayed.
Judging by the latest temper tantrums, I accept that this is a forlorn hope. Therefore it is incumbent upon you as an individual to make sure you fortify your personal financial situation to withstand the forces of GFC MkII.
Minimise your debt. Adopt a more conservative asset allocation. Expect taxation to rise and entitlements to reduce.
While our collective legacy to the next generation may be subjected to harsh criticism, by taking individual responsibility for your personal financial situation you can ensure your legacy to your children and future family members is one they will be very proud of.
for The Daily Reckoning Australia