Tuesday, 24 July 2018 07:58

Housing Credit Crunch

Written by

Livewire recently produced a video with Dan Moore (Investors Mutual) discussing the changes to Australian lending and the likely impact on the economy.

 

Transcript of video

Q. Are tighter lending standards having an impact and where is it being felt? 

Daniel Moore: We're definitely seeing the banks change their lending standards, particularly around loan to income ratios, which has been pulled back quite a bit. They're now sort of having a max of about six times income, which is reduction in the past. And that's having an impact on loan approvals and clearance rates of the market. 

Q. Self-managed super funds have been pulled back from some of their lending. Westpac initially, some of the other banks, is this another part of that puzzle and is it getting worse?

Hamish: We actually are more focused on investor lending. The investors in Sydney and Melbourne were taking anywhere between 50 and 60% of total mortgage flow at the peak about a year ago, which by international standards is just a witheringly high number. There's no international precedent for numbers anywhere near that high. So, it's true that the banks are pulling back from lending to self-managed super funds for real estate. At Watermark, we're much more focused on the impact of investors pulling back. The work that we've done suggests that borrowing capacity of investors is down anywhere between 10 and 20% and we think it's going to keep going. We know from channel checks with mortgage brokers that not all of the banks have rolled out the new loan serviceability requirements, they will do throughout the rest of the year. 

So the tightening should continue to go in our view. 

Q. So a negative for the economy or is there something positive we can say about it? 

Hamish: No not really. I guess long-term it rebalances the economy and millennials can afford a house. If you're a millennial that's probably a positive. So, lower house prices impacts the economy in a bunch of different ways. Directly it's through something called residential investment. Residential investment is building of new houses, renovating existing houses, and dwelling transfers. And there's a lot of literature that says when that peaks as a contribution to GDP as it has done in Australia about 12 months ago, that's a very good leading indicator for an economic slowdown and usually a recession. 

So there's not a lot of good news about the housing market and residential investment rolling over. 

Q. Daniel, housing affordability getting better certainly helps and makes the economic story a bit more sustainable, is that a positive or is there absolutely none as Hamish is suggesting?

Daniel: I think the one positive you can say is that the royal commission happened before the crisis rather than after. Improving lending standards is a good thing, but there's no doubt the short-term impacts are negative. There's a very close correlation between house prices and household gearing level. So as banks are less willing to lend consequentially you would expect house prices to fall. 

Improving lending standards is a good thing, but there's no doubt the short-term impacts are negative.

Q. If we're looking at the ASX listed stocks who is going to be most affected by this, and what should we be aware of there? 

Daniel: So if you look at probably the leading ... so the companies that are right at the pointing end, so the companies that are leveraged to house prices, or new housing. We sort of look at the property developers, we look at building material companies, and probably the retail sectors which sell household goods particularly the most expensive household goods. 

Q. So into that discretionary side, what are the areas that are really flashing red lights for you?

Hamish: I wouldn't disagree with anything that was said before. Most of the work that we've done that informs our view on Australian housing and its impact on the economy was based on what happened in the Netherlands and the UK earlier in the decade. And exactly as described, the mortgage banks actually do reasonably well, it's the rest of the economy that disintegrates. So, retailers go bust, commercial real estate collapses, people stop going to the movies, people stop going to restaurants, but they pay their mortgages. So, we're focused on many of the same areas. 

The mortgage banks actually do reasonably well, it's the rest of the economy that disintegrates.

Q. What would you do portfolio wise? Are there things you'd sell if this thing was going to take hold?

Hamish: Again, what you would sell is reasonably obvious. I think the one area that might be a little counter consensual is owning the housing banks. So again, when we looked overseas in the Dutch downturn houses prices fell about 20%, the banks lost four basis points on their mortgage portfolios, which is not a lot. That same number in the UK was six basis points, which is not a lot. And in Sweden it was about one basis point.

To answer your question in an interesting way, a counter consensual view that we have is that the housing banks actually will do reasonably well in this scenario, and then the businesses that will do badly are the ones that we described before. 

Q. Daniel you mentioned some of the housing stocks, building materials, any of those particularly a sell for you at the moment?

Daniel: I think if we think of the building materials companies, the one that's most exposed to residential housing in Australia is CSR Limited (ASX: CSR), so despite the multiple looking quite reasonable we think those earnings are at the top of the cycle.

In terms of retail probably the stock that's right at the pointing end, which has had a really good run in terms of earnings growth is Nick Scali (ASX: NCK), they're a furniture retailer. So they're probably two stocks we think are right at the pointy end. 

So they've had a good run and now it's time that things are changing. Not all investments are as safe as houses.

Written by Rebecca Cassells and Alan Duncan (sourced from The Conversation)

As we move closer to Treasurer Scott Morrison’s third budget, what we do know is this - Australia has a revenue problem. A more global and digital economy; an ageing population with fewer taxpayers and sluggish wage growth make future predictions of revenue even more precarious. There’s never been a better time for tax reform. 

But as governments have tried to reform (and stumbled) over the years the burden has shifted to individual taxpayers and the latest budget is likely to be no different.


Read more: Government spending explained in 10 charts; from Howard to Turnbull


We looked at revenue data over the last 20 years drawing from budget papers, government finance statistics and the Australian Tax Office. To compare revenue over time, we have adjusted for the effect of inflation by using real measures.

Tax revenues have risen 26% in Australia since the global financial crisis, from A$310.3 billion in 2009 to A$389.8 billion by 2016. 

Income tax has contributed most to this growth and some is driven by rising wages and jobs growth. Between 2009-10 and 2016-17, individual income tax revenue grew by 37% - an average of 5% each year.

But bracket creep also comes into play as personal tax thresholds have not kept pace with inflation, causing average tax rates to rise among middle income earners in particular. 

The growth in business tax revenue leading up to the global financial crisis was heroic – averaging 11% each year and well above any budget forecasts. In the ten years to 2007, business tax revenue grew by almost 130% - from A$41.4 billion to almost A$95 billion. 

But what goes up must come down, and business tax fell by 6.3% between 2008 and 2016. However we can see strong growth between the last two periods, with business tax receipts growing by 10.7% from A$72.6 billion to A$80.3 billion. 

Revenues from GST and sales taxes have risen, by 16% since 2009.

The relationship between Australia’s economic output and its tax revenue looks somewhat different. The tax-to-GDP ratio reached nearly 25% prior to the global financial crisis, but dropped to 20.5% in 2010-11. It recovered to around 22% by 2012 and has remained essentially flat since then. 

A history of reform attempts

Successive governments have attempted to create an efficient tax system that’s fair and reliable with few distortions. Prior to the turn of the century the Howard government argued the tax system was out of date, complex and inequitable, heavily reliant on individual and company tax, and prevented Australia competing on a global level. 

The Howard government’s new tax system in 2001 was an answer to this. This new tax system seemed to have all the reform solutions needed - income tax cuts for hard working Australians and at long last the introduction of a goods and services tax, along with some pretty big welfare reforms. 

Everything appeared to be going quite well with the new tax system – revenue from company tax was way, way above any Treasury official’s forecast. 

But fast-forward 10 years and cracks began to show, prompting a new review into the effectiveness of Australia’s tax system. The Henry Review, provided some 138 recommendations for tax reform, yet very few saw the light of day. And just five years later, another review was conductedwith then Treasurer Joe Hockey at the helm, which since seems to have been not so much parked as abandoned. 

Income taxes from individuals have always made up the greatest share of tax revenue in Australia. Prior to the introduction of the Howard government’s tax system, income tax from individuals made up 57.3% of the total tax pool – it now accounts for 51.0% of total tax revenue. 

The Howard reforms included a reduction in personal income tax rates. During the next ten years Australian businesses shouldered a greater share of the tax burden, with their share rising from 17.9% in 2000-01 to 27.4% in 2007-08 at the peak of the resource boom. This has since fallen to 20.6%. 

The contribution of taxes on goods and services has remained fairly steady since moving from sales tax to the GST in 2001. GST revenue is consistently around 16% of all tax revenue. 

The share of tax revenue from customs duties, excises and levies has been falling since 2001, from 14.5% to 9.5%. Other tax revenue has been fairly consistent over time, contributing less than 2% of total tax revenue. However, in 2012-13 this increased to around 4%, with the introduction of the short-lived carbon pricing mechanism. 

The problem with predicting future revenue

Taxation revenues were consistently underestimated prior to the global financial crisis, but have fallen below expectations since its end. The tax-to-GDP ratio has been anchored close to 22% since 2012-13. This is despite eight successive federal budgets since May 2010 projecting future tax revenues in excess of 24% of GDP. 

And where does the greatest divergence lie between forecast revenues and out turns?

Company tax revenues are consistently – and by some margin – the most difficult to predict. Receipts fell short of forecast estimates of around 5% of GDP, by around one percentage point over four years, since the May 2010 budget. 

Estimates of company tax receipts for 2017-18 were revised upwards by A$4.4 billion in the latest MYEFO update in December 2017. Should this eventuate, it will take total company tax revenues for 2017-18 to A$83.8 billion (around 4.6% of GDP). 

The government may well feel that this creates space for a company tax cut and personal income tax cuts in the upcoming budget. 

Revenue from individual income tax has been projected to rise to around 12.5% of GDP over the forward estimates, in each budget, since May 2013. Revenue has risen from 9.5% of GDP in 2009 to 11.4% by 2016 before dropping marginally by 0.2 percentage points in the latest Mid-Year Economic and Fiscal Outlook (MYEFO) forecasts.

But wages have not played the leading role that they have been cast in, in every budget going back to May 2011. Since this time wage growth has been forecast at an elusive 3% mark or thereabouts, yet has fallen well short of this each year and currently stand at 2.1%. 

Tax thresholds remained fixed between the 2012 and 2016 budgets, and the only change since has been to lift the 32.5% tax threshold from $80,000 to $87,000, effective 1 July 2016. Tax revenue growth up to now has certainly been driven by the effects of bracket creep. 

Unless tax thresholds in the future are increased at least in line with inflation, this means that average taxes will continue to rise.

Plans for a 0.5% increase in the Medicare Levy rate from July 2019 have been shelved, which would have raised around A$8.2 billion over the next four years to support the National Disability Insurance Scheme.

Expectations have been raised for tax cuts to businesses as the government advocates for the “trickle-down” benefits to Australian households. 

It’s hard to see how this will lead to anything other than a shift in the tax burden towards individual taxpayers – at least in the short term. This is unless company tax cuts are balanced with substantial, not modest, cuts to personal income taxes as well. 

It seems Scott Morrison will be banking ever more on a strengthening economy to support Australia’s taxation revenues into the future.

Wednesday, 02 August 2017 12:51

SA Bank Levy might be legal, but politically unviable

Written by
Joe McIntyre, University of South Australia

South Australia’s new bank levy, projected to earn A$370 million over four years, seems to be constitutionally valid but it remains hostage to political machinations.

While precise details are sparse, the Major Banks Levy will target those institutions liable for the Commonwealth bank levy (Commonwealth Bank, ANZ Bank, Westpac, National Australia Bank and Macquarie Bank). It will impose a state levy of 0.015% per quarter of South Australia’s share (about 6%) of the total value of bank liabilities subject to the federal government levy.

By making Commonwealth grant payments conditional on the removal of a levy, the federal government could force South Australia to abandon its bank levy.

It’s here that South Australia can benefit from the cover provided by the federal government’s bank levy. The federal government would be forced to tread a very tight line if they try to argue that it is fine for them to tap the banks’ honeypot but not for the states to do it too.

With new sources of state funding rare, South Australian treasurer Tom Koutsantonis has exploited this political opportunity, potentially signalling a shift of power back to the states. Unsurprisingly, the banks have reacted with fury, mounting their own attack campaign and threatening reprisals.

Taxation powers in Australia

The constitutional validity of South Australia’s bank levy rests on the distribution of taxation powers in the Australian federation. The power of the states has been eroded over time as the Commonwealth gradually came to dominate the federation.

The Constitution assigns almost equal power over taxation to the states and the federal government. Under Section 51(ii) the federal government is granted a power to enact laws with respect to taxation, but “not so as to discriminate between states or parts of states”.

However, Section 90 grants the federal government the exclusive power to impose “duties of customs and of excise”. So a state tax will generally only be constitutionally invalid if it’s characterised as a duty of custom or excise, or if it is incompatible with a Commonwealth Act.

Back in 1942, the federal government used its power under Section 96 to gain an effective monopoly on income tax. Under the scheme, the federal government levied a uniform tax on income, then gave a grant to the states equal to the income tax they had collected on the condition they cease collecting income tax.

In South Australia v Commonwealth (1942), the High Court upheld this effective takeover of income tax. While states retain the right to levy income tax, the risk of losing Commonwealth grants (together with administrative cost and competitive pressures) has made the proposition unattractive.

The federal government has consolidated more power through the expansive definition given by the High Court to the meaning of “duties of excise” in Section 90. For example, in the court case Ha v New South Wales (1997) a majority of the court held that duties of excise are taxes on the production, manufacture, sale or distribution of goods. As this is an exclusive federal government power, the states are effectively prohibited from taxing goods – such as sales tax.

The states have instead been forced to rely on a range of relatively inefficient transaction taxes (that is, stamp duties on certain written documents), on land taxes, and on payroll tax (levied on the wages paid by employers). The narrow base of these taxes has seen the federal government come to dominate taxation revenue – collecting more than 80% of tax revenue in 2015-16.

This “vertical fiscal imbalance” leaves the states dependent on federal government grants, together with any conditions attached to such grants. As Professor Alan Fenna has observed, the states are left:

…scrounging for revenue in economically inefficient or socially undesirable ways and going cap in hand to the Commonwealth.

With opportunities for the states to introduce new forms of taxation being so limited, the proposed South Australian bank levy is something of a game-changer.

The legality of South Australia’s bank levy

The levy’s structure doesn’t appear to involve the taxation of goods in a way that would go against Section 90 of the Constitution. The banks are being taxed on the basis of the value of an asset class they hold – in a way that is comparable to land tax.

Given the small percentages involved, this levy does not seem to interfere with the federal government’s levy, and would arguably not be incompatible with it. While relatively novel, the tax appears on its face to be constitutionally valid.

However, the politics of the issue is far more vexed, as the dark shadows of the federal government tied-grants scheme loom over all matters involving state tax. As Western Australia has learned, raising state taxes can have catastrophic unintended consequences. After that State raised mining royalties during the mining boom, the Commonwealth Grants Commission drastically reduced its share of GST payments - down to 34 cents in the dollar.

The fate of the state levy remains uncertain, with the politics very much in flux. What is clear is that the other states are taking notice.

The ConversationWith growing frustration over fiscal dependence on the federal government, it seems we may be entering a new phase of innovation in state taxation. Perhaps the federation is not yet dead.

Joe McIntyre, Senior Lecturer in Law, University of South Australia

This article was originally published on The Conversation. Read the original article.

Thursday, 13 July 2017 16:46

Platinum Quarterly Report - a great read

Written by

Platinum Asset Management's quarterly report is always full of insightful information about the world economies and financial markets.

The most recent quarter considers the imbalance of investment capital around the world, comparing the economies of US, UK and Australia who all are spending above their income levels (running deficits) versus economies in Europe and Asia who are spending less than their income.  It is indeed thought provoking from the perspective of an Australian investor.

While quite a detailed read, we thoroughly recommend investors take the time to run through this excellent document that is put together by the professional investors who manage the money at Platinum rather than marketing spin doctors.

You can download your copy of the report by clicking on the image below.

 

Wednesday, 28 June 2017 06:39

Australian economy hits rough patch

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Despite numerous forecasts for an “unavoidable” recession following the end of the mining boom early this decade, the Australian economy has continued to defy the doomsters and keep growing. However, recently it seems to have hit a bit of a rough patch. After contracting in the September quarter, the economy bounced back in the December quarter only to falter again in the March quarter. While there was relief that we didn’t see another contraction, as had been feared, and the economy has now had 103 quarters without a recession, it would be wrong to get too excited. March quarter growth was just 0.3% quarter on quarter and annual growth slowed to 1.7% year on year, its slowest since the global financial crisis (GFC).


Source: ABS, AMP Capital

Bad weather and bad wages growth – the negatives

Cyclone Debbie and its aftermath disrupted housing construction & trade in the March quarter and this will pass. But before it does, the weather impact on trade will worsen in the current quarter – as indicated by a 45% collapse in coal exports in April, which is unlikely to be made up for in May and June – resulting in another quarter of poor growth. More fundamentally though:

  • http://www.ampcapital.com.au/custom/reskin/images/bg-bullet-dot.png); padding-left: 11px; margin-bottom: 5px; background-position: 0px 8px; background-repeat: no-repeat no-repeat;">Consumer spending is heavily constrained by record low wages growth and high levels of underemployment resulting in real household disposable income growth of just 0.4% over the last 12 months. While real consumer spending grew more strongly than income at 2.3% over the last year, this was only possible because of a fall in the household savings rate to 4.7% from 6.9% a year ago. Rapid increases in the cost of electricity, talk of an increase in the Medicare levy and high debt levels are probably also not helping. All of which is showing up in relatively low levels of consumer confidence.
  • http://www.ampcapital.com.au/custom/reskin/images/bg-bullet-dot.png); padding-left: 11px; margin-bottom: 5px; background-position: 0px 8px; background-repeat: no-repeat no-repeat;">The housing cycle is starting to slow. Falling building approvals point to a downtrend in housing construction activity (see next chart). Similarly, the wealth effects from home price gains are likely to slow if, as we expect, Sydney and Melbourne property price growth has now peaked under the weight of bank rate hikes, tighter lending standards, rising supply and poor affordability.


Source: ABS, AMP Capital

The impact of the housing cycle on the Australian economy is regularly exaggerated. Last year it contributed around 0.3% directly to GDP growth (via housing construction) and indirect effects look unlikely to have been more than another 0.3%. In other words, not a huge amount. But nevertheless it will be a drag on growth when it slows.

Offsetting positives

However, while the consumer and the housing cycle look like becoming a drag on Australian growth in the year or two ahead, several considerations will provide an offset:

  • http://www.ampcapital.com.au/custom/reskin/images/bg-bullet-dot.png); padding-left: 11px; margin-bottom: 5px; background-position: 0px 8px; background-repeat: no-repeat no-repeat;">The big drag on growth from falling mining investment is nearly over.Mining investment peaked at nearly 7% of GDP four years ago and has been falling at around 30% per annum, knocking around 1.5% pa from GDP growth (and a lot more in Western Australia). While it’s still falling rapidly, at around 2% of GDP now, its weight in the economy has collapsed reducing its drag on growth to around 0.5% for the year ahead and it’s getting close to the bottom.


Source: ABS, AMP Capital

  • http://www.ampcapital.com.au/custom/reskin/images/bg-bullet-dot.png); padding-left: 11px; margin-bottom: 5px; background-position: 0px 8px; background-repeat: no-repeat no-repeat;">Secondly, public infrastructure investment is rising strongly, up 9.5% over the last year, in response to state infrastructure spending much of which is financed from the privatisation of existing public assets.
  • http://www.ampcapital.com.au/custom/reskin/images/bg-bullet-dot.png); padding-left: 11px; margin-bottom: 5px; background-position: 0px 8px; background-repeat: no-repeat no-repeat;">Finally, net exports or trade is likely to return to contributing to growth as the impact of Cyclone Debbie fades, resource projects including for gas complete and services exports continue to strengthen.


Source: ABS, AMP Capital

Recession avoided, but growth to remain subdued

These considerations should ensure that the Australian economy continues to grow and avoids recession. However, the drag from soft consumer spending and an end to the east coast housing boom will likely leave growth stuck around 2 to 2.5%. This is below Government and RBA expectations for a return to 3%, posing downside risks to the inflation outlook.

In an ideal world and given the declining potency of monetary policy (and the fear of reigniting home prices gains), this would be the time to consider income tax cuts (or “cheques in the mail”) to help shore up consumer spending. The Government could consider financing this by dropping/delaying the cuts to corporate tax for large companies that are stalled in the Senate. However, since the corporate tax cuts were due to kick in much later, the budget deficit would still blow out in the short term and it’s doubtful the Government would want to allow this given the risk of a ratings downgrade.

As a result, the pressure to do something if growth remains sub-par and underlying inflation stays below target will fall back to the RBA. As such our view is that the chance of an interest rate hike in the next 12 months is very low and the probability of another rate cut has pushed up to around 40-50% (well above the probability implied by the money market of 11%). Yes, the RBA remains reluctant to cut rates again and showed no signs of an easing bias in its June post-meeting statement, but then again it’s been a reluctant rate cutter all the way down since 2011. Key things to watch for another rate cut are: a softening in jobs data; continued weak consumer spending; another downwards revision in RBA growth and inflation forecasts; significant cooling in the Sydney and Melbourne property markets; and the Australian dollar remaining relatively resilient.

Implications for investors

There are two major implications for Australian based investors. First, continue to favour global over Australian shares. While US and global share indices are hitting new record highs, Australian shares remain well below their pre-GFC peak. In fact, Australian shares have been underperforming global shares since October 2009. See the next chart. This reflects relatively tighter monetary policy in Australia (the US had money printing and zero rates and Australia had neither), the commodity slump, the lagged impact of the rise in the $A above parity in 2010 and a mean reversion of the 2000 to 2009 outperformance by Australian shares. While the underperformance has reversed half of the 2000 to 2009 outperformance, it looks like it has further to go reflecting weaker growth prospects in Australia. We see the ASX 200 higher by year end, but global shares are likely to do better.


Source: Thomson Reuters, AMP Capital

Secondly, maintain a decent exposure to foreign currency. A simple way to do this is to leave a proportion of global shares unhedged. Historically the $A has tended to fall against the $US when the level of interest rates in Australia relative to the US is falling. See the next chart. With the Fed likely to continue (gradually) raising rates and the RBA on hold or potentially cutting rates again, the risk for the $A remains down.


Source: Bloomberg, AMP Capital

 

Article by Shane Oliver - Chief Economist AMP

Tuesday, 27 June 2017 15:31

SA Bank Levy - Fact or Crap

Written by

With SA Treasurer, Tom Koutsantonis announcing in the budget recently, a state based bank levy, we examine his assertions in a game of "Fact or Crap"

1. Tom Koutsantonis asserts that a new tax on the banking sector will ensure 'the sector contributes their fair share'.  

The fact of the matter is that last year alone, the banking industry paid over $14bn in tax.  In terms of tax paid, it is banks first, daylight second.  Banks make the highest contribution by far to help governments at all levels fund essential public services such as hospitals, schools and roads, and income support for those in need.  In fact, banks paid 55.3% of all tax paid by Australia's top 200 listed companies.  Food and Staples retailing paid 5.4% and the Metals and Mining industry paid 3.8%.  Source of this information is special report published by Australian Bankers Association.

Therefore we declare Tom Koutsantonis' first assertion is CRAP.

 

 

2. Tom Koutsantonis asserts that banks are earning super profits and therefore should pay more tax.

 

If banks in Australia truly were earning 'super profits' investors would clearly be able to see a material increase in financial ratios such as bank margins, and return on equity.  The first chart shows return on equity over the past 30+ years.  If banks were earning super profits this graph would show an increased return on equity, whereas the fact of the matter is that return on equity has been relatively stable over the past 30 years.  And while Australia's banks are profitable, this is something that Australians actually benefit from not only in their superannuation fund investment returns, but also having access to credit from a stable financial system to purchase houses, cars, businesses etc.   

The second chart shows the journey of bank interest margins over the last 20 years.  If banks were making super profits, margins would not be decreasing which is clearly what the chart demonstrates.

Tom Koutsantonis' second assertion is also CRAP.

 

3. Tom Koutsantonis asserts that banks should pay extra tax as they have closed branches.

We sourced information from the IMF Financial Access Survey (2015) which outlined the number of Commercial Bank branches per 100,000 adults and some of the key results are as follows:

 

Australia 28.7 branches per 100,000 adults

Canada 23.6

Germany 14.1

Greece 26.8

Netherlands 13.9

Norway 7.7

North America 28.2

OECD Average 23.6

 

Arguing an organisation which rationalises its physical locations should pay higher tax liabilities would result in some interesting tax outcomes for the likes of Book stores, Record/CD shops and of course Video rental shops that have all changed materially at the hands of technology.

Australia has one of the highest rates of bank branches to populations in the world, and it is with this in mind that we declare that Tom Koutsantonis' third assertion is also CRAP.

 

And for further interest from the same IMF report, Australia has 164 ATM's per 100,000 adults, providing ease of access to cash.  This compares to OECD average of 75.9 ATM's per 100,000 adults, further demonstrating that banks provide an above average service to Australians.

 

GEM Capital believes it is poor policy to single out an industry and impose a specific levy in a particular geographic location.  This is likely to distort the integrity of the tax system in Australia and lead to poor economic outcomes for South Australia.

 

We conclude this article by quoting some interesting sources who have shown their concern about the proposal to introduce a state based levy in South Australia on the banks:

 

"My concern is that it will damage investment.  It's quite a different set of circumstances from the federal tax".  "A state based levy could make the region uncompetitive" - Nick Xenophon, who is opposing the SA Bank Levy.

"There is no justification for this state tax other than a grab for revenue.  It is clearly open season for governments attacking big banks, but it is their shareholders who will bear these added taxes"  Ross Barker - Australian Foundation Investment Company

"In the case of South Australia the tax is avoidable by not doing business there and that's a very bad outcome for bank customers of that state" - David Murray former CEO of Commonwealth Bank

 "Koutsantonis shows his lack of understanding of the profitability of the banks relative to their capital by quoting the annual profits number..... and he might get a shock when they start shutting down local operations in Adelaide in response to the tax, which woul be a rational response"  Tony Boyd Australian Financial Review

"Australia is becoming a laughing stock of global investment circles as erratic governments - state, territory and federal - carelessly undermine confidence by chop and changing the rules of doing business" Jennifer Westacott - Business Council of Australia

 

GEM Capital is concerned at the anti-business messages the SA Government is promoting in this levy and believes it is highly likely to result in reduced investment in South Australia which is likely to result in reduced employment over time.  From an investment perspective, actions of Australian Governments like this are materially increasing "Sovereign Risk" of investing in Australia which is also likely to negatively impact the Australian economy over time.  It very much validates our view to look to continue to invest outside of Australia in search of investment returns.

 

These opinions are my personal views and not necessarily those of the Dealer Group we are licensed through.

 

 

 

 

 

Tuesday, 09 May 2017 20:55

Budget 2017 at a glance

Written by
Jenni Henderson, The Conversation and Wes Mountain, The Conversation

The Conversation








Jenni Henderson, Editor, Business and Economy, The Conversation and Wes Mountain, Deputy Multimedia Editor, The Conversation

This article was originally published on The Conversation. Read the original article.

Alan Duncan, Curtin University and Rebecca Cassells, Curtin University

Successive Australian governments are usually judged on how they balance the budget and spend taxpayers’ dollars. The stereotypes are that Liberal governments keep a tight hold on the purse strings, while Labor governments are spendthrifts. The Conversation

While total government spending has increased from around A$240 billion in 1998-99 to a predicted A$451 billion in the 2016-17 financial year, it’s also accompanied by an increase in revenue from around A$250 billion to A$417 billion over the same period.

But the pressure on the budget under a Turnbull government is more acute now than ever before, because spending is outpacing revenue. It’s now at an estimated 26.6% of GDP in 2016-17, higher than at any point since before the start of the millennium.

When you look at the mix of government spending over the past fifteen years, you start to see some of the drivers of the growth.

To compare spending over time, we have adjusted for the effect of inflation by using real measures.

The Conversation/Emil Jeyaratnam, CC BY-ND

Social security continues to dominate government spending at A$161.4 billion, constituting around 35% of all government outlays on latest figures. This has fallen from a high of 39% during the Rudd government stimulus package in 2009-10 and is similar to levels at the beginning of the millennium.

In the graph below “other” spending includes the distribution of GST revenues to states and territories as well as spending in areas such as job seekers assistance, industrial relations, vocational training, tourism and immigration. This constitutes the second highest share of government spending, at 18% (A$83.4 billion) of the total spend. General revenue assistance to states and territories accounts for two thirds of spending in this category.

Governments spend almost as much on defence and public safety (around A$32.6 billion) as they do on education (A$34.3 billion), although the states ultimately pick up most of the education bill.

The global financial crisis saw a temporary blip in the mix of general government spending. Social security spending rose by 22% in the year to June 2009, and education expenditure jumped 60% a year later as a result of Rudd’s economic stimulus package.

Government spending on public debt interest has more than tripled in real terms to A$15.4 billion since the start of the global financial crisis, and now accounts for 3.7% of all government spending.

The Conversation/Emil Jeyaratnam, CC BY-ND

Many of the changes in real government spending between 2008 and 2010 were driven by the impact of the global financial crisis, which resulted in a slowdown in economic growth, rising unemployment and a negative hit on the sharemarket.

The Rudd government response was a stimulus package. The main spending increases came from a combination of accelerating public debt interest, increased payments to assist the unemployed, but mainly the government’s stimulus measures channelled through increased spending on education, housing and cash payments to families.

If a spending measure is truly temporary, a rise in real spending should be followed by an equivalent fall in subsequent years when the spending runs out or the program ends. This is evident to some degree for the social security and welfare and fuel and energy portfolios, but less so in other areas.

For example, the 45% rise in fuel and energy spending in 2008-09 was primarily driven by the introduction of the Energy Efficient Homes package within the Rudd stimulus suite. The scheme ended in February 2010, resulting in a 33% drop in spending.

On the other hand, spending on education rose by A$16 billion as part of the Rudd stimulus package, but remained A$10 billion higher than pre-global financial crisis levels in subsequent years.

Overall government spending has continued to grow since 2010-11, but less dramatically than during the heart of the global financial crisis, by around 8% in real terms over the five years to 2015-16.

The Conversation/Emil Jeyaratnam

Social security and welfare spending constitutes the largest spending commitment of any government budget. It has risen by 70% in real terms over the past fifteen years, from A$91 billion at the turn of the millennium in 1999-00 to A$155 billion in 2015-16.

The biggest welfare spending is for assistance to the aged, families with children and people with a disability. Together, these three items make up almost 85% of all welfare spending.

The 2008-09 Rudd stimulus package had a substantial yet temporary effect on welfare spend, with “bonus” cash payments to families in the 2009 calendar year increasing assistance to families by around A$10 billion. Additional cash payments were also made to students, pensioners and farmers under the stimulus program. And 8.7 million Australian workers earning $100,000 or less also received a cash payment.

Australia’s ageing population and increases in both disability prevalence and disability support are the main driving forces behind welfare spending growth. These factors will continue to exert pressure on future government budgets, especially with the full rollout of the National Disability Insurance Scheme (NDIS).

The Conversation/Emil Jeyaratnam, CC BY-ND

More than 40% of the government’s 2015-16 health budget of around A$71.2 billion was committed to community health services spending. At A$28.7 billion, spending in this sector has nearly doubled since the start of the millennium and by a quarter since the start of the global financial crisis in 2008-09.

This stems from the need to deliver medical services to a growing – and ageing – population, and the increased prevalence of chronic disease. In this respect, Australia is little different to most countries around the world.

Specific measures contributing to this growth included the expansion of health infrastructure, the costs of enhanced primary care attracting higher Medicare rebates, and indexation of health related payments to states and territories. Pharmaceutical spending increased by 12%, from A$1.4 billion year-on-year to A$12.1 billion in 2015-16.

The Conversation/Emil Jeyaratnam, CC BY-ND

Education spending rose dramatically during the global financial crisis, with spending on primary and secondary education increasing 81% to A$24.7 billion in the year to 2009-10 as part of the economic stimulus package.

Rudd’s “education revolution” led to a 12% growth in education spending in the 2008-09 budget, quickly followed by a further 61% spending increase in 2009-10 as part of the economic stimulus package. Spending in the following year fell as the temporary stimulus measures came to an end, but overall, education spending has remained significantly higher in real terms than pre-global financial crisis levels.

Spending on the university sector rose to around A$10.9 billion over the same period, but has remained relatively stable since.

The Conversation/Emil Jeyaratnam, CC BY-ND

Federal government money given to the states and territories

The federal government committed A$60.8 billion in general revenue assistance to states and territories in 2015-16, almost all of which came through the distribution of GST revenue. General revenue assistance spending rose A$3.8 billion in real terms in 2014-15, up 7% on the previous year, but has since stabilised.

Spending on superannuation interest has grown by a quarter since the end of the Howard years, reflecting the increase in the government’s superannuation liability. Lower public sector wages and employment have led to superannuation interest payments stabilising over the last two budgets to around A$9.4 billion in 2015-16.

Immigration spending rose between the Gillard and Abbott governments to a peak of A$4.7 billion in 2013-14, but has since fallen back to around A$3.8billion in 2016 dollars.

Much of the growth in immigration spending occurred during the Rudd and Gillard governments, by an average of 23% annually. This compares to an average of 7% during the previous Howard years. Additional government spending on detention facilities for irregular arrivals was the principal reason for this spending growth.

Natural disaster relief spending spiked between 2009 and 20-11 to assist with the damage and recovery costs from the Black Saturday bushfires in Victoria in 2009, and the 2010 Queensland floods.

The Conversation/Emil Jeyaratnam, CC BY-ND

Government approaches to supporting various industries has typically been applied on an ad hoc basis. Budget spending on specific industries has risen from A$3.2 to A$5.6 billion in real terms. Agriculture, forestry and fishing typically received a greater share of industry spending during the Howard budgets, reaching a high of A$4.8 billion in Swan’s final 2007-08 budget.

Growth in industry spend slowed during the Rudd years, picking up again with the Gillard and Abbott governments, with a greater preference towards spending in mining, manufacturing and construction projects.

The Conversation/Emil Jeyaratnam, CC BY-ND

Spending on housing and community amenities has increased from A$2.7 billion to A$7.6 billion, reaching a high of almost A$12 billion in the Rudd years. Spending in this portfolio increased with the Rudd stimulus package, incorporating a number of housing affordability measures including the First Home Buyers Grant Scheme and a boost in investment in social housing.

Spending on sanitation and protection of the environment also expanded rapidly during the Rudd/Gillard government, relative to the Howard years. The establishment of the Climate Change Action fund introduced by Rudd in 2009-10 and the Clean Energy Futures package in 2010-11 have been the main drivers behind this increase. Spending in each has been pared back since the Liberals came to power with Abbott at the helm.

The Conversation/Emil Jeyaratnam, CC BY-ND

Commonwealth spending on transport and communications projects has more than doubled from A$3.1 to A$7.5 billion over the last 15 years. Spending remained relatively stable under Howard’s government, and then got a further injection on roads in the last two Swan budgets. The Rudd government continued this trend, with Gillard following suit with increases in both road and rail projects.

Spending in this portfolio has been clawed back since the Abbott government, falling from A$9.2 billion to A$7.8 billion between the final Labor government budget (2013-14 financial year) and the first Liberal government budget (2014-15 financial year). The most recent Turnbull/Morrison budget has reaffirmed spending commitments under this portfolio, committing to more than A$11 billion in 2016-17.

The Conversation/Emil Jeyaratnam, CC BY-ND

The Howard/Costello years were characterised by good economic times, with an extended period of strong revenue growth, yet this prosperity wasn’t matched with any significant spending growth. In fact, overall government spending fell as a share of GDP – from 25.7% in 2000 to 23.6% in 2006-07 – the lowest share since the start of the millennium. And the combination of strong revenue and limited spending commitments under Howard drove down public debt, and public debt interest payments.

We saw some pretty dramatic increases in real spending when Rudd came into power in December 2007. Rudd’s first budget in 2008-09 saw some substantial spending commitments in the area of education but nothing exorbitant.

However, the major turning point in government spending has been driven by the response to the global financial crisis. There were significant spending commitments over the course of the crisis, some of which are still present.

Spending on public debt interest has increased to A$15.4 billion since the global financial crisis - more than the spending on transport and housing combined. And it’s projected to increase further to A$18.7 billion by 2019-20. This just emphasises how high the stakes are for Scott Morrison in delivering a credible budget repair strategy.

The spending of incumbent governments inevitably draw from the commitments of previous administrations, especially for those programs – in infrastructure, education or housing - that involve medium-term funding commitments.

The growth in real spending in areas that directly affect households – social security, NDIS, health or pensions - is an issue that no government can ignore. NDIS costs have been hugely underestimated already, and social security and health spending will inevitably increase with the ageing population.

Set against this context, it’s clear that a piecemeal approach to budget repair is unsustainable. A drop in revenue has ramped up budget pressures, and highlights the compelling need to return to a sustainable spending path and a credible budget repair strategy.

The Turnbull government cannot shy away from making the big decisions that secure a sustainable future for Australia. And the roadmap towards a sustainable future has to include revenue as well as spending as part of the recovery narrative.


The graphs in this article were created by The Conversation’s Multimedia Editor Emil Jerayatnam

Alan Duncan, Director, Bankwest Curtin Economics Centre and Bankwest Research Chair in Economic Policy, Curtin University and Rebecca Cassells, Associate Professor, Bankwest Curtin Economics Centre, Curtin University

This article was originally published on The Conversation. Read the original article.

It has been rumoured in many media outlets that Amazon will commence operations in Australia next year.  Richard Goyder (CEO Wesfarmers) has often quipped that Amazon won't just 'eat our lunch, they will eat breakfast and dinner too'.  So with such a large threat to the status quo of retailing in Australia, many of whom enjoy some of the largest retailing margins in the world, we examine what this may mean for investors.

It may comes as a surprise  that online penetration is less than 15% in most developed countries - in fact many countries online presence is below 10%.

Source:  Forager Funds Management

 

Clearly when Amazon commences operations in Australia, there will be much fanfare, but investors need to ask how much market share are they likely to pick up.  the next chart shows Amazon's share of online retail sales.  While Amazon is the largest online retailer in the US and Europe, it by no means has a majority share of these markets.  Globally it tends to gain about a 15-20% share of e-commerce.  If the same mathematics was applied to the Australian market, Amazon could expect to gain around 1 - 1.5% of total retail sales.

Source:  Forager Funds Management

 

Finally we consider that not all retailing is equal when approaching the idea of online sales.  The furniture division of Amazon has been a 'disaster' while apparel and electronics have shared greater success.  When we approached the subject with senior management at Perpetual, they said "Fresh Food would be almost impossible for Amazon".  The last chart is a summary from the Aust Financial Review outlining the view of Citigroup of the market share that Amazon is likely to gain in each market segment.  The chart also highlights an estimate of earnings lost by the incumbent retailers assuming these market share estimates prove correct.

 

 

 

We have nothing but respect for Amazon and their business model, and investors are encouraged to ensure that their investment strategy takes into account the likely entry of Amazon into the Australian market in 2017.

Saul Eslake, University of Tasmania

Opinion polls, statistical prediction models and betting markets are now all predicting a fairly comfortable victory for Hilary Clinton in the United States presidential election. However, they all said much the same about the prospect of British voters opting to remain in the European Union, before a majority of them actually voted to leave at the Brexit referendum in June.

In Brexit those wanting “change” felt much more strongly about it and were thus more inclined to vote, than those favouring the status quo. This might also be the case with Trump voters. So the possibility of a Trump victory can’t be entirely dismissed – and the possible economic consequences of such an outcome are worth considering.

Precisely because a triumph for Trump has by now been so widely discounted – including by the financial markets – this outcome would prompt a much larger financial market reaction than a Clinton victory.

The unexpected outcome of the Brexit referendum saw the London share market fall by more than 5%, and the British pound by more than 8%, in the following 24 hours. And although the share market has since more than recouped its initial losses, the pound is now almost 18% below its pre-referendum level against the US dollar.

The financial market reaction to a Trump victory in the US presidential race is likely to be sharper. As the Reserve Bank of Australia governor Philip Lowe noted earlier this month, “the possible election of President Trump wouldn’t be as benign an event”, as Brexit turned out to be. A paper published this week by Justin Wolfers and Eric Zitzewitz (of the University of Michigan and Dartmouth College, respectively) suggests that the US, UK and Asian share markets could fall by 10-15%, and that the Mexican peso would fall by 25%, in the event of a Trump victory.

From an historical perspective this is an extraordinary prospect, given that, as Wolfers and Zitzewitz note:

In almost every case back to 1880, equity markets have risen on the news that Republicans win elections and fall when Democrats win.

This is also because, at least superficially, Trump is proposing policies that are more likely to benefit rich households (who are more likely to own equities), while Clinton is explicitly advocating higher taxes on capital.

These findings are more understandable in the light of mainstream economists’ assessments of the likely implications of the policy proposals put forward by the two main contenders. Out of 414 respondents to a survey conducted by the US National Association of Business Economists, 55% thought Hilary Clinton would “do the best job as president of managing the economy”.

Only 14% thought that Donald Trump would (and that was 1 percentage point less than the proportion who nominated Libertarian Party candidate Gary Johnson). It’s perhaps worth emphasising that this was a survey of business, not academic, economists.

This overwhelming view likely reflects three particularly important concerns to mainstream economists about the Republican presidential candidate’s policies.

Differences in policies

Donald Trump’s policies would significantly increase the US Budget deficit. The bipartisan Committee for a Responsible Federal Budget (CRFB) last month estimated that the combination of tax cuts and spending increases proposed by Donald Trump would add US$5.3 trillion to US public debt over the next decade, lifting it from 77% to 105% of GDP.

Hillary Clinton’s policies would add US$200 billion to public debt in the next decade, despite her recent claim that she will ‘not add a penny to the debt’. Mike Blake/Reuters

By contrast, the spending and tax measures (cuts for some, increases for others) advocated by Hilary Clinton would boost public debt by US$200 billion, to 86% of GDP, over the next decade. A more recent analysis of Donald Trump’s tax proposals by the Urban Institute and Brookings Institution’s Tax Policy Center suggests that they would increase US Federal debt by US$7.2 trillion over a decade.

While both candidates assert that their policy proposals would boost economic growth, which would in turn result in lower (rather than higher) budget deficits, the Committee for a Responsible Federal Budget (CRFB) calculates that economic growth would need to average 3.5% per annum over the next decade in order to stabilise the debt-to-GDP ratio without further tax increases. According to the CRFB, that would “likely require a level of productivity growth that has not been achieved in any decade in modern history”. Whereas the same objective would require economic growth averaging 2.7% per annum under Hillary Clinton’s proposals.

In addition to this, Donald Trump has consistently advocated a major upheaval in US trade policies, including the repudiation of the North America Free Trade Agreement (NAFTA) and the designation of China as a “currency manipulator”. This is something which under existing US trade laws would allow the imposition of tariffs of up to 45% on goods imported into the US from China.

The greatest adverse impact of such measures would be on low-income households in the US, as the result of having to pay much higher prices for goods that make up a large proportion of their spending. But there would also be an obvious negative impact on the Chinese economy – since China’s exports to the US account for 18% of its total exports, and just under 4% of China’s GDP.

It’s also hard to imagine that China wouldn’t seek to retaliate in some way against any such measures by a Trump Administration. In a study published by the Petersen Institute, Marcus Nolan, Sherman Robinson and Tyler Moran suggest that in such circumstances, the US economy would experience a recession in 2018 and 2019, with unemployment rising to 8.6%.

It’s hard to imagine how a trade war between the world’s two largest economies, Australia’s largest and third-largest trading partners, could have anything other than negative consequences for Australia.

Current US president Barack Obama tried to forge closer ties with China over his two terms. Stephen Crowley/Pool/Reuters

Another concern for mainstream economists arising from Donald Trump’s economic agenda is his contempt for the independence of the US Federal Reserve. Trump’s suggestion that the Federal Reserve should have been more willing to raise US interest rates this year is not without some basis.

But his personal criticisms of Federal Reserve Chair Janet Yellen, combined with the fact that there are already two unfilled vacancies on the Fed’s Board of Governors, suggests that the Fed could quickly become much more politicised in the event of a Trump victory. That would likely undermine confidence in US monetary policy, potentially leading in turn to a weaker US dollar and higher US bond yields.

Relationships between the US and other nations

Beyond these concerns to mainstream economists, the Republican candidate’s attitude to longstanding US strategic alliances – with European countries, Japan and Korea – threatens to create much greater political uncertainty around the world. It may even prompt an “arms race” entailing greater proliferation of nuclear weapons.

Trump hasn’t specifically listed Australia as being among the US allies who “aren’t paying anywhere near what it costs to defend them”. It could be that Australia’s status, as one of the few countries with which the US runs a trade surplus, puts us in a different category. Nonetheless, a deteriorating regional security environment could result in the Australian government concluding that it needs to spend more on defence.

It’s important to note that not all of the foregoing concerns will be completely alleviated should, as seems more likely, Hillary Clinton becoms the 45th President of the United States. If that result were to be accompanied by a “clean sweep” of both the Senate and (less likely) the House of Representatives, left-wing Democrats such as Elizabeth Warren and Bernie Sanders will have a much larger influence on US economic policy.

The differences between Donald Trump and the left wing of the Democratic Party on trade policy, or on the independence of the Federal Reserve, are in reality quite small. So while a Clinton victory on 8th November is much the better outcome from an Australian perspective, it would not be in Australia’s interests for her to win too well.

The Conversation

Saul Eslake, Vice-Chancellor’s Fellow, University of Tasmania

This article was originally published on The Conversation. Read the original article.

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