|Summary: Australia remains one of the fastest-growing economies in the world, but cost of living pressures are on the rise. An early recommendation for the upcoming Taxation Review should be a tax on speculative activity such as sharemarket, bond and foreign exchange transactions. This activity has little to do with long-term investment activity.|
|Key take-out: The daily turnover on the ASX is regularly in excess of $3 billion. A 0.2% duty on all ASX transactions could raise $2 billion annually for the Australian population, which could be put to better use by servicing Australian pensions.|
|Key beneficiaries: General investors. Category: Economics and investment strategy.|
The recent Audit Commission report has generated much debate regarding its recommendations to bring the budget back to surplus in the next 10 years.
In the main, it was a collection of opinion pieces that fell short of a proper budget review. It mainly looked at expenditure and under government direction paid scant regard to taxation. In my view, its fundamental flaw was its assumption that taxation collections for the Commonwealth will not lift above 24% of GDP. To achieve a 1% surplus, then obviously expenditure must be held to 23% of GDP. That assumption, in the face of a discernable ageing of the population, drove the recommendations for expenditure restraint.
Ultimately, it will be the electorate who will dictate to government whether there is a community expectation for broad social support or a safety net for the ageing population. The Audit Commission can identify trends, but clearly the Government will listen to the people. The following chart shows that there are a lot of people entering their retirement years in the next decade.
The number of births lifted from 180,000 per annum in 1945 to more than 240,000 per annum in 1960. These people have begun retirement, and there are likely to be 2 million more people in retirement in 2025 than there are today. That will probably represent 8% of the then population, and therefore the directed assumption by the Audit Commission that government expenditure will be held down to 23% of GDP (below where it is now) is simply fantasy.
An early recommendation for the Taxation Review
The clearly more important enquiry for the Australian community will be the Taxation Review that will hopefully drive a sensible long-term budget discussion. This review is likely to deliver recommendations in 2015 that will lead to taxation policies being developed and put to the voters in 2016. My guess is that, on a sober reflection of economic reality, that both of sides of politics will agree that the Commonwealth budget outlays and taxation must be held in balance at about 25% of GDP. At that level it would still mean that Australia’s government expenditure and outlays is amongst the lowest in the world, even when state governments are taken into account as below.
In broad terms there are numerous activities that can are taxed at present. These include:
- Earning of income or profit;
- The use of public services or infrastructure (tolls or royalties);
- Consumption of goods and services;
- Savings for long-term retirement; and
- Speculative activity through financial markets.
When I scan the above opportunities, and I do not dispute that there may be many more, I perceive that there is a glaring hole in the attempt of the Government to raise taxation from nonessential economic activity. If there is truly a budget crisis in this country, then would not the first target be a tax on speculative activity? Would that not be more sensible than the mooted debt tax?
While it is disturbing that a financial institutions duty on sharemarket and other asset speculation activities is seldom publicly canvassed, it is also explainable. Governments tend to appoint favoured advisors who are either blinded in their advice or corrupted in their thought processes by their employment history.
I therefore suggest to the Government that it investigate the imposition of a tax on all sharemarket transactions. Transaction taxes on bonds and foreign exchange transactions should also be considered, as the amount of endless speculative flows provides an untapped river of taxation revenue.
For instance, the daily turnover on the ASX is regularly in excess of $3 billion. While no-one seems to be able to adequately explain what this turnover achieves, it is clearly dominated by speculative activity supposedly on behalf of unwitting members of superannuation funds. This activity has little to do with long-term investment activity. Therefore, it is a sensible taxation target.
A mere 0.2% duty on all ASX transactions could raise $2 billion annually for the Australian population. It could then be put to better use by servicing Australian pensions, rather than being speculated on behalf of Australian superannuation funds. Add the speculative flows through foreign exchange markets and the government has a ready source of revenue.
Australia does not have a budget crisis but rather it has a crisis in thought process, and this was on display in a recent statement by the Treasurer.
Prior to the release of the Commission for Budget Audit’s report the Treasurer (below) described the Government’s dilemma with the budget outlook. In doing so, the Treasurer made some comments that suggest crisis but actually reflect the relative financial strength of Australia.
Figure 3. Excerpt from ‘The Case for Change’, Address to Spectator Magazine Function
“The IMF’s most recent assessment of Australia showed that for the six years from 2012 to 2018, Australia is forecast to have the third largest increase in net debt (in per cent of GDP) among 17 advanced economies. That means our debt is growing more quickly than the likes of the United States and Canada.
"Over half of the 17 advanced economies forecast a reduction in net debt over the same period. Countries which are reducing net debt include France, New Zealand, Germany, and Korea.”
Source: Joe Hockey, Liberal Party of Australia, Treasury.gov.au
Time will tell whether the IMF was being told the truth by the countries mentioned. Recent history suggests that most governments have exaggerated their abilities to repay debt. For instance, in forecasting a fiscal surplus at some point in the next five years France is relying upon a punitive lift in the tax rates of high-income earners. Across Europe governments have lifted VAT taxes (equivalent to our GST) in an attempt to raise revenue in the face of 12% unemployment.
In any case, what our Treasurer did to emphasise a supposed debt crisis was to manipulate the law of relatively small numbers. It is obvious that our low current level of debt to GDP means that a minor increase in debt leads to a relatively higher rate of debt growth, when compared to countries with massive debt! That is not a crisis, but it was presented as one.
In my view, Australia does not have an expenditure problem but rather we have a cost of living problem, and we have no focus as a nation on driving productivity and lowering costs. Much of our economy is based on a requirement to have a never-ending increase in the cost of delivering services. The sale value of public infrastructure assets is bolstered by the assumption that charges will always increase by greater than CPI. We as a community swap long-term infrastructure assets that service low-cost debt for a commitment to pay increasing fees to private owners, who may include local or foreign pension funds.
I believe that Audit Commission did make some important statements that are worth summarising. These were:
- Australia’s nominal GDP will grow from $1.577 trillion in 2014 to $2.588 trillion in 2024. Over 10 years, nominal GDP is expected to grow by an average 5.1% per annum;
- Known government outlays based on current programs and capital items are projected to grow by 5.3% per annum; and
- Specific programs, a subset of 2 above, will grow by 6.9% per annum.
The above suggests that Australia remains one of the fastest-growing economies in the world and it is one of the most attractive places to live.
However, it is the cost of living that will erode our attractiveness. In a stark way I believe the Audit Commission showed this when it noted the extraordinary projected rise in childcare costs (11.5% per annum) over the next 10 years. It is clear to me that this has resulted from a long-term trend in our society to force households to move to two incomes to bring up a family.
Burgeoning residential prices, excessive mortgage debt, lifting healthcare and education costs plus the indexing of basic government charges have increasingly forced young households to seek government assistance for childcare. Importantly, the requirement for childcare and its burgeoning cost to the community is not the result of an ageing population and it may indicate that Australia’s standard of living has not improved with our supposed wealth.
John Abernethy is the Chief Investment Officer at Clime Asset Management. Clime offer excellent performing growth and income portfolios through its individually managed accounts service. To find out more, or to request a review of your share portfolio, call Clime on 1300 788 568 or visit www.clime.com.au.