Labor’s tax plan

This week in Talking Finance, it’s all about politics, the markets, the economy and technology.

• Phillip Coorey, Chief Political Correspondent at the Australian Financial Review runs me through the week’s political news;
• Diana Mousina, Senior Economist of the Multi-Asset Group at AMP Capital talks me through what’s been going on market wise;
• Callam Pickering, APAC Economist at ‎Indeed.com goes through the latest economic data; and
• Justin Rampono, Director of The Currency Shop tells me how he’s disrupting the foreign exchange scene;

Hello and welcome to Talking Finance, I’m David Thornton.  This week Phil Coorey, Chief Political Correspondent at The Australian Financial Review, runs me through the week’s political news.  Diana Mousina, Senior Economist of the Multi-Asset Group at AMP Capital, talks me through what’s been going on market-wise.  Callam Pickering, APAC economist at Indeed.com, goes through the latest economic data.  And Justin Rampono, Director of The Currency Shop, tells me how he’s disrupting the foreign exchange scene. 

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Joining me now is Phil Coorey, Chief Political Correspondent at The Australian Financial Review.  Phil, the news continues to centre on Labor’s tax plan.  Do you think Shorten will stay the course or will he dilute it with exemptions for pensioners, low income earners and the like?

PK:  I think they’ll definitely dilute it and he said as much pretty much from day one that, “Watch this space, there’s more to come from pensioners.”  The intent of the measure, if you like, is to go after people on higher incomes, but there’s many thousand on lower incomes who lose a little bit or a lot.  I think the most likely exemption or course of action they’ll take will be to bring in some sort of threshold.  I hear they’re thinking one, two or three thousand dollars a year in a franking credit payment that would be exempt, so you’d have to earn higher than that before you’re not eligible for it.  They’re touting around some modelling from the industry super association which seems to suggest a $1,000 exemption, for example, would not cost very much out of the annual savings, so it’d be pretty easy to do. 

Is this policy going to cost them the election or has the whole thing been overstated.  It seems like an incredibly stupid thing for Shorten to do, but then Labor won the Batman by-election easily?

PK:  That’s right, I think it’s too early to tell and even Labor says it’s too early to tell.  It will depend when people actually work out whether they’re actually affected or not.  Retirees, especially self-funded retirees aren’t traditionally a Labor voting demographic.  They tend to be more coalition voters, especially the ones who are on higher incomes.  I guess Labor’s calculated some element of gamble there and don’t forget this gives them, if they get that this through, a massive war chest so they can – the net effect is – buy votes elsewhere, if you like, with income tax cuts that will probably gazump whatever the Government’s going to announce in the budget for low income earners. 

If they exempt low income pensioners that may mitigate some of the backlash.  Short answer, too early to tell.  Long answer, what I just said, it’s too many variables.  But the bottom line is, I think, retirees are just a little bit sick of it because one of the problems is I guess there’s so much heat on retirees in the Howard/Costello years and as successive governments undo a lot of this largess, there’s a big pot of money there and this is the third raid, if you like, on retirees in the last few years.  The Coalition trimmed pensions of self-funded retirees, they changed the asset test, then they went after the contentious superannuation measures in the budget and now Labor’s coming back for a third dip.  I just think the whole sector is a little bit hyper sensitive at the moment and it’s not probably good politics to keep going there. 

Is this part of some bigger plan of Shorten’s to cut his losses and go all in with the younger voters?

PK:  No, I don’t think so.  It’s just, you’ve got to appeal to all demographics.  It is interesting that I think the day after Shorten announced this policy, when it was going gangbusters, Turnbull did three interviews with FM radio stations and didn’t get a single question on it.  It is an issue that doesn’t really fuss younger voters at all.  But you’ve got to appeal to all demographics, you can’t just sort of – some people are more popular with age groups than others but at the end of the day everyone votes and you’ve got to sort of not try and exclude one to the other.  I think as Labor keeps saying, “We’re the party of pensioners.”  And so forth, and, “We opposed the cuts two years ago.”  Then when Scott Morrison did a deal with the Greens when Tony Abbott was Prime Minister.  I think we just have to wait and see what the final shape of this policy is before we can really take a view whether it’s anti-pensioner or not.

Moving to the other side of politics, Turnbull has, I think, three news polls to get to the magic 30.  How do you see it all playing out?  Is he going to be skewered by his own news poll test?

PK:  I don’t think so, because, a) no one’s talking anything about leadership at the moment, even if they were there’s no candidate.  Who in the Coalition would lift their vote if you had a change today?  I would say, no one.  At best, Julie Bishop might hold station but everyone else would probably go backwards.  It will be a lot of fun and a lot of yelling and screaming on the day.  I’m sure Tony Abbott will make his views heard, but we’ve heard the Prime Minister already rehearsing some of the arguments.  He’s been saying, “When I knocked off Abbott in 2015…” – he cited 30 negative news polls but he also cited a few other things. 

One was the need to restore business confidence, consumer confidence, get the economy growing and he’s saying he’s done all off those.  He’s done three out of the four, so you can’t just judge him on the news poll test alone, but there’ll be some spin and elbows out from ‘Abbott and co’, but I think he’ll survive that.  I think his bigger problem, if you like, in the leadership sense is toward the end of this year if he lets the election go into next year and they’re still behind. 

It could get fairly febrile inside the Coalition around November/December once people start facing the reality of actually losing their seats, then that’s why I think he’ll probably on balance still go to an election this year.  For now, he’ll get through the news poll thing.

Moving on now to the corporate tax cuts, Hanson seems to be on board but Derryn Hinch is a hold out, so now I think with Hanson on board the Government needs another two votes, is that right?

PK:  That’s right.

Do you think they’re going to get there?

PK:  I do.  This thing has a real sort of momentum about it.  If Derryn Hinch wasn’t – what’s going on is, as of Thursday morning, Hanson, after the business leaders sort of sent her open letter saying they’d invest the proceeds and so forth, Hanson pretty much all but said she’s happy.  As you said, that gives them the seven votes, they need nine.  Hinch is negotiating.  If Hinch wasn’t interested he wouldn’t be talking, he’d do what the Nick Xenophon senators are, who are saying, “No, we’re opposed, go away.”  He wants to do a deal.  I think he’s positioning himself as the new Xenophon, just drive everyone mad and be the last guy to sign up and hold out for some sort of thing so you can wave around some sort of victory to your supporters.  Ask for something that’s got nothing to do with the issue at stake, just a bit of ‘horse-trading’, so he’s in the middle of all that and if they get him on board they need one more and it all comes down to a bloke called Tim Storer, who only got sworn in on Monday. 

He’s an Independent from South Australia.  He replaced the Nick Xenophon team’s Skye Kakoschke-Moore, but he quit the Xenophon team so he’s by himself.  He’s the hardest to pick because he hasn’t said anything so far, but he’s only been here a few days and as I said, elsewhere he’s still working out where the toilets are and he’s got to make a $65 billion dollar decision.

[Laughs]

PK:  But I would be very surprised if they had eight and this bloke said, no because it’s a big thing.  It’s Government’s mandate and they will be putting all sorts of pressure on him.  The Mattias Cormann will just camp out on his doorstep every day between now and the end of the world and he can be very persuasive, Mathias, he’s a superb negotiator and if they do get this across it will be almost exclusively due to him.  Let’s wait and see, but I think on balance they’ll get there, it will just cost them a bit.

Finally, Phil, how much trouble is the Victorian Labor Party in amid the revelations they reallocated almost $400,000 from electorate offices to campaign efforts in 2014?

PK:  Well it’s not a good look, especially in an election year.  He goes to the polls, Daniel Andrews, in November.  Given the shortness of the news cycle, it’ll probably be forgotten by then, but the trouble with these things, Dave, is it just feeds into that whole antipathy people have towards politicians which has been very pronounced over the last few years.  They just think they’re all rorters and swine who just have got their hands in the till and every opportunity, gouge the taxpayer.  These sorts of things, whether warranted or not, just fuel that perception.  They tend to be more damage generally to politics than a specific party.  The prime example was Bronwyn Bishop’s helicopter ride. 

The reaction to that was completely out of proportion to the crime but it just burst this bubble that had been growing of resentment and it just became the sort of lightning rod for that.  This is similar, I imagine the reaction is, oh they’re all crooks, they’re all in it, they’re all feathering their nest.  I assume the Liberals will make something of it but Andrews has responded and fairly swiftly paid the money back, will try and shut it down and it’s only March, the election’s in November.  I’m sure there’ll be other stuff by then.  But if you’re the Labor Party you’d rather it didn’t happen when it did.

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Joining me now is Diana Mousina, Senior Economist at the Multi-Asset Group at AMP Capital.  Diana, the big news out of America this morning is an increase of the Federal Funds rate announced by Jerome Powell.  How have the markets reacted?

DM:  Well, it’s been a bit of a strange reaction.  Initially when we saw the outcome from the Fed, the actual increase in the Fed funds rate from 1.25 to 1.75 wasn’t unexpected and the market – US equities actually rallied.  The US bond yields moved up to above 2.9% on the 10-year and the US Dollar spiked a bit higher.  But all of that was reversed during the Fed’s testimony or the press conference.  The US market ended up closing 0.2% and the US Dollar had a pretty significant fall lower.  It was a bit of a strange reaction and it probably comes down to the fact that markets think that the US Fed is more dovish than what they were expecting.

Powell’s flagged three rate rises for this year.  How do you view his monetary policy compared to Yellen’s, is it going to be more aggressive?  

DM:  I think it will be more of the same and that continuity is really what we thought we’d see with Powell because he had been a member of the FOMC for such a long time with Yellen.  I suppose that the Fed has to tread quite carefully in trying to not make markets too excited that they’re going to hike too aggressively.  I think that they’ve done a good job of that.  Equity markets tend to get spooked when they see that a central bank is going to hike too aggressively and that isn’t happening for the US yet. 

If we did see some indication from the Federal reserve that they were going to move from three to four hikes this year, then I think that the market probably would have taken that as a much more hawkish sign and the currency would have rallied.  But we’re not getting that indication yet.  However, based on the Fed’s own forecast, they revised up their growth numbers a little bit and they seem to be quite comfortable in potentially overshooting the inflation target.  That’s definitely what they’ve said in their commentary.  I think that we may actually get four hikes this year.  The market pricing for the Fed funds rate needs to move higher over the next two months and it probably will move higher.

Moving on now to the steel and aluminium tariffs announced by Trump.  Have the markets completely priced that in now?

DM:  I think that the weakness in equities over the past few weeks definitely reflect some uncertainty as to what’s happening with trade.  The steel and aluminium tariffs are actually quite small in the big scheme of things in terms of the country that the US is targeting because they’ve made some exemptions for countries but also because the actual impact to the US economy will be small.  But what the market is pricing in is a potential for more announcements from the Republican Party and the Trump administration as to what other tariffs they’re going to impose. 

What the market is really worried about is potentially much bigger tariffs that are specifically imposed on the Chinese economy.   That would create a much bigger impact on world trade on the US economy and on the Chinese economy and we could see retaliation by the Chinese economy and perhaps even other countries as well if the US was to impose tariffs on them.   That market pricing is partly reflected, I think, for tariffs.  But if we do get more announcements then there’s definitely more downside to go for the equity markets.

Do you anticipate a trade war?

DM:  That’s a difficult question to answer.  We don’t anticipate that there will be a full blown trade war because that would completely wipe out any benefits that the Trump administration has wanted to put in place with the very large tax cuts that they’ve done.  The increase to the spending caps that were approved in the legislation that was passed in February around the budget.  If the trade war was to happen that would completely eliminate all those gains.  It would just seem like bad economic policy, really.  But you can’t rule out more tariffs that are specifically targeted towards countries and China is obviously one that has been most spoken about in the press that’s coming out from the Republicans, so I guess that we have to say that that’s really a big risk. 

However, Trump did tone down on the initial tariffs of steel and aluminium after it was announced, so we may actually see that happening as well, even though he’s talking about potentially imposing tariffs on $60 billion dollars’ worth of Chinese goods, it might actually end up being a lot lower than that.  It may just be a bargaining tactic that he’s trying to use with Xi Jinping. 

And just finally, how did markets here at home respond to the rate increase?

DM:  I haven’t actually looked at how the markets open but the US futures which were trading lower in the morning, so it’s not a great sign for the Aussie market for today’s session.  The increase in the Australian Dollar as well after a few days or a few weeks of becoming weaker is probably also not so great for our opening market performance.  In the next few weeks and our medium term view overall anti-capital is still that Australian equities will underperform global equities and that’s mainly just because earnings growth here is likely to be lower than where it is overseas. 

The high currency in Australia does really put a dampening effect on equity market performance, and that’s similar to countries like Europe and Japan as well that have recently had appreciating currencies that have been putting downward pressure on the markets there.  It’s probably not such good news for equity market performance here. 

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Joining me now is Callam Pickering, APAC economist at Indeed.com.  Callam, the February jobs report was just released, what did we learn?

CP:  It was another strong month for the Australian labour market employment was up 17,500 people.  Full time employment rebounded, participation in the labour force is now at its highest level on record which is a really good development.  Overall, it’s sort of a continuation of what we’ve seen over the past 12 months.  That is that the labour market in Australia is improving and there is a number of bright spots going forward.

How far will the unemployment rate have to fall before we see wage pressures increase?

CP:  Right now it says around 5.5%.  I anticipate that it would need to get down to around 5% before we really begin to see a material pickup in wages.  We might see it increase by, say, a quarter of a percentage point before we got down to 5%, but any meaningful increase in wages up to over 3% and the sort of levels that we were once accustomed to, won’t occur until the unemployment rate gets down to around 5% and lower. 

How did the figures compare between the major cities and the states?

CP:  New South Wales continues to have the strongest labour market in Australia.  Their unemployment rate is a little bit below 5%.  Most of the other states continue to be in the high-5s to the low 6% range, so there’s quite a divergence between New South Wales and the rest of the country in that regard.  We continue to see strong growth in Sydney and to Melbourne to a lesser extent, but there continues to be some issues with the other capital cities and states.

I’m zeroing in now on the nuts and bolts.  How many hours are Australian’s working?

CP:  Just recently we’ve seen a little bit of an easing in growth in total hours worked, which is a concerning development.  Hours worked across Australia has increased by 2.7% over the past year which is tracking a little bit slower than total employment growth of 3.3%.  This is an issue that we’re keeping a close eye on because while it’s important that a lot of people are working, it’s also very important that they’re working a lot of hours as well.  It suggests that there are still a lot of Australians out there who perhaps aren’t working as many hours as they’d like to and those people would certainly be looking for more opportunity going forward.

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Joining me now is Justin Rampono, Director of The Currency Shop.  Justin, when was The Currency Shop launched and what exactly does it offer?

JR:  The Currency Shop was launched about three and a half years ago.  What it offers is an opportunity for people to compare exchange rates similar to, say, if you used iSelect to compare health insurance or if you used Skyscanner for airfares.  We allow people to compare exchange rates and fees predominantly if you’re sending money overseas or just buying some cash before a holiday.

Who are the major players in the space?  Who are you comparing rates between?

JR:  On the cash side, so think of buying some money before you head off to Bali or New Zealand, it’s the big banks along with guys like Travelex, who I’m sure you know, and Travel Money Oz, who are also a large player in the space.  On the international money transfer side, again we compare the big banks.  We also compare the next level of large money transfer companies, so the likes of OFX, who are based in Australia, TransferWise, WorldFirst, XE Money Transfer, TorFX, those kind of companies.

Those companies, are they market makers themselves or do they take their rates from the bigger banks?

JR:  No, no.  Those players all operate within the interbank wholesale market.  Their cost of goods sold, if you will, is the same as the banks.  When you look at XE.com or Google or Yahoo and you see the wholesale interbank rate, that’s what everybody’s buying it at roughly.  

It seems the space has been dominated for the longest time by the big banks.  Was there a regulatory reason for that, and what’s changed?

JR:  I think, in part, it was, yeah.  In order to establish and run a money transfer company, there are pretty big barriers to entry and for good reason.  It’s an incredibly highly regulated industry and again, for good reason.  Just to setup a money transfer company requires a fair bit capital and it is really regulation heavy.  It means that every mum and dad can’t setup a money transfer business.  But you’re still seeing really good players in the market like OFX,  that was born in Sydney in the 90s, and guys like Transferwise challenge the banks and take a fair bit of market share away from them.

I see on your website, the transaction time can be greatly reduced versus going through the banks.  What kind of friction do you guys avoid that the banks might have to deal with?

JR:  In terms of transaction time, banks versus a non-bank like Transferwise or OFX or TorFX, using a bank is still – while it’s probably not going to be the cheapest way, it’s still quicker and that’s because, say you bank with ANZ and you use ANZ, they’ve got your bank details, they can take the money out of your account straight away and send that money overseas.  If you’re using someone like Transferwise, OFX, WorldFirst, you need to actually pay the money to that provider before they send it overseas.  Which, means that you’re throwing in an extra 24 hours transfer time.  That’s going to be cut down in the coming year with the NPP.  Once most Australians go onto that platform, it’s going to cut it from 24 hours to a matter of seconds.  The transfer times from Australia to overseas is also coming down every year.  I remember it used to take 2-3 business days to get money to London.  Now at most it should take about 24 hours.  Which is, in my opinion, still pretty slow.  You can fly to London a lot quicker than you can get money there.

[Laughs] Absolutely.  Justin, what kind of demand have you seen for your service?

JR:  In the last three and a half years, we’ve seen really, really consistent strong growth.  We see the demand, not just for comparison in money transfers but thanks to the likes of iSelect, Finder, a lot of other good comparison sites, I think Australians are getting a bit more used to comparing their financial products, whereas 5-10 years ago you wouldn’t think to do that.  The demand for the comparison itself is increasing which we love and we also like the fact that it’s increasing competition as a result.

Where’s Australia situated compared to overseas?  Are these market comparison services well established overseas?  Are we lagging behind or are we ahead of the pack?

JR:  No, I think we’re in the leading pack.  I think OFX is placed really well against its peers.  There are a lot of other good start-ups and mid-sized companies in Australia like Airwallex, there’s a great company out of New Zealand called LadderPay that are all establishing themselves as leaders in the industry.  So no, I don’t think we’re lagging at all. 

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Happy Birthday to the legendary Sir Elton John, who turns 71 on Sunday.  Here’s one of his best, ‘Goodbye, Yellow Brick Road’.

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That’s it for Talking Finance, I’m David Thornton, have a great week.

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