Red lights blaze at Canberra's crossroads

No Australian Treasurer would announce major new taxes on the eve of an election unless he saw very nasty short and long-term economic signals coming across his desk.

That means domestic Australian profits in the current year are almost certainty going to be below analysts’ expectations – but given current global market buoyancy the impact of what is ahead may take time to be understood. 

Meanwhile the current government’s response to those adverse signals is to raise taxes on community staple items – cars, cigarettes, liquor and banking. In each case the government dreams up a reason to impose the extra tax but in truth it’s like a selective GST.

The Opposition's response will be to take some but not all of the government’s GST style taxes but, as I will explain below, they are looking at a completely different approach.

I cannot recall our two major two parties being further apart in their approach to the same problem on the eve of an election.  

On the markets, stockbroker Baillieu Holst has issued a special bulletin warning that they are concerned that earnings forecasts by analysts could be downgraded by 8 per cent. 

“Our earnings model based on commodity prices and credit flows combined with concerning growth signals points to such an outcome,” Baillieu Holst says.

If they are right – and I think they are – then there will be some very worried analysts in coming weeks.  The downturn will apply to the current financial year, not 2012-13. The Australian dollar is also under pressure and if Baillieu Holst is right then it will increase selling in the stock market from nervous overseas investors. Of course when global markets are rising – as they are now – then that pressure will lie dormant.

On the domestic economy the Australian scene is different from the US. We are experiencing a downturn in mining investment, a slump in motor vehicle sales, the downturn in manufacturing, sluggish non-food retail demand and a dormant business community (Business decays while Rudd delays, July 31).  

Just as that downturn causes reduced government revenue so it will translate into lower profits.

Because the current government is trying to fill the revenue void with higher taxes that means that activity over a wider area will be hit and it will increase the momentum for lower profits. If it wins the election, the Coalition will keep some of the tax increases and stop others. But their approach is totally different. They believe they can cover the shortfall by getting rid of regulation and massive duplication with the states but more importantly making it far easier to start new businesses. 

The methods being used by the tax office and Treasury will be transformed and will aim at a huge stimulus to small and medium business, led by independent contractors.

It is about a total culture change in the Australian business community (Abbott’s red-letter day for enterprise, August 1).