THE DISTILLERY: Double dips

Like many today, this column is trying to put 'AXA', 'AMP', 'egg' and 'face' into a sentence. Nonetheless, in commentary published before NAB dropped its AXA APH bombshell today, tax and GDP were the dominant themes.

Matthew Stevens of The Australian has two comments on tax. The first is a declaration of war from the mining sector on the Henry Tax Review. According to Stevens, the likely outcome will be a "resource rents tax” without the removal of state royalties. Stevens reckons this amounts to an extra $20 to $25 billion tax on a sector that represents "8 per cent of GDP [and] pays 16 per cent of company tax”. He concludes "... introducing changes like a double-dip tax on top of a new carbon tax will doubtless shift the risk-reward balance and that will improve the competitiveness of investment destinations that currently cannot compete with Australia.” Like Alan Mitchell yesterday, Stevens provides insufficient detail for reader judgement. For example, specific descriptions of where the miners might emigrate to would be helpful. Precise figures on the competitive advantages of these destinations would also strengthen the argument. As would engineering detail on the plan to mount the Pilbara on a barge and move it elsewhere.

Stevens' second tax-related comment follows the Supreme Court ruling on the ATO ruling on TPG. Stevens begins "...the ATO has signalled an intent that is potentially devastating to TPG and looms as, at best, an added complication for just about any foreign institution considering investment in Australia.” Yet by the end, even as his piece continues its sympathetic tone toward firms caught in the ATO shift, Stevens is arguing a clear case of tax avoidance by TPG when he describes the chain of transactions through Holland, Luxembourg and the Cayman Islands. He concludes "the ATO stressed that there may be sound commercial reasons for creating this pattern of holding company.” But if not, "the ATO is going to want to check out whether you are merely attempting to avoid paying tax.” 

A clearer position is provided by Stephen Bartholomeusz of Business Spectator. "Private equity groups are essentially actively-managed collective investment vehicles ... the investors ... are primarily institutional. They aren't in the business of buying and managing and ultimately selling assets – they are passive investors in the vehicles. They also tend to be dispersed around the globe – funds are channelled into the big private equity funds from the US, Europe, Asia and the Middle East. The purpose of the structures used by private equity isn't to help the end investors avoid or evade tax in their home jurisdictions but to provide, in effect, a clearing house for global collection and distribution of the investors' funds and avoid paying a second layer of what would essentially be gratuitous transaction taxes tax as the investors' funds are eventually repatriated.”

It's not clear, however, that the ATO misunderstands this as Bartholomeusz suggests. Alan Jury of The Australian Financial Review puts the ATO's position differently: "... private equity profits will be taxed ... at the immediate ownership level rather than ultimate ownership level if [the ATO] has doubts about the structure linking them.” 

All three agree that further clarification is needed.

On our second topic, the economy, there is universal agreement that yesterdays dud GDP print is an aberration as we transition from stimulus to private sector investment and demand. Yet if we look into the details, there is an unmistakable cooling of enthusiasm. David Bassanese of The Australian Financial Review maintains that the economy has "considerable momentum”. But he unwittingly confirms this column's thesis that it is the ongoing government housing bubble that is supporting growth: "Household consumer spending surprised, growing by 0.7 per cent, even though the quarterly retail sales report revealed a contraction of 0.4 per cent ... non-retail elements of consumer spending – on cars, telecommunications and financial services – grew quite strongly during the quarter.” This doesn't look too promising to this column. Cars from mortgage equity withdrawal. More mortgages. And broadband to be entertained at home. Moreover, Bassanese goes on say "the economy seems well-placed to post decent economic growth in the next few quarters”. Which is much less bullish language than several days ago when the economy was apparently "on a tear”. In this column's view, because we avoided the cleansing benefits of a recession – repairing balance sheets – we're also avoiding the wonders of pent-up demand. The jury is out on growth for next year. 

Which is an argument that Michael Stutchbury of The Australian might use to lick his wounds after a month of attacking fiscal stimulus and demanding its immediate removal because he foresaw an over-heating economy. Instead, today we get this: "... the economy's solid recovery will still produce higher interest rates and pressure for budget spending cuts next year.” Perhaps on the first, and certainly on the second. But, the spending cuts are not due to excessive stimulus. A point made by Alan Wood of The Australian, who repeats his argument from last week that "... there are hard numbers to back [Swan] up. Treasury estimates that without the stimulus the Australian economy would have contracted in each of the last four quarters, shrinking by 2 per cent during the past year. Instead it grew by 0.5 per cent, an impressive performance in a developed world mired in recession.” However, Wood goes on to caution that "... the success of fiscal expansion in this episode does not mean fiscal policy is back in the politicians' play box. We are not back in a Keynesian world where any future downturn in the economic cycle should be met by a large discretionary fiscal expansion. This episode is a one-off, a once-in-80-years economic and financial crisis.” This column suggests Wood is right for the wrong reason. The GFC is not a one-off, nor is it even over. That is why we need fiscal responsibility. We're going to need more bullets and, likely, keep sponsoring our banks.

Which is why this column disagrees with Alan Kohler of Business Spectator and his description of the decline of economic rationalism.Although this column agrees that big government is ill-conceived, Kohler's contention that "in Europe and America the financial deregulation of the 1980s and 1990s is now being reversed” mis-characterises what is happening. The US and European financial systems have been bailed out, not re-regulated. As such, moral hazard is now rampant across the global financial system. To make matters worse, there is little legislated reform in the offing that will contain this spur to speculative behaviour. The derivatives and short-term bonuses that drive it are attracting only mock reform.

In other stories today, Elizabeth Knight of The Sydney Morning Herald judges legislative shifts around Qantas to be less than meaningful. Bryan Frith of The Australian reckons "the Rudd government may have squibbed removal or relaxation of the 49 per cent foreign ownership cap... [because] ... it could create a political backlash”. Malcolm Maiden has an interesting take on how the ACCC scuttled the GUD Breville bid, including the deadpan observation that "The big retailers told the ACCC that the two Australian appliance companies acted as competitive counterweights, producing price competition at the wholesale level, as well as product and marketing innovation ... Their fear was that after the merger, that competitive tension would be replaced by monopoly behaviour.” 

Finally, anyone seeking an alternative reading to Paul Krugman's panegyric of Paul Samuelson, run on Business Spectator today, can find an excellent take on the damage wrought by the guy here.