: Personal finance news from Parliament House in Canberra

January 31, 2008

A bitter harvest

Filed under: Uncategorized — Alan Thornhill @ 12:42 pm

Another dry season has left Australia with a bare 9 million tonnes of wheat in the nation’s bins.

That figure, which the Australian Bureau of Statistics released today, compares with the 20.5 million tonnes held in storage, in December 2003, after a more normal season.

The current drought has been doubly bitter for the nation’s wheat farmers this season.

That’s because a world shortage of wheat has kept wheat prices unusually high.

Indeed, the Australian Bureau of Agricultural and Resource Economics is predicting an average price of $US 310 a tonne for wheat, this financial year.

So growing wheat would have been a profitable business, if it had grown. But it hasn’t, because of the drought. And Australian farmers have had little, if any, wheat to sell, this season. Thousands have, once again, been looking out over dry, dusty paddocks, over recent months.

And many farmers, who have already been squeezed financially, are now finding it almost impossible to hang on.

Their financial capacity was hit once again, last financial year. ABARE estimates that incomes on broadacre farms fell by 40 per cent nationally then, an average of just $42,000.

And many farmers went backwards, financially.

“The proportion of farms reporting negative farm cash incomes increased in each State,” the bureau said.

Expect to hear some serious talk if you attend the Bureau’s annual National Agricultural Outlook Conference, which will be held in Canberra in the first week of March.

Access confident on China

Filed under: Uncategorized — Alan Thornhill @ 7:20 am

Access Economics believes demand from China will underpin good growth for Australia over the coming year, even though the Chinese, themselves, are now worried about their prospects.

Premier Wen Jiaboa has warned this week that China has a “most difficult year” ahead.

“There are uncertainties in international circumstances and the economic environment and there are new difficulties and contradictions in the domestic economy,” the Chinese leader said in an official paper, which he prepared for China’s State Council
It’s not just that Chinese trade with America is threatened by the now apparent slowing of the US economy. China also has vast reserves of cash, invested in $US securities.

Access admits that much of Australia’s economic fortunes this year are tied up with Chinese growth, which has been running in double digit figures.

Its economists are basing their argument on their assessment that increased domestic demand in China will take up any slack, that a US slowdown might inject into the order books of Chinese factories, over coming months.

In the latest issue of its Investment Monitor, the forecaster notes that new Australian projects, worth a total of $353.3 billion are currently being planned.

Access says Australia’s resources sector is the most direct beneficiary of Chinese demand.

“Massive investment dollars are being aimed at LNG, iron ore and coal in particular,” Access said.

“And were it not for skill shortages in WA, investment levels would be considerably higher still,” the forecaster added.

Its optimistic assessment supports advice that officials in Canberra have been giving the Federal Treasurer, Wayne Swan.

Tax breaks:the rising cost

Filed under: Uncategorized — Alan Thornhill @ 7:15 am

The Federal Treasury loves to talk about “tax expenditures.”

Most people call them tax breaks. And they are legitimate.

But the Treasury hates them. That’s because protecting Federal revenue is a big part of its job.

So we shouldn’t be too surprised to see that the Treasury has just produced figures showing that the cost of these “expenditures” – or tax breaks – is rising sharply.

A tax expenditure is money the Federal government doesn’t get because it allows tax breaks on certain items, like superannuation and accelerated depreciation on business equipment.

But superannuation is the really big ticket item in a report that the Treasury has just published. Its study shows that the government will “spend” almost $26.9 billion, on superannuation tax breaks this financial year.

So, theoretically at least, the government would get an extra $26.9 billion this financial year, if super was taxed at standard rates.

That’s almost twice what tax breaks on super cost, back in 2003-04.

That calculation makes no allowance for inflation.

However, even the Treasury, itself, urges us to take care with these figures. And they are, frankly, controversial. Indeed one MP we talk to calls them “nonsense.”

The Treasury does admit that its figures are not really a suitable base, for comparisons over time.

However it does publish such comparisons and its figures are the best available.

The Treasury also admits that Australians would probably not save for their retirement, as they do now, if the tax breaks on super were scrapped. That’s putting it mildly.

The Treasury report says the total cost of all tax breaks, this financial year, will be $51.4 billion.

That is a massive 4.6 per cent of Australia’s gross domestic product.

That is up from just 3.7 per cent in 2003-04. And this comparison does take inflation into account, at least indirectly.
Naturally, the Treasurer, Wayne Swan, would abolish all tax breaks overnight, if he could do so – and survive.

But he knows that is not a realistic idea.

Besides, even from the government’s point of view, tax breaks, or expenditures, are not necessarily bad.

If the superannuation tax breaks, for example, were abolished millions of Australians, who do save for their retirement that way, would, almost certainly, stop doing so.

So the government would face much bigger pension bills in future.

Besides, many people believe that the tax breaks the government does offer on retirement savings are not all that generous, anyway.

“They tax (retirement savings) on the way in (to the super fund), tax earnings on that money while its there, and then tax it again, on the way out,” many say.

That common complaint does have some merit.

So, though, does counting the cost of tax breaks. And if the Treasury didn’t do that, each year, who would?

January 29, 2008

The latest

Filed under: Uncategorized — Alan Thornhill @ 8:40 am

Top stories:-

  1. US investors strong:oil majors face grilling
  2. Opportunities lost
  3. Meet your new clients

The week ahead


Fed meets Wednesday on US interest rates

US job growth data Friday

Retail price data for Australia Wednesday

Meet your new clients

Filed under: investment — Alan Thornhill @ 7:01 am

Expect some unexpected new clients, with troubling issues, over the next few months. That’s the situation many financial planners will face, as the Rudd government’s razor gang gets to work.

With a public service of almost 140,000, the government is one of the biggest direct employers in the country. It has also, at least until now, been the source of a fairly steady stream of lucrative consultancy contracts. The Howard government had been of spending about $360 million a year, on consultants.

But the new government is already between a rock and a hard place. It must reduce its spending, to curb inflation. But it must also keep its election promises, to preserve its credibility. That means that it will proceed with the $31 billion worth of staged tax cuts, which many believe might well be deferred. And it won’t cut excessive spending on private schools and middle class welfare, that should be prime targets, in any cost cutting program. These things are just too difficult, politically.

So what can it do? Look for soft targets, of course. Once again, we have a a new government with the public service in its sights. Just as the Howard government did when it first came to office, back in 1996.

There won’t be another bloodbath now, as there was then, when Howard slashed some 30,000 public service jobs.

But there will be severe trimming. The Finance Minister, Lindsay Tanner, already has two groups, particularly, in his sights. These are the Senior Executive Service and government contractors.

Both are soft targets. The SES, as it is known, has been one of the least accountable divisions of government, over the past decade or so.

Even the Treasury has resisted scrutiny in this area, arguing that would invade the privacy of its senior workers. So standard checks on the way public money is spent in this area has been weakened. But the SES is about to pay for its arrogance.

As Mr Tanner has noted, the SES has become bloated over recent years. He recalls that, just a few years ago,only 13 per cent of Australia’s Federal public servants were in this very privileged club. Now, though, that has blown out to 25 per cent. That growth was not accompanied by substantial signs of any matching improvement in the performance of the public service.

Governments of all persuasions are well aware that there is little public support for senior public servants. The old television comedy, Yes Minister, didn’t help them either.

The National Capital Authority, the Federal Department which manages key aspects of Canberra’s face to the world, has already been targeted. The Defence Department, which is a much harder target, has been exempted.

Mr Tanner has, all too apparently, decided that scattered targets are the easiest to deal with. That’s the pattern that can be expected, as his Razor Gang he heads, gets on with its work.

But there will, of course, be a human cost. The public servants who are “shaved” in this process, will be facing new realities. Their retirement plans will have to be revised. The contractors, hit by the government’s cuts, could well face even more severe problems. The smooth flow of work, to which they have become accustomed, will be interrupted. They will now face quite long waits, between projects.

With the private job market strong, at least for now, the issues arising from the dislocation these groups face, might well be less severe than they could have been, at other times.

They will, nevertheless, be both serious and complex. Financial advisers should prepare to meet these needs. Those who do, will find their clients grateful.

January 25, 2008

Markets:the “fundamentals”

Filed under: Uncategorized — Alan Thornhill @ 6:08 am

Recent events on shaky world markets offer lessons for all investors.

But just what are those lessons? That is a question of some importance, right now.

Australia’s Investment and Financial Services Association has stepped in to offer some answers.

Its CEO, Richard Gilbert, says:”Investment markets move in cycles.

“And it is impossible to predict when a market will rise or fall.

“However, by looking at the past we can observe how markets usually perform.

“And that can help us to put market movements in perspective.”

His association has produced a pamphlet, which it called “Four Lessons from the Market.”

Summarised, they are:-

  1. Markets move in cycles
  2. Diversification reduces risk
  3. Look at ‘time in the market’ not “timing the market” and
  4. Start investing early, save regularly

It’s all a bit general, of course. And the old song, As Time Goes By, summarised much the same thoughts, very elegantly, many years ago. The key line in that song is unforgettable:-

“The fundamental things apply, as time goes by.”

Markets, after all, are just one more human relationship.

Naturally, there is a bit more to IFSA’s pamphlet, than we have been able to record here.

You can get the whole thing from www.ifsa.com.au

January 22, 2008

Early retirement:an unpleasant surprise?

Filed under: investment — Alan Thornhill @ 2:15 pm

Many Australians – particularly men – will be surprised by their own retirements, which might come earlier than they had expected.

Young men, especially, still hold to the traditional belief that they can safely plan to retire at the traditional age of 65.

However, new figures, produced by the Australian Bureau of Statistics, strongly suggest that this may not be so. Yet the bureau’s report is likely to be swamped, by all the bad news flowing from financial markets, right now.

That would be a pity. The bureau’s study, called Retirement and Retirement Intentions, should serve as a wake up call, for all people making long term financial plans.

The bureau reports, for example, that the average age of retirement, for Australian men, is now closer to 60 than 65. It’s 60.3, to be precise.

The average retirement age for women is lower, at 59.

Compulsory superannuation payouts will, generally, still be too small to fund a financially comfortable retirement. So a little advance planning, based on solid figures, rather than broad perceptions, is still as necessary as ever.

The bureau’s 56 page report, based on the findings of the 2006-07 Multi-Purpose Household Survey it conducted in 2006-07,is an excellent guide. It revealed that a no less than 42 per cent of Australians, who have chalked up their 45th birthdays, have already retired from the nation’s workforce.

That is some 3.1 million people.

Naturally, the likelihood of retirement rises with age. Only 6 per cent of 45-49 year olds had retired, at the time of the survey, but that increased to 23 per cent, among 55-59 year olds and 75 per cent of 65-69 year olds.

The bureau reported that sickness or injury often led to early retirement as did retrenchment.

The report’s catalogue number is 6238. For more detail, go to www.abs.gov.au

Growth:Access backs Stevens

Filed under: economics — Alan Thornhill @ 6:05 am

Access Economics is backing Glenn Stevens’ prediction of good global growth, around trend levels, this year.

It says its assessment is that the world will post another year of good growth in 2008 as Asia’s momentum offsets US weakness.

That, broadly, is the view the RBA chief also took, in a speech he delivered in London last Friday.

But, perhaps wisely, Access is hedging its bets.

“The risks are rising fast,” the forecaster says in the latest issue of its Business Outlook, which it published today.

“We don’t forecast a US recession, but one is quite possible.” it adds.

“And both Japan and Europe have the wobbles.”

Access is advising its clients to keep watching commodity prices.

“…they will stumble if the globe does too,” it says.

Access says any weakness in global commodity prices might well be the first indicator of a potential problems.

And while Access still expects global growth to be strong, on balance, this year, it is also predicting some softening next year.

It warns, also, that Australia is presently loaded with “inflation risk.”

January 21, 2008

Price pressures soar

Filed under: Uncategorized — Alan Thornhill @ 6:10 pm

New figures confirm fears that price pressures have been rising sharply in Australia.

At the basic commodity stage, for example, producer prices rose by 1.5 per cent in the final three months of last year and by a massive 4.7 per cent over the year.

Developments like this clearly threaten the Reserve Bank’s stated aim of keeping Australia’s inflation in the 2-3 per cent range, over the course of a business cycle.

The bank’s chief, Glenn Stevens, admitted in a speech he made on Friday, that the authorities had, in the past, tended to discount so-called volatile items, such as oil and gas prices and the cost of refining petroleum which dominate this indicator.

However Mr Stevens also warned then that present circumstances are forcing both the Reserve Bank and its counterparts overseas to reasses all that. The question now, he said, is whether these developments will become permanent, and therefore more dangerous to the economy.

That is no light judgement. And we will all see what Mr Stevens and his board have decided about all this, when they meet on February 5.

Most analysts now expect an immediate rate rise, that day.

The drought, with its consequent rise in food prices, also contributed to the increase in stage one producer prices, that the Australian Bureau of Statistics reported today.

Upstream processing price rises were more moderate. They increased by just 0.6 per cent in the December quarter and 2.8 per cent over the 12 months to the end of December.

The bureau also reported today that both personal lending and commercial finance continued at high levels in November.

PM sets his agenda

Filed under: politics — Alan Thornhill @ 11:20 am

The Prime Minister Kevin Rudd set the agenda for his new government, at a business breakfast in Perth this morning.

He told those attending they could expect sharp cuts in government spending, fresh incentives for savings and moves to get more people into the worlkforce.

His promise to tackle Australia’s skills shortage is particularly attractive to W.A. businesses. They have been struggling to overcome skills shortages for many months, as a result of the State’s mining boom.

Mr Rudd’s promise to clear bottlenecks, while cutting Federal spending, appears to rest on basic contradictions.

Better port, rail and road facilities usually require extra government spending.

That implies that cuts to other Federal spending will, in all likelihood, be much deeper than previously expected.

That, too, was made clear, by implication,  today when the Treasurer, Wayne Swan, told ABC radio that the government would proceed with its staged tax cuts, worth some $31 billion, despite its severe spending cuts.

Predictably, Mr Rudd  also attacked his predecessor, John Howard, saying the outgoing government had done little, if anything, to contain inflationary pressures in Australia.

He won’t be able to get away with that kind of talk much longer.

Mr Rudd did not spell out all that his government will do to curb inflation, although he has now signalled that this is is his top priority.

Full details won’t be made public until the government’s first budget in May. Unless, of course, it sees value in some well placed leaks, beforehand. As it did over the weekend that has just passed.

Tighter times ahead

Filed under: investment — Alan Thornhill @ 6:55 am

Federal spending is to be slashed and interest rates will rise.

That’s the tough prospect Australia faces, as the government and the Reserve Bank work together to curb inflation.

The Prime Minister Kevin Rudd plans to explain his strategy to business leaders in Perth today.

He is aiming for a surplus of some $18 billion, even though he will still proceed with the staged, $31 billion of tax cuts that he promised before last year’s election.

That can only mean one thing, in the present circumstances. That is big spending cuts.

There is plenty of room for that. Despite its small government rhetoric, the Howard government was both a big taxer and a big spender. The slices of GDP it took in taxes – and then spent – made even the Whitlam government look pale, by comparison.

Rudd’s cuts are likely to trim the Federal public service, in particular. The Department of Foreign Affairs and Trade may well be a particular target.

It will, however, fight back. The government is keen to increase Australia’s exports to both India and China. It will need its own people on the ground, in both places, to do that.

Meanwhile, the Reserve Bank Governor, Glenn Stevens, has signalled as clearly as he can that further interest rate rises are needed, possibly as soon as February 5, when the bank’s board next meets.

He did that on Friday. London time, in address to expatriate Australian business leaders.

Mr Stevens said he did not like the pattern of price rises, that is now appearing in Australia.

“Prices for foodstuffs, energy and raw materials and for industrial processes are quite high,” he said.

“The synchronised nature of the increases has been quite marked, as well, in a fashion eerily reminiscent of the early 1970s.”

Hints don’t come much clearer than that.

Mr Stevens let all who are interested know, in the most forceful way possible, that the Reserve Bank now has its eyes firmly fixed on inflationary pressures in Australia.

And it is not content to stand idly by, hoping that a slowdown in America will kill inflation in this country.

January 17, 2008

Sunlight still the best disinfectant

Filed under: investment — Alan Thornhill @ 6:15 am

Investors are – predictably – taking tougher attitudes to offers of Asset Backed Commercial Paper.

That is a natural product of the US sub-prime mortgage crisis.

The Reserve Bank tracks the development, in an article it published yesterday in its monthly bulletin.

It notes that ABCP investments still have advantages.

“Notwithstanding the recent difficulties in this market, ABCP, like other forms of securitisation can allow financial institutions to diversify their sources of funding ,” the bank said.

It also said that these instruments also enable credit risk to be packaged and sold to meet the preferences of investors.

But, to put it mildly, there are issues, too, as the bank noted.

“Recent events have, however, highlighted a number of issues that are likely to receive ongoing attention.

“One of these is the important role of transparency in the smooth operation of the market,” the bank said.

It said investors are now reluctant to roll over these short term instruments, because of what it called the “opacity” of the market.

Obscurity, that is, both in the composition of asset pools, backing ABCP and in the lack of publicly quoted prices.

Putting it simply, the bank said investors are now demanding more transparency in this area.

As the late Ralph Jacobi MP used to say, about such matters:” Sunlight is the best disinfectant.”

www.rba.gov.au

January 16, 2008

Uranium:India’s crouching tiger

Filed under: trade — Alan Thornhill @ 8:34 am

Fighting for great causes is glorious – while you are in opposition. The consequences can be a little troubling, though, if you wake, one day, in government.

Things are a bit like that, right now, for Labor. The South Australian Labor Premier, Mike Rann, wants to boost his State’s already impressive endeavours in uranium exploration and production. And he specifically included India, when asked to identify countries likely to increase their nuclear power output.

So far, so good. But that put Australia’s new Foreign Minister, Stephen Smith,on a sticky wicket in Perth yesterday, when he visited the cricket, with an Indian friend, Shyam Saran, who is also an envoy of the Indian Prime Minister.

Unlike its neighbour, Pakistan, India has a good record on non proliferation. As Mr Saran happily noted, it hasn’t allowed its nuclear secrets to leak. But India hasn’t signed the Nuclear Non Proliferation Treaty, either. Nor is it likely to do so.

That leaves Australia in a bit of a spot. Likely, that is, to miss out on sales it wants to make to India. Especially as its denial, of such an important resource,l are weightier in semantics than reality.

There another point of of embarrassment for Australia in all this.

The previous government, of Prime Minister John Howard, agreed “in principle” last year to sell uranium to India. On the usual “strict conditions,” of course.

Mr Smith has now announced that the Rudd Labor government will reverse that decision.

That’s not a particularly good look, especially with Australia’s Trade Minister, Simon Crean, now in India, on a trade boosting mission. Especially after that recent unpleasantness, after an earlier cricket match.
The financial wire service, Bloombergs, ran the story last night with a suitable touch of disappointment, emphasisng that word “reversing.”

Once again, not a good look for Australia, which has the world’s biggest known uranium reserves.

Winning elections is wonderful. But it does present problems.

January 15, 2008

The West – going West?

Filed under: economics — Alan Thornhill @ 6:45 am

West Australians have been celebrating the State’s boom in great style, but the question now is can it last?

The spectre of a US recession is making that question urgent.

WA doesn’t sell much directly to the United States, but its big customers, Japan and China certainly do.

And there’s the rub.

There’s been hopeful talk suggesting that growing domestic demand, in both of these countries might fill any shortfalls they might face in US orders.

But that’s just what it is, at this stage. Talk. No more than that.

The West Australian Chamber of Commerce and Industry reports that spending on hospitality and services in the State rose by a massive 6.7 per cent in November.

To put it another way, West Australians spent an extra $18.5 million on those items that month.

That is, certainly, starting the party season in great style.

And why not? West Australians have a lot to celebrate, right now.

At 3.4 per cent, their unemployment rate, is significantly below the national average of 4.5 per cent.

The State’s total employment rose by 3.1 per cent over the year.

As other Australians decided to seek their fortunes by going West, in the June quarter of last year, the State chalked up a net gain of 1,355 from net interstate migration.

But that was swamped by the 5.642 migrants who arrived from other countries in the same time.

That was beginning to look like those of the old goldrush days, when the Golden Mile, between Kalgoorlie and Boulder, shone like a beacon to the world’s young and ambitious.

Over the same brief period, the State’s net gain, from overseas migration, was no less than 5,642.

Once again, too, they came for the money.

Average weekly earnings in the State rose by 5.7 per cent in the 12 months to the end of August and that, once again, was significantly above the national average of 4.9 per cent.

Established house prices rose by a relatively modest 2.8 per cent in Perth, over the 12 months year. Who, though, would be surprised at that after they had risen by a almost 50 per cent, in the previous 12 months.

The State’s exports, particularly in times of drought, are overwhelmingly mineral based. And, despite the boom, it’s economy is still relatively thin.

All this means that any significant cut in still booming iron ore orders, from Japan and China, could bring the State’s boom to a very sharp halt.

January 7, 2008

Financial advice for Aborigines extended

Filed under: Uncategorized — Alan Thornhill @ 10:14 am

The new Labor government is to extend a service which provides basic financial help and  advice  to  Aboriginal  communities.

The service, known as income management, will be available from today in the Alice Springs town camps or Ingerreke and Amoonguna.

The Minister for Families, Housing, Community Services and  Indigenous Affairs, Jennny Macklin, who made the announcement, said the program had already been well received in other  Aboriginal Communities.

“People understand why it is important to have half of their income support payments protected, so that money is used on essential items such as food, rent, medicines and utilities,” she said.

Ms Macklin said Centrelink had already stationed officers in the Alice Springs communities and camps.

They had conducted individual interviews with community members.

The aim was to help their clients understand what income management means and where their money goes.

“Income management is extremely important in helping families manage their government payments to cover essential items and, importantly, also provide for the wellbeing of their children,” Ms Macklin said.

The Labor government picked up the initiative from the previous Howard government, which was worried about the habit of some Aboriginal men, who pooled their social security payments to buy alcohol, instead of meeting their families needs.