Investors get new protection

Australia’s financial services and advice industries have always had their shares of fraudsters and carpetbaggers.

Just ask those who invested in Storm, Trio or Westpoint.

Barely explained, but recurrent fees, on financial products have been a persistent problem, too.

But the Federal government has made a strong start on tackling these abuses.

An announcement by the Financial Services and Superannuation Minister Bill Shorten, sets out how this will be done.

Private and union superannuation funds both welcomed his statement, but the private funds reminded the government that there is still more to be done.

So what is Mr Shorten saying?

Firstly, that investors who receive financial advice will have more protection, as a result of his announcement which provides “further details of the Future of Financial Advice reforms.”

Mr Shorten spelt out “three key elements of the reforms.”

These were: -

* A requirement for financial advisers to get clients to ‘opt-in’ every two years if they wish to continue to receive ongoing advice

* Banning all commissions on risk insurance inside superannuation and

* A broad ban on volume-based payments.

He said these reforms would help restore trust in the system, after recent collapses.

“It will also provide more certainty to the financial advice profession, which has been closely engaged in the consultation process,” Mr Shorten said.

“The vast majority of financial advisers are dedicated professionals who give good advice to the best of their ability.

“But that doesn’t change the fact that many consumers lack trust in the profession and there is a perception that advice is under-regulated and open to abuse.”

Other measures, also announced, include:-

* A decision to ban all trailing and up-front commissions and like payments from 1 July 2013.

* A broad ban on volume-based payments, targeted at removing payments that have similar conflicts to product provider-set remuneration, such as commissions. This includes those payments based on volume or sales targets from platform providers to financial advisory dealer groups and

* A ban on any ‘soft-dollar’ benefit that is $300 or more (per benefit) from 1 July 2012

Mr Shorten said this ban would not inlude professional development or IT administration services, if set criteria were met.

The Association of Superannuation Funds of Australia, ASFA, described these measures as “a key step in the reform process” but warned that the government “still had a way to go” in this area.

The Industry Super Network, which represents union based funds, said the measures just announced “retained the central integrity and intent” of a reform package the government  originally announced in April last year.

And Unions New South Wales described the government’s announcement as “a win for workers.”

How you were hit

Wild weather is already hitting Australian budgets very hard – and there may be even more damage to come, through an early rise in interest rates.

The Bureau of Statistics reports that headline inflation leapt by 1.6 per cent in the first three months of this year as flood and cyclone damaged pushed fruit and vegetable prices to new heights.  That was the biggest quarterly rise in almost 25 years.

This left Australia with a 3.3 per cent Consumer Price Index rise for the 12 months to the end of March.

Surprisingly, though, Australia’s underlying inflation rate remained steady, at an annual rate of 2.2 per cent.

That’s the figure the Reserve Bank board studies when it reviews rates.

However, as Access Economics notes, Australia’s underlying inflation rate has now “bottomed.”  So its next movement  will be upwards.

The Reserve Bank tries to look through short term price movements, like those due to floods, when it sets its marker interest rates.

However the damage done by Cyclone Yasi – and the floods in Queensland, Victoria and Western Australia – might well have a lasting impact on Australia’s inflation rates, over the coming year. That could force the bank to act.

The Bureau also noted that fuel prices rose by 8.8 per cent in the March quarter- and further rises seem likely, as political troubles in the oil rich Middle East show little, if any, sign of easing.

So there could well be another rise in interest rates before the end of the year.

That would hit young home owners – and Australia’s building industry – very hard.

Builders have already complained that the rate rises, which occurred last November, have already put a “wrecking ball” through their industry.

The bureau reported that fruit prices leapt by 14.5 per cent in the March quarter, while vegetable prices jumped 16 per cent.

The Reserve Bank is not expected to raise Australia’s interest rates again, when it next meets to review them on May 3.

But it could do so later this year.

The Federal Treasurer, Wayne Swan said the government  “understands higher prices are an unwelcome hit to family budgets.”

He admitted that this is particularly so when  many families are still picking up the pieces from natural disasters that have ravaged communities across the country.

“The Government will continue its task of building the economy’s capacity so we can have sustainable growth with low inflation into the future,” Mr Swan said.

“This includes cutting the company tax rate, making vital investments in capacity-building infrastructure, and major investments in training and education,” he added.

The opposition’s Treasury spokesman, Joe Hockey, said the government is clearly “out of touch” with the damage higher prices are causing Australian families.

He said some, but not all of the March quarter price rises, were due to Cyclone Yasi and extensive flooding, particularly in Queensland.

But higher electricity prices are also pushing up Australia’s inflation, Mr Hockey said.

Floods push up prices, but…

Australia’s inflation rate leapt by 1.6 per cent in the first three months of this year, the biggest quarterly rise seen for  almost 25 years.

Fruit and vegetable price rises rose sharply -  and banana prices doubled – as floods hit crops in Queensland and Victoria.

Fuel prices also soared in the quarter.

These developments pushed Australia’s headline inflation rate up from an annual rate of 2.7 per cent, at the end of last year,  to 3.3 per cent.

Oddly, though, the nation’s underlying inflation rate – the one the Reserve Bank studies when it sets interest rates – remained flat at 2.2 per cent.

The bank  looks through “one off factors” – like the first impact of floods – and political instability in oil producing nations – when it reviews rates.

Even so, the CPI figures, produced by the Australian Bureau of Statistics, are disturbing.

The quarterly rise in the CPI, for example, was the biggest since the June quarter of 1986.

And the once  humble banana now has  almost almost super-star status.

Higher prices at the markets were hard to escape, too, as fruit prices  generally leapt by 14.5 per cent in the quarter.

There were other big hits to family budgets, too, in that time.

The price of vegetables, for example, jumped by 16 per cent, while deposit and loan costs rose 4.6 per cent and the price of pharmaceuticals rose by 12.5 per cent.

Fuel prices, too, rose by 8.8 per cent in the March quarter.

Fortunately, there were some offsets.

The price of furniture, computers and cars all fell.

So did the price of milk.

Australians also found overseas travel cheaper, as the already strong Australian dollar continued to rise against the $US dollar and other major currencies.

Higher rates likely

Prepare for higher interest rates, over the year ahead.

The private economic forecaster, Access Economics, warns that Australia’s underlying inflation has now bottomed “and will now head back up.”

And it adds:”Although it’ll be a close run thing, we expect that the Reserve Bank will have to push up rates over the next year.”

But they have good news, too, noting that “talk of a double dip in the rich world has all but disappeared.”

These economists say, too, that the Federal government might well find it easier, than it has expected, to get its budget back into surplus within three years.

But they accept that  next month’s budget has to be tough.

Wayne Swan and Julia Gillard have been declaring,  quite frankly,  that it will be.

But the Access economists disagree with the Treasurer, on one vital issue.

Mr Swan has been arguing that the Federal government’s revenues, from the mining sector will be reduced by the sector’s emerging boom.

He notes that Australia’s mining  companies are investing huge amounts of money, to fund new and bigger projects.

That means they can claim bigger tax deductions.

The Access economists are much more positive, saying high prices, for Australia’s mine and farm produce, will boost Federal revenues, for years to come.

“The biggest winner from the latest commodity price surge will be the Federal budget,”  they say.

So, Access says, the government should find it that much easier to meet its stated target of getting the budget back into surplus by 2012-13.

But they agree with Mr Swan on one critical point.

“…the coming budget needs to be tough if the government wants to keep its promise of restraining spending, as it  should,” they say.

These economists note, though, that prices for Australia’s exports have already surged past their 2008 peaks.

They also predict that these prices will remain high for some time yet

So why has the pace of  Australia’s recovery stalled lately?

These economists say this pause reflects the disadvantages which come with a two speed economy.

“A resource boom brings with it higher interest and exchange rates,” the economists say.

And that, apparently, is not over yet.

How you blew the budget

Your new habits, of spending less and saving more, will be partly to blame for the austere -and unpopular – budget that Wayne Swan will deliver next month.

Even the Treasurer admits, though, that your new caution is understandable, in the wake of the global financial crisis.

He also concedes that it will make Australia “more resilient” in future.

But it  cuts Federal revenue, because there is less GST money flowing into the  government’s vaults.

Mr Swan’s main message, though, in a speech he gave to the Media Club in Brisbane is that the  the mining boom Mark II, which is now emerging, won’t produce the rivers of gold that came with the first one.

He said that’s because mining is becoming more capital intensive all the time.

That means big tax deductions for the miners and less money for the Federal government.

Mr Swan said, repeatedly, that Australia now has a “patchwork economy.”

“Despite strong job creation and incomes growth, consumers are now saving much more of their income and borrowing a lot less,’” Mr Swan said.

“This is not surprising given what the global economy has come through, with the memory of the GFC and stock market falls still in the minds of many households.” he added.

“This is a dramatic change relative to (the mining boom) Mark I, where strong consumption growth was accompanied by negative household savings rates, and rising indebtedness fuelled by rapidly rising asset prices,” he said.

“Of course, it’s clear that some of this growth was unsustainable, which explains why we’ve seen such a significant shift in behaviour under Mark II,” Mr Swan added.

The Treasurer  declared, once again, that  the government is still firm in its resolve to have the Federal budget back into surplus, in the 2012-13 financial year.

He said emerging credibility issues, associated with high debt levels in the United States, showed very clearly just how important national credibility is, in such matters.

Rate pressures rise

The Reserve Bank is starting to worry about inflation again, both at home and abroad, raising the spectre of a fresh rise in interests rates.

The Bank’s Governor, Glenn Stevens, says  several overseas countries are already experiencing significant price rises.

In the minutes of a Board meeting, held earlier this month, Mr Stevens said:”The broader flow of information on the global economy continued to be consistent with relatively strong growth and a build-up in inflationary pressures.”

Those minutes have just been released.

Mr Stevens noted that some commodity prices had eased amid the uncertainty that followed the Japanese earthquakes.

But this had been reversed after the situation became clearer.

“Most commodity prices (are now) at high levels, reflecting strong demand from emerging economies,” Mr Stevens said.

“The increase in commodity prices over the past year (is) flowing into higher rates of inflation in many countries.”

Mr Stevens also said Australia would face significant challenges, on the price front.

Board members  had  noted that the expected high rate of investment” in Australia’s gas industries would present the economy with “a major challenge.”

That is, whether it could occur without undue pressure on costs.”

The Bank had signalled, previously, that it was likely to keep Australia’s interest rates on hold until the end of 2011.

However, the minutes, just published, raise fresh doubts about that.

Builders, particularly, will be worried, about the increased risk of another early rate rise.

They have been complaining, for months, that the rate rises which occurred last November have put a “wrecking ball” through their industry.

However the Reserve Bank also noted that Australians are showing significant restraint in their spending.

That will tend to dampen rate rise pressures.

So will the higher savings rates, now evident in Australia, as consumers remain cautious, in the wake of the global financial crisis.

A disappearing dream

Have you been  dreaming of building a house, outside the big cities, for your retirement?

Many do.

If you are one of them, though, you should be watching land prices, very closely.

If you don’t, that dream could well pass out of reach.

A new report shows the mid level, or median price, of a building lot on Queensland’s Sunshine Coast has now reached $240,000.

That is even higher that the price of a block of land on the Gold Coast, which at $234,000 is the second highest anywhere in Australia.

After the Sunshine Coast, of course.

So where are the cheap blocks?

The lowest prices, according to the report, published by the Housing Industry Association, are to be found in Southern Tasmania.

The median price, for a building block there, is just $62,000.

The region’s climate, though, probably does not have the immediate appeal of a Queensland beach.

The report reveals some strange quirks in land markets throughout Australia.

For example, the volume of land sales fell, in the final three months of last year, to its lowest level in a decade.

Land sales, in that time, were 40 per cent below those seen in the last three months of 2009.

Prices, though, rose sharply.

The report said, on weighted mid level measures, the price of building blocks throughout Australia, rose by 4.1 per cent, in the final three months of last year, reaching a level 5.9 per cent above those seen 12 months earlier.

So what is going on?

HIA economist, Matthew King, blamed a mix of planning and zoning delays, high regulatory costs, restrictive land release policies and high taxes.

The credit squeeze hadn’t helped either, Mr King said.

Nor had the interest rate rises, that arrived last November.

He said these are all bad signs for Australia’s building industry.

The fall in the number of land sales, in particular, suggested ongoing weakness in Australia’s housing construction sector, which was already “very soft,” Mr King said.

Budget betting

The Federal government is going to extra-ordinary lengths to soften us up, as it prepares next month’s Federal budget.

Its campaign hasn’t peaked yet.

Wayne Swan is planning to step it up again on Wednesday, when he is planning a “really important” speech, to the Queensland Media Club

The Treasurer is expected to argue,  broadly,  that the  present mining boom will squeeze Federal spending much harder than earlier booms.

Julia Gillard launched the campaign, earlier this month.

She warned that, warning that Federal spending would have to be cut as Australia recovers from the global financial crisis.

If  it wasn’t  Australia could face  inflation and higher interest rates.

The Treasurer, Wayne Swan, is  now echoing the Prime Minister’s words, as he, too presses the message that this will be a tough budget.

Tanya Plibersek, too, has chimed in.

She issued a statement declaring that 521 welfare cheats, who have been betting heavily in their local casinos and pokie palaces, have been presented with demands for repayment of benefits, worth more than $9 million.

The timing of the Human Services Minister’s statement, late on Friday night, was no accident.

It, too,  was part of the Gillard government’s pre-budget “jawboning.”

Some softening up is common, as a Federal budget approaches.

This time, though,  it sounds more like the tough talk of a hard hearted Conservative  government,  than a Labor  administration, speaking to the voters.

So what is going on?

One of two things.

Either Wayne Swan really will bring down a horror budget next month.

Or his budget won’t be quite as bad as the government is leading us to expect.

High rollers are betting on the first option.

That’s where the smart money is going.

For some months now, the government has been declaring its firm intention to bring the Federal budget back into balance within three years.

Recent catastrophes won’t help.

As Mr Swan says “… events in Japan, on top of the summer’s floods and cyclone at home, have had a substantial impact on our own economy and government revenues in the short term.

“Growth will take a hit this year with these events knocking up to ¾ of a percentage point off GDP in 2010-11.

“This will have an impact on government revenues and hit the budget bottom line in the short term,” Mr Swan warned.

Significantly, he also quoted Julia Gillard:” As the PM said in a speech to the Sydney Institute on Wednesday, ‘if government doesn’t step back when the private sector employs more people, spends more money and builds more projects, we will be chasing the same scarce resources, driving up prices’.

“That’s why we need to restrain spending and build a surplus in the years ahead – so we won’t be adding to those price pressures,” Mr Swan said.

All the signs are there.

The government means what it is saying, this time.