Tax reform:Have your say

The Federal government has just released a major paper on tax reform , ahead of a forum it plans to hold on October 4 and 5.

The Treasurer, Wayne Swan, said the paper is meant to inform public debate about the government’s priorities and directions, before the forum.

“The government has put in place a series of major reforms to build a stronger, fairer and simpler tax system,” Mr Swan said.

He said the forum would help the government to build on that.

Mr Swan is inviting the public to comment on the paper.

The highly detailed paper precedes a tax forum the government is planning.

It says:”The world is changing.

“For our economy to remain strong for the years ahead, we need our tax system to change with it.”

The government has placed the paper on the internet.

It aims, particularly, to improve taxation of small business and major resource projects.

The government is also planning to gradually raise the superannuation guarantee levy to 12 per cent.

Its announcement says, in part:”Following extensive consultation with the industry the Government has announced the new taxation framework to apply from 1 July 2012 for the resources industry. Under the framework:
• a new Minerals Resource Rent Tax (MRRT) will apply to mining of iron ore and coal in Australia; and
• The current Petroleum Resource Rent Tax (PRRT) will be extended to all onshore and offshore oil and has projects, including North West Shelf. This will put onshore and offshore oil and gas projects on the same footing.

A new Policy Transition Group, led by Resources Minister Martin Ferguson AM and Mr Don Argus AC, will consult with stakeholders on the design and implementation of the revised resource tax arrangements for Australia’s future.

On small business, it says:”Complexity imposes a significant cost on Australia’s 2.4 million small businesses.

Our small business package provides practical benefits to help reduce complexity and improve cash flow.
The Government will introduce an instant write-off for small business assets costing up to $5,000.

Many small business purchases will be able to be written off in the year of purchase. This will also help cash flow.

Most other assets will be able to be depreciated in a single pool, at a rate of 30 per cent, cutting down on complex tax calculations.

Small business companies will also benefit from an earlier start to the cut in the company tax rate.

And on individuals:”Tax time can be complicated and, as a result, seven in ten Australians pay a professional to do their tax return.

From 2012-13, the Government will provide taxpayers with the choice of a $500 standard deduction to replace deductions for their work-related expenses and the cost of managing their tax affairs.

This will increase to $1000 from 2013-14, potentially benefiting 6.4 million Australians.

We will also improve incentives for Australians to save for their future.

From 1 July 2013, Australians will be entitled to a tax discount equal to 50 per cent on up to $1000 of interest income, including interest earned on deposits, bonds, debentures and annuity products.

Rates:What happens Tuesday?

So what happens next Tuesday, when the Reserve Bank board meets again to review rates?

With inflation clearly rising, another rate rise will certainly be considered.

But a close look at the latest inflation figures suggests that a rise, that soon, is unlikely.

Australia is still suffering from the after effects of both Cyclone Yasi and the floods which wiped out the nations banana crops, earlier this year.

Soaring banana – and other fruit – prices were the biggest factor behind the 0.9 per cent rise in Australia’s inflation rate, in the June quarter of this year.

Indeed, the Statistician reports that the price of bananas soared by 470 points, in the first six months of this year.

That contributed heavily to the 3.6 per cent rise in Australia’s headline inflation rate, over the 12 months to the end of June.

But although the underlying inflation rate has also risen, from an annual rate of 2.3 per cent at the end of March, to 2.7 per cent at the end of June, it is still within the bank’s 2-3 per cent target rate, which is traditionally assessed over the full course of a business cycle.

So what lies ahead is important, too.

The Reserve Bank board prides itself on ignoring one off factors, like the impact of floods or cyclones, when it does its sums.

That’s why it looks at Australia’s underlying inflation rate, not the raw Consumer Price Index figure.

And the impact of this year’s floods and Cyclone are likely to recede, as time moves on, over the months ahead.

The Reserve Bank board has other important factors to assess, right now.

As the bank’s Governor, Glenn Stevens, admitted earlier this week, Australians are saving, rather than shopping, right now.

He attributed that, in large measure, to worries over debt problem in Europe and America, in the wake of the global economic crisis.

Business people are worried, too.

Builders, for example, admit that Australia’s inflation has “ticked higher” – but insist that doesn’t justify a rate rise.

Australia’s manufacturers insist, too, that the strong $A – which hit 110.5 US cents this afternoon – is knocking them around, by making them less competitive.

Another rate rise, next week, would certainly damage the already weak confidence of Australia’s shoppers, builders and factory owners.

But it will still be the Reserve Bank’s call.

And nothing worries the bank’s board more than the prospect of accelerating inflation.

Glenn Stevens’ fear

Glenn Stevens wakes at night, sweating over the spectre of the resource push inflation that he fears so much.

That’s because he knows there’s a vast amount of money, lurking in the resource investment pipeline.

And, at first glance, the latest Consumer Price Index figures seem to suggest that the Reserve Bank Governor might be right.

After all, Perth, the capital of the resource rich State of Western Australia, had the biggest CPI jump of any capital, in the June quarter.

At 1.3 per cent, it was well ahead of the rise of the 0.9 per cent chalked up by the nation as a whole.

A closer look at the detail, though, suggests that Mr Stevens should relax.

West Australians aren’t bidding up the price of picks and shovels, so that they can rush out and join their State’s iron ore and gas bonanzas.

The Bureau reports that the most important price rises they faced, in the June quarter, were those they paid for their fruit.

Besides, Perth prices rose by just 3 per cent, in the 12 months to the end of June.

That’s well below the national average of 3.6 per cent.

Canberra had the second highest quarterly CPI rise, of 1.1 per cent, in the June quarter.

In other Australian capitals prices rose by between 0.7 and 1 per cent in the same time.

Adelaide now has Australia’s highest annual inflation rate of 3.9 per cent.

Sydney’s inflation rate is almost as high at 3.8 per cent, while Melbourne’s is 3.6 per cent, Hobart’s 3.4 per cent, Darwin’s 3.1 per cent and Canberra 3.7 per cent.

Bananas now a luxury

The once humble banana has moved up in the world, pricewise.

The Australian Bureau of Statistics reports that the price of the nation’s favourite fruit leapt by 138 per cent in the three months to the end of June.

Yet even that high figure reflects an easing trend.

The Bureau reports that banana prices almost went into orbit, in the first six months of this year, rocketing by no less than 470 per cent in that time.

But don’t blame your greengrocer.

It’s Cyclone Yasi’s fault.

That cyclone virtually wiped out Australia’s banana crop.

Happily, though, vegetable prices fell by 10.3 per cent, in the three months to the end of June.

Milk wars saw the price of that commodity fall by 4.6 per cent in the same time.

And the bureau reports that even electricity bills eased, by 1.5 per cent.

Inflation jumps, but rates may hold

Australia’s headline inflation rate has hit 3.6 per cent – but an early rate rise still seems unlikely.

That’s partly because the underlying inflation rate – which the Reserve Bank studies when adjusting rates – is still within the bank’s 2-3 per cent target range.

But even that underlying rate, is accelerating.

It hit 2.7 per cent at the end of the June quarter, compared with 2.3 per cent three months earlier.

The underlying rate, which excludes one off events like the after effects of floods and cyclones, is the one the Reserve Bank board studies when it reviews rates.

Even so, the latest figures, published by the Australian Bureau of Statistics, show that inflation is accelerating.

Both the Consumer Price index and the nation’s underlying inflation rate rose by 0.9 per cent in the June quarter.

Those rises were higher than the 0.7 per cent increase, which had been widely expected.

Once again, though, detailed figures produced by the Bureau show that both the floods earlier this year – and Cyclone Yasi – are still having a big impact on the prices Australian families face each week.

Fruit prices, for example, leapt by a massive 26.9 per cent in the June quarter, while petrol prices rose by 4 per cent, hospital and doctors’ bills jumped 3.4 per cent and rents rose 1.1. per cent.

Perhaps oddly, though, vegetable prices fell by 10.3 per cent, audio visual and computer equipment prices fell 6.3 per cent and electricity bills eased by 1.5 per cent.

The Reserve Bank Governor, Glenn Stevens, noted yesterday that Australian families are still shopping cautiously – and saving more – in the wake of the global financial crisis and financial instability in both Europe and the United States.

Default looms as US debt crisis drags on

President Barack Obama is defying Republicans, over the US debt crisis.

He says their plan to avoid default would place a “greater burden” on America’s working families, without asking the nation’s wealthiest people to contribute anything at all.

With just a week left, in which the US government can pay its bills, Mr Obama said “defaulting on our obligations is a reckless and irresponsible outcome to this debate.”

The standoff, which follows several breakdowns in talks on the crisis, is worrying critics throughout the world.

It centres on Mr Obama’s need to raise the US debt ceiling, which now stands at $US14.3 trillion.

Similar debt ceilings have been raised, several times, as a matter of course, in the past.

And Nobel Prize winning economist Paul Krugman insists that another rise now would still be well within US capacity.

He argues that job creation, not spending cuts, should be the first priority of the US government, right now.

The cuts, demanded by the Republicans, would slash spending on health care, welfare programs and government employment.

In a nationally televised address, Mr Obama said:”Republican House members have essentially said the only way they will vote to prevent America’s first ever default is if the rest of us agree to their deep, spending cuts only approach.”

That approach, he added “doesn’t ask the wealthiest Americans or the biggest corporations to contribute anything at all.

“Most Americans, regardless of political party, don’t understand how we can ask a senior citizen to pay more for her Medicare before we ask corporate jet owners and oil companies to give up tax breaks that other companies don’t get,” Mr Obama said.

Australia’s Reserve Bank Governor, Glenn Stevens, admitted in a speech he delivered in Sydney, that he is worried about potential instability in both Europe and America.

“The global outlook does seem more clouded due to the events in Europe and the United States,” he said.

A senior Republican, John Boehner, who has been leading the other side of the debate, said tax increases would cost jobs.

Mr Boehner said he had operated a small business and knew how that worked.

Meanwhile, a Democrat, Senator Harry Reid, said the Republicans were essentially trying to embarrass Mr Obama, ahead of the next US presidential elections.

So far, there has been no sign of a backdown from either side, even though the stakes, in this debate, are very high.

Average family wealth? $800,000

With sharply rising incomes – and average wealth of $800,000 – Australian families might well feel that they are sitting pretty, financially.

Yet even the Reserve Bank Governor, Glenn Stevens, who used these figures in a speech, admits that we are not.

Indeed, the nation’s shopkeepers are having such a tough time that one major fashion chain is slashing its operations.

Remarkably, Mr Stevens’ speech contained no hint of an early rise in interest rates.

Indeed, its tone suggested that Mr Stevens, himself, has put that idea on hold.

Regular readers will recall that Mr Stevens was warning, quite bluntly, earlier this year that a rate rise might well be close.

Why, though, are Australians so glum when our international trade is so good, that Mr Stevens, himself, harks back to the gold rushes of the 1850s, as he reaches for a comparison.

“….Australia is in the midst of a once-in-a-century event in our terms of trade,” he said.

“I won’t recite the facts yet again.

“Suffice to say that this is, at least potentially, the biggest gift the global economy has handed Australia since the gold rush of the 1850s.”

Mr Stevens admitted that the global financial crisis and fear of rising interest rates have unsettled Australian shoppers.

He also took a non-too-subtle swipe at Australia’s politicians.

“Increasingly bitter political debates over various issues are said by some to have played a role as well,” Mr Stevens said.

He acknowledged, too, that continuing financial uncertainties in America and Europe are worrying Australians.

“ The global outlook does seem more clouded due to the events in Europe and the United States,” Mr Stevens said.

So there had been a very sudden rise in the amount of money Australians are saving.

Mr Stevens said the rising incomes, that Australians are now enjoying, are flowing from improved trade in resources.

He noted, too, that the presently high levels of family wealth in Australia had followed several years of rising house prices.

Our new caution noted

We are less adventurous with money – and debt – than we used to be.

Malcolm Edey, an Assistant Governor of the Reserve Bank says Australians are now more conservative financially, both in business and in managing their family finances.

Speaking to a property seminar in Darwin, he said there has been “a shift towards greater financial conservatism by households and businesses.

“Household saving rates have increased, and there has been widespread de-leveraging by businesses, ” he said.

Mr Edey said the global financial crisis is causing Australians to be more aware of the dangers of excessive debt.

So the nation would probably not be seeing a return to the days of consistent double digit growth in lending that had been common before the crisis.

” That growth was driven in part by factors that can’t be repeated – the deregulation of the financial system in the 1980s and the transition to low inflation in the 1990s,” Mr Edey said.

“There was also a world-wide trend towards greater appetite for risk and leverage,” he added.

Mr Edey said investors, too, are more cautious than they were “both at home and abroad.”

These developments would be good for Australia’s financial stability, he said.

But the nation’s banks would have to get used to slower rates of growth than they had enjoyed in the past.