Tuesday 26th February 2008 - 7:54 am

A horror budget

by Alan Thornhill

Australians can expect a horror budget in May.

That’s because the new Rudd Labor government has a doubly difficult task before it.

It must reduce the high inflationary pressures, which now threaten the economy.

And it has to make room for the staged tax cuts that it promised before the election last November.

The first instalment of those tax cuts, which will ultimately cost $31 billion, is due to be paid from July 1, this year.

The government will probably get a little help from the present downturn in the US economy.

That should help reduce those inflationary pressures, by slowing the Australian economy, too.

The interest rate rises, that the Reserve Bank has already announced, and those it is likely to announce, in the months ahead, are starting to bite, too.

The government will also get some extra tax, from Australia’s iron ore and coal companies, which have just extracted big price rises from their customers.

The trouble with all this, though, is that the timing is far from predictable.

It is all too possible that those nasty inflationary pressures will cause real damage, that will be hard to reverse, before the economy slows.

So the government’s spending cuts will be deep. Especially as Mr Rudd is ruling out slashing middle class welfare. He has declared, for example, that the private health fund rebate will not be touched.

The government says there are two reasons why the tax cuts should be paid, as promised. Firstly, they will offset the pain working families are now experiencing, as a result of those rate rises.  And secondly,  they will counter inflation by encouraging people to re-enter the workforce.  But these are just pretexts.

What the government is actually concerned about here is its own survival. It knows that the public would never forgive it, if it didn’t keep its promise to cut taxes. The results of Paul Keating’s politically disastrous attempt to defer part of his “L.A.W. law” tax cuts, by paying the second tranche into superannuation accounts, is still well remembered in Canberra.

Besides, the government is also facing the grim prospect of increased spending in particular areas, such as hospitals.

There is room, of course, for savings, in this area, too. Building good hospitals is generally cheaper, in the long run, than building bad ones, that don’t work, as the Iemma government has done, in Bathurst.

In the end, though, those tax cuts will have to be paid for somehow.

And even the people in Canberra, who reliably vote Labor in Federal elections, will suffer.

Urgent roadworks, in the National capital, are being deferred, as part of the Federal government’s economy campaign. And, as a result, the bush capital will soon start to see some real traffic jams.

Don’t laugh. You will be next. No matter where you live in Australia.

You may have to wait for the budget, itself, in May, to find out how you will be hit. But don’t think you will escape the Treasurer’s axe. You won’t.

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Monday 25th February 2008 - 12:34 pm

Australia’s underemployed:a big labour pool

by Alan Thornhill

More than half a million Australians would like to work longer each week.

The Statistician reported today that the nation has 571,900 part time workers who would “prefer more hours.”

That’s a significant figure, for a country battling high inflationary pressures.

Especially as those pressures could be expected to ease, if more of those workers were able to get the extra work that they want.

We mustn’t be simplistic about this. There are, after all, many good reasons why these people are not putting in those extra hours.

These include child minding responsibilities, inadequate training and language difficulties.

Australia will always need more skilled migrants, to fill gaps in the nation’s workforce.

But that does not mean that it can afford to overlook people like the underemployed, either.

Training a semi-skilled person, to do a skilled job, is a win-win situation for everyone.

The person involved gets a better job. The boss gets a better employee. The nation gets more tax, from that person’s higher income.

What all this does mean, though, is that breaking down the present barriers to better to things like better training can be a great investment, for everyone.

Monday 25th February 2008 - 6:54 am

Alternative energy:what’s new?

by Alan Thornhill

As Ross Garnaut’s report last week shows, even the economists are now convinced that we must act quickly to avoid environmental disaster.

But what does that mean? What must we do?

The first step, as always, is to equip ourselves with the knowledge we will need, to meet this challenge.

So a paper the Australian Bureau of Statistics is planning to release tomorrow should be particularly interesting.

We all know that the world can’t continue to rely on dirty, coal fired power stations for ever. Yet coal exports are one of Australia’s biggest exports.

And coal still provides most of Australia’s electricity.

But what are the alternatives?

That, hopefully, is what the Statistician will address tomorrow, in a very timely paper the bureau is planning to release then.

It’s a new publication.

The research paper will be called “Developing an Alternative View of Electricity and Gas Supply Activity in Australia.”

In less urgent times, it probably wouldn’t get much attention.

But, with environmental disaster looming, it should be a big mover.

You will be able to get your copy, free, by going to www.abs.gov.au after 11.30 am tomorrow (Tuesday). The catalogue number you will need is 4647.0.55.001

The final full stop, which would otherwise have been at the end of the last sentence, has been deliberately omitted, to avoid confusion.

Friday 22nd February 2008 - 12:54 pm

Retirement planning:Australian style

by Alan Thornhill

Australians need to plan for early retirement.

Why? Because the workforce is not as reliable as it once was.

And the old target of retiring at 65 is now a shibboleth.

Indeed, the Australian Bureau of Statistics reported today that almost one Australian in four, between the ages of 55 and 59 has already retired.

That’s 23 per cent, for those who insist on precise figures.

A mere 6 per cen t retired in their mid to late 40s.

That, too, is something of a change.

Back in the early 50s, thousands of Australian farmers were retiring before their 45th birthdays, because they had made so much money that they no longer had any financial need to work.

No wonder older people still remember those long gone days as Australia’s golden years.

They were, indeed, just that, at least for some.

The bureau also reports that 75 per cent of Australians who have already celebrated their 65th birthdays have already retired.

That number rises to 95 per cent, for those aged 70 or more.

Liike to know more?

Go to www.abs.gov.au and follow the prompts.

Friday 22nd February 2008 - 8:04 am

The enviroment – balancing the costs of investing, and not investing

by Alan Thornhill

The five year drought, that Australia has just suffered, has given everyone a clear idea of the damage that global warming can do.

Cattle numbers are down. The national sheep flock is just a remnant of what it once was. And farmers have seen their once bountiful wheat fields dusty, dry and barren.

All of this makes a new report, by economist Ross Garnaut, very timely.

Essentially, he is urging the government to take a leading role in combating climate change, saying Australia might well become the most damaged country in the Western world, if it does’nt.

And, after such a severe drought, even city people know very well just what is at stake.

Professor Garnaut says Australia needs to go beyond its present aim of a 60 per cent cut in greenhouse gas emissions by 2050.

He is advocating a 90 per cent cut.

At this stage, the new Rudd Labor government is not entirely convinced.

But Professor Garnaut’s report is compelling.

So, too, is Australia’s bitter experience with the drought.

The drought has devastated Australia’s once great rural industries.

The nation was once said to ride on the sheep’s back.

These days, the mines, alone underpin Australia’s prosperity.

The losses Australia has suffered, in its agricultural sector, have been huge.

These are the kind of costs Australian governments, both Federal and State, will have to balance in future against the undoubtedly substantial costs of making the adjustments necessary, to cut our greenhouse gas emissions even more sharply.
And there were some re-assuring words, from a totally unexpected source, on that subject this morning.

That is, from Professor Garnaut, himself.

He said those costs would be “reasonable.”

Oh, come on Ross. You are an economist. You are supposed to be miserable

You can make it nastier than that, can’t you?

Friday 22nd February 2008 - 7:46 am

Oh that $1 billion of your superannuation money

by Alan Thornhill

Tougher times, like those we are facing now, do one thing well.

That is exposing mistakes made in the better times.

Possible mismatches, for example, between investments and investment objectives.

That issue arose starkly, before a Senate committee hearing in Canberra this week.

An investment manager was asked to explain why his fund had lent perhaps $1 billion or more worth of blue chip stocks to hedge funds.

The unfortunate man, Peter Carrigy-Ryan probably may well have been reminded of a tough headline, from last Saturday’s Australian newspaper, as he faced his inquisitors.

That headline – Traders plunder super – ran with a story sharply questioning the placement of blue chip stocks, purchased with superannuation funds – with hedge operations, whose possible shortcomings have been thrown into sharp relief. That, of course, has been a direct result of current volatility in world financial markets.

A Tasmanian Liberal Senator, John Watson, who is an acknowledged expert on superannuation, led the questioning.

Senator Watson said he accepted that the placement had been made for “commercial gain.”

That is, of course, what fund managers, like Mr Carrigy-Ryan, a senior executing of the Australian Reward Investment Alliance, are paid to do.

That, rather obscure, government agency, invests the money that Australia’s Federal public servants and military personnel put into their superannuation funds. It has some 325,00 members.

And fund managers, like Mr Carrigy-Ryan, could – quite properly – be condemned for not investing, when the right opportunities arose.

There would be opportunity costs for fund members, if they held back like that.

But a basic question remains.

Is it right to lend long term assets, like superannuation money,to aggressive operations, like hedge funds, that exist only to make big, short term profits? Especially when those funds operate with high degrees of risk, at times.

Mr Carrigy-Ryan resorted, at one point, to the “everyone does it” defence.

“I think you would find that most custodians in the Australian market would lend scrip for a whole range of reasons, and those reasons could include…”

Clearly not satisfied, with the drift of this reply, Senator Watson cut in with another tough question.

“Including short selling?” he asked.

“They could include that,” Mr Carrigy-Ryan replied.

“They could include a settlement delay, for whatever reason that happens in the market.

“There could be a whole range of reasons.”

Mr Carrigy-Ryan, who was clearly not comfortable, offered to get more details for Senator Watson.

But Superannuation Minister, Nick Sherry, who represented the government at the hearing, said it might not be possible to disclose them, because they could involve commercial confidence.

Senator Watson said he would, grudgingly accept that, if he had to, to get the figure, but he let everyone know that he was not happy about that.

“I would like to be sure that I am going to get a figure,” he said.

“It has been hidden under a masquerade of in confidence,” he growled.

Senator Watson is still waiting for his detailed figure.

But his criticism of the secrecy, in which this investment has been made, goes right to the heart of the matter.

If fund members had known that such investments were being made, and told of the reasons for them, they might have accepted the practice, as part of a normal commercial operation.

But sudden exposure, of what can be seen as secret practices, indulged in by people suffering from a masters of the universe syndrome, might well prove to be a different matter, altogether.  Fund members might get very angry, indeed.

Thursday 21st February 2008 - 8:31 am

Wall Street rises:after three days

by Alan Thornhill

Record oil prices weren’t enough to dampen the spirits of Wall Street traders overnight, Australian time.

After three days of losses, they found their courage again and trading closed with the Dow Jones industrial index up 90.04 points at 12,427.26.

That might be seen as particularly surprising, as news from the Fed overnight was mixed.

Once more, US authorities declared that they are prepared to cut America’s interest rates again, if that proves to be necessary.

But they also admitted that US inflation is now likely to rise faster than they had forecast last October.

Significantly, they also cut their projections of US growth this year, from the previously forecast range of 1.8-2.5 per cent.

They now expect it to be between 1.3 and 2 per cent.

The big news overnight, though, was that world oil prices hit a new record of $US101.32 a barrel, before dropping back slightly to $US100.74.

The recent surge in oil prices has been due, largely, to worries about supply from OPEC countries.

In a key speech, retiring St. Louis Fed president William Poole warned US authorities not to overlook inflation.

“The seeds of an inflation problem are sown several years in advance.

“And it is not always easy to see the seeds as they sprout,” Mr Poole said.

Australia’s monetary authorities are not nearly as poetic as that. But the Reserve Bank chief, Glenn Stevens, would heartily applaud that thought.

Thursday 21st February 2008 - 6:52 am

Wage growth:the full picture

by Alan Thornhill

The Australian Bureau of Statistics will release its latest average weekly earnings figures later today.

Although they will just be for November, the new figures should give us a more complete picture of wage growth trends in Australia, over the past year.

Labour price figures, that the Bureau published yesterday, suggest that this growth, a basic input into inflation, has, at least, been more moderate than might have been expected in a minerals boom.

They showed that, overall, labour costs rose by just 1.1 per cent in the final three months of last year and by 4.2 per cent over the year.

These figures exclude bonuses.

Once they are taken into account, though, the annual growth rises to 4.3 per cent.

So have the big boys in the boardrooms of the nation been quietly giving themselves fantastic bonuses?

Perhaps.  But Craig James, of Comsec, sees a more prosaic explanation.

He says good workers are hard to find and even harder to keep, during economic booms.

So a boss who ensures that the good people he has are adequately rewarded is simply pursuing good business practices.

As always, though, pay rises which are not matched by productivity increases, will eventually be illusory.

They are just swallowed up by inflation.

And that is a very real risk, right now.

This, naturally, means that any attempt to make sense of wage figures, alone, will be incomplete.

That is, at least, until productivity figures are also published.

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Alan Thornhill

Alan Thornhill is a parliamentary press gallery journalist.
Private Briefing is updated daily with Australian personal finance news, analysis, and commentary.

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