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Monday, 29 April 2013

Setting the scene for a horror budget

Looks like the Labor government of Australia has started the annual 'softening up' of the electorate in preparation for the nasties that will have be included in this year's budget in order to prevent the forecast deficit growing to party-annihilating levels prior to the September federal election. Even keeping the budget deficit to low double-digit billions will probably require a lot of smoke and mirrors, in addition to some direct revenue raising measures, given that the PM has ruled out winding back their major spending programs such as the unaffordable schools funding and unfunded disability care programs.

In yesterday's speech the PM said "the burden of the government's fiscal woes will be shared across the Australian community", but that also "while no one group will be singled out, cuts will be framed around Labor values" - which is usually code for middle-class taxpayers having to shoulder the burden of the massive expenditure programs Labor has been busy implementing during its final year in power.

While there is lip-service paid to the concept of "ask[ing] everyone to make some contribution" the reality of the PMs view that "People come with different capacities to the task" will mean that any cuts in expenditure or increased taxes are likely to target the 'middle class'.

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Saturday, 27 April 2013

Rejecting Austerity, or just accepting the inevitable?

There have been several articles recently (such as this one) espousing the view that 'austerity' has fallen out of fashion with governments around the world, as they come to realise that deficits are not always a bad thing. However, it seems more likely that many governments have abandoned trying to balance their budgets 'over the economic cycle' since the GFC, simply because the problem is proving too overwhelmingly large to address through relatively painless amounts of belt-tightening, and savage austerity cuts are too painful to maintain long enough for the long-term positive effects to be realised.

The amount of austerity measures required to bring a national budget back into balance within a time-frame of years rather than decades is proving time and again to be simply too large for either the economy or the population to tolerate for long. Excessive austerity measures ruin public confidence, and hence have a psychological 'multiplier effect' that makes the immediate negative impact on economic activity far outweigh the potential benefits of reducing the deficit. Also, in a democracy voters tend to support the party that promises they can have their cake and eat it too - with economic fantasies such as reducing the deficit without budget cuts that negatively impact voters or increase their taxes. It was no coincidence that most of the G20 countries had a change of government within an election or two of the GFC becoming apparent - no matter which side of politics was in power and therefore supposedly 'responsible' for the crisis.

I suspect that 'austerity' budgets are proving too toxic for elected governments (or opposition parties) to continue to support, hence the move towards the view that deficits aren't really such a bad thing after all. The danger is that having gone through a cycle of weak economic 'recovery' without being able to balance the books, the next recession will produce such large deficits that government debt will become a major drag on economic activity. While the 2010 paper 'Growth in a Time of Debt' by Reinhart and Rogoff has lost much of its pro-austerity influence (due to errors in the data analysis used to reach their conclusion that their was a distinct economic 'tipping point' when debt reached 90% of GDP), there will come some point where debt is so large that governments have to resort to inflation to keep their debt levels manageable. Rather than austerity falling out of fashion, it seems that governments are simply resigning themselves to living with deficits 'as far as the eye can see', and in a strange version of the Stockholm Syndrome, are starting to view deficits as the lesser of two evils. Whether embracing deficits rather than austerity budgets proves to be good economic policy or  unsustainable political expendiency only time will tell.

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Sunday, 14 April 2013

Labor is busy rearranging the deck-chairs of the Titanic

Having failed to balance the budget since they came to power, Labor is busy finding ways to fund their promised reforms by merely shifting around existing government spending instead. Their latest idea is to take a couple of billion dollars funding out of the tertiary sector in order to meet part of the massive cost of starting to implement the Gonski reforms (it would still leave about $4b unfunded, but that will probably be left to the states to cover). While this is one Labor party policy initiative that would actually directly benefit us (since we have kids in the public primary and secondary education sectors, but I'm past the stage of paying HECS fees or claiming self-education tax deductions, so the cuts won't impact me) I still think this is a very poor way of trying to find more money to improve the Australian public education system. I can't help but think the coalitions plan for cheaper, lower spec NBN would be a better way to trim enough from the budget to fund the Gonski reforms.

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Sunday, 7 April 2013

Are Gillard and Wong misandryists?

Having won world-wide acclaim (from some people) for her parliamentary speech vilifying opposition leader Tony Abbott as a 'misogynist' for his criticisms of her (AND of being sexist, although Gillard later tried to redefine woman-hating (misogyny) as being merely another term for being sexist!), Gillard's latest exercise in 'positive' non-electioneering (since we're not in 'election mode' yet, according to Labor) while on the international stage during her China trip was to paint Abbott as an "economic simpleton" for his criticism of Labor's new superannuation tax plan. Wong followed this up with comments that Abbott "behaves as a one-man wrecking ball" for observing that the Labor government policy of taxing people's retirement account earnings above 100,000 in order to fund the government's deficit was akin to what the Cyprus government was proposing (to tax people's savings above 100,000 in order to fund the government's deficit...).

Continued references to 'that man' by Gillard suggest there may be a trace of misandryism [or possibly just hating that one particular man ;) ] creeping into Gillard's attacks on the opposition leader. After all, it is hard to objectively paint a Rhodes Scholar (Abbott) as an "economic simpleton". Julia Gillard and Ying-yen Wong on the other hand, weren't Rhodes Scholars, and their Arts and Law degrees don't make hem economic experts (at least Abbott did Economics and Law degrees). So, after repeatedly promising to wind-back government spending in order to achieve a budget surplus in 2013, and failing to do so, perhaps it is the Labor side of federal politics that has a larger quota of "economic simpletons" - especially now that a large tranche of the more talented Labor ministers have been relegated to the back bench for supporting a change of leadership.

It appears to be one of Labor's current spin strategies to paint any and all cricism of their economic policies as 'negative' and 'economically illiterate' - perhaps they think this is one way to counter the general view that Labor is a worse 'economic manager' that the Liberals. A more effective approach would be to actually deliver a budget surplus, and via cutting government waste rather than by simply finding new ways to tax in order to fund their spending habit.

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Changing the super rules will affect SMSF trustees superannuation strategies

As pointed out in this SMH article, the government's claim that the proposed 15% tax hike on self-funded retirees earnings above $100,000 pa would only impact the richest 20,000 or so retirees (those having super balances above $2m) is a bit misleading. In reality, many retirees will keep their superannuation invested in 'growth' asset classes (shares and/or property) even after their fund moves into pension mode, so it is unlikely that their funds income will be a nice, neat 5% pa every year (not all retirees immediately shift their super into fixed interest options when they stop working). For those that remain directly or indirectly invested in the stock market, some years will produce a negative return while others can produce a total return of 20% or more. So some self-funded retirees with a balance of around $500,000 might be affected by this 'tax on the rich' in a 'good' year, if their fund earnings (plus capital gains) happen to exceed $100,000. And it's not as if this tax is based on the pension payment received by the self-funded retiree, it is the tax rate paid by their super fund on fund 'earnings' above $100,000, regardless of the actual amount being distributed to the retiree as a pension payment. So in the early years of retirement, when the legislated minimum withdrawal rates are lower and self-funded retirees often take the minimum pension payment from their superfund (in order to avoid their fund running dry before they die - 'longevity risk'), the fund may be paying 15% tax on some of the 'retained' earnings, even though the pensioner is only receiving a small pension payment from the fund and is actually still working part-time to try and preserve their superannuation balance for their 'old age'. Hardly a tax that will apply only to the 'fabulously wealthy', as some Labor politicians are trying to spin this savings raid (hence Abbott's reference to the tax proposal being similar to the tax raid on savings accounts over 100,000 Euros being used by Cyprus to pay off a huge government deficit).

This tax change would therefore make tax-planning necessary well into retirement for many self-funded pensioners (at least those with a SMSF that have to pay attention to the tax implications of their investment decisions as trustee), not just the 'fabulously wealthy' - hardly the 'simple super' concept intended when pension incomes were made tax-free by the coalition. And, as is always the case with capital gains, it will sometimes be impossible to know before-hand what the most tax-effective strategy may be. While those holding investment in direct shares or property can often pick and choose when they sell an asset and trigger a capital gains tax event, and can therefore plan to realise capital gains in those financial years when they would remain below the $100,000 threshold, the situation is more difficult for those investing in managed funds. Even though you can choose when to sell units in a managed fund, some years the managed fund's annual tax statement will include realised capital gains (due to active asset reallocations by the fund manager) even when the actual cash distribution paid out to the superannuation fund is minimal.

Perhaps the unforeseen consequence of this particular tax change (if it is ever passed into legislation) will be to provide yet another incentive for self-funded retirees so withdraw and spend their retirement savings as large 'lump sums' during their early years of retirement, and after a few glorious years of world travel and partying, live off the old age pension.

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Friday, 5 April 2013

Superannuation changes need careful consideration

Some detail has been released about the planned changes to the Australian superannuation system that are likely to be introduced in the May budget. Nothing is definite until the 'fine print' comes out with the Budget, and there may be some additional tweaking for political reasons over the coming weeks, as I'm sure some 'unforeseen consequences' will emerge as superannuation accountants consider these changes. Not to mention that the changes may be rolled back, or at least modified, if the coalition wins the next federal election a few months after budget night (after brings down there own Budget before these changes are due to kick in on July 1 2014!).

Meanwhile, the broad outline of the changes don't appear to dire for us - I'll be greatly surprises to have more than $2m balance ever in my SMSF, so using the assumed 5% earnings rate during pension phase, the proposed 15% tax on earnings above the first $100Kpa during pension mode are unlikely to impact me. A breakout in inflation (say, above 10%, which happened in the 80s) might boost both my SMSF balance and earnings to the level where these changes bite, but I expect the thresholds would be occasionally indexed with inflation, so even that impact is unlikely. Given the continual fiddling with the superannuation system, legislative risk is a much greater concern.

There is also the possibility for shifting some of my contributions into DW's SMSF account, as she has a much lower balance than myself, so is never likely to be impacted by the proposed Budget changes. However, as DW currently expects me to continue to pay for all the essentials during retirement, and seems to view her SMSF as a 'windfall' lump sum upon reaching retirement age, rather than as a source of pension income, I'm loath to shift my contributions into her account. Having any say in how she spends 'her' retirement income stream (or lump sum) would be extremely contentious, so I'd rather not open that can of worms!

One positive move being suggested is to partially roll-back the changes to concessionally-taxed contributions threshold Labor introduced in order to fund pink-bats, school halls and the other emergency spending measures they introduced post-GFC. Rather than re-instate the $50K threshold for over-50 workers that they scrapped, Labor is proposing a modest boost in the threshold from $25K to $35K for workers aged over 60 (from 1 July this year), and extend that concession to over-50 workers from 2014 (although promising any changes past the Nov election is pure fantasy). At my current age (51) the $25K limit on concessionally taxed contributions (instead of $50K) *would* have had a major impact on my retirement savings plan - 'fortunately' the impact of the GFC on my investments held outside of super has meant that I can't actually *afford* to salary sacrifice enough to exceed the current $25K cap by much, even if I wanted to. So a slight increase to $35K from age 52 onwards would probably be adequate in my case - I can't see any pay-rise of more than $10Kpa coming my way! (I haven't had a pay rise above the cpi for the past decade or so!). Perhaps if we sell our investment property and can pay off our non-tax-deductible home mortgage, I can redirect some of my marginally taxed 'tax-home' pay into salary sacrifice contributions. However, while a saving of 15% tax on $10Kpa would be very nice, it is hardly going to make much difference to my retirement lifestyle. Putting this tax saving into my SMSF until I retire at 65 would, at 5% earnings rate during retirement, provide an extra $18.75 per week income during retirement. Every little bit counts, I suppose.

In reality, the prospect of further changes to how superannuation is taxed during the accumulation and pension phases, makes any detailed planning a rather futile exercise. And with Labor apparently viewing the trillion-dollar pool of private retirement savings as a huge 'honey pot' waiting to be taxed (in order to fund their wealth redistribution and social re-engineering goals), unless the coalition has such a massive land-slide victory in the Nov election that there is some prospect of a multi-decade period of conservative government (like the period from 1945 to 1980), trying to optimise retirement savings strategies based on prevailing legislation is pointless.

While I have little sympathy for the estimated 16,000 investors that $2m+ balances in the super account (after all, only the income above $100Kpa will be taxed at 15%, so the real impact will be minimal unless your super balance is considerably MORE than $2m), the change is an unfortunate example of retrospectivity, since it will apply to the earnings of funds accumulated within super prior to the introduction of this legislation.

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Wednesday, 3 April 2013

Net Worth Update: March 2013

Investment class valuations were all down slightly over the March period, presumably due to reduced investor confidence caused by the Cyprus financial upheavals. My net worth was also impacted slightly by some above-average monthly expenses - payments of the annual land tax due on our rental property, plus the costs associated with travelling to Townsville with DS1 to attend my graduation ceremony. Only our mortgage balance moved in the right direction during March, but only by a trivial amount.

The Sydney property market is looking reasonably robust, with the RBA interest rate cuts to a historic low of 3% finally starting to stimulate buyer interest, despite high property prices. So we may see a small overall gain in the value of our property portfolio over the remainder of 2013. The quarterly influx of employer superannuation contributions (SGL and salary sacrifice amounts) is due in April, which should add about $6,000 to my SMSF account balance next month. So, providing North Korea doesn't start WWIII and the stock market gets over the Cyprus jitters, April may recoup the value lost during March.

Assets$ Amount $ Diff% Diff
Stocks *$7,642-$11,961n/a
Retirement$475,917-$5,486-1.14%
Properties$883,298-$4,249-0.48%
Debts$ Amount $ Diff% Diff
Home Mortgage(s)$363,429-$122-0.03%
Net Worth$1,003,428-$21,574-2.10%
* the Stocks figure is portfolio value - margin loans

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