Category Archives: Economy

Economy

Property crash fears downgrade Australian banks

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By Joe Montero

Fears of an Australian crash in property prices have been around for quite a while.  Regardless, property prices have continued to rise.

But in the last month or so, they have stabilised and even gone down a bit in Melbourne and Sydney, the two places that are at the heart of the price bubble. Nevertheless, they are not crashing, as they have in some other countries.

The reason for this is that Australia has some unique factors that makes our housing bubble a special case.

Because of the existence of a generous negative gearing provision, housing stock has been turned into an attractive investment option, not so much for the home buyer, but for the corporate buyer seeking a higher return in a lack lustre investing environment.  Consequently, it is not those buying a home to live in that are keeping up the price. It is the corporate investor, able to do this, thanks to the generous handout of taxpayers’ money,on the basis of recompense for loss of potential rental income. This is guaranteed to keep up the price. And it has gone up by 250 percent since the 1990’s (OECD figures)

A second consequence of negative gearing is that for the corporate investor with a large stock, it is more profitable to take the property out of the rental market. This is why Australia’s two biggest cities have about 80,000 vacant residential properties each. This is replicated proportionally around the country, creating an artificial shortage that pushes rents up. This also buoys up property prices.

corporate investors also enjoy write offs on the Capital Gains Tax.

Buying residential property has become an attractive proposition in its own right and it is useful as a means to transfer funds from other business activities to minimise company and personal tax obligations.

A further factor is the nature of Australia’s financial market. It is heavily dependent on investment from overseas. This means that it reacts to changes in the global financial market and the national financial markets from which this investment comes from. The two main ones are the United States and Great Britain.

If the investment climate in these countries worsens, investment funds will turn up in Australia, which tends to run on opposite short and medium term cycles. Some of it turns up in the housing market. The greatest part of corporate investment in Australian housing property comes via companies registered in Singapore, but using funds that traditionally mostly originate from Great Britain. Some up to date research is needed on this. Nevertheless, enough is known to see the pattern.

Investment in assets that come with the guarantee of government payouts is attractive to foreign investors in an uncertain global market and an Australia that for now is relatively stable.

Without these factors coming into play, it is doubtful that property prices would have kept on rising for so long. It still will not last forever, because there is one inescapable fact. Sooner or later, the price becomes too high for too many people to afford and the market will start to cave in. We are close to this point, and this is why it is starting to get a little shaky.

Enough for the ratings agency Standard and Poores to downgrade Australia’s financial sector, because of a belief that “economic imbalances” caused by soaring private-sector debt and property prices, are leading to a potential precipice.

“Consequently, we believe financial institutions operating in Australia now face an increased risk of a sharp correction in property prices and, if that were to occur, a significant rise in credit losses,” the agency wrote.

High housing costs is the major reason why Australia’s personal debt level is the highest in the world. This is not sustainable. The longer the property bubble continues, the large the level of personal debt and this suggests that a crash could be in the making.

The Standard and Poores downgrade follows a March report by OECD warning that soaring house prices and ever-rising household debt had exposed the Australian economy to “extreme vulnerability”.

The rating downgrades applied to 23 financial institutions, including AMP, Bank of Queensland, and the Bendigo and Adelaide Bank.

The notable exceptions were the ‘Big Four’ (AA-) and Macquarie (AA), which kept their ratings, but only because the agency presumed they would be bailed out by the government in the event of any catastrophe.

The financial institutions are on the one hand heavily exposed to risk with the level of debt tied up to housing loans. They are even more exposed with the level of debt owed overseas.  The collapse of the real estate bubble could place their ongoing survival at risk.

As defaults multiply, This would mean the spread of the crisis through the whole economy.

Economy

Bernie Fraser and John Edwards say increase taxes on wealthy

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 The following from Elysse Morgan (ABC 17 May 2017) shows just how widespread has become the rejection of increasing the income of those at the top, at the cost of those lower down, as the means to economic recovery has become. When people with backgrounds like Bernie Fraser and John Edwards feel compelled to speak out, there may just be something in it. They go so far as to support increasing taxes for the rich.
Financial heavyweights Bernie Fraser and John Edwards are united in calling on the Government to increase taxes if it wants to balance the budget.

Both believe there are flaws in Treasurer Scott Morrison’s assumptions of a surplus by 2021 and say some radical changes are needed to address future spending.

Taxing the rich more and hitting all Australians with the Medicare levy is the only reliable way the Federal Government will reach its surplus goal, according to Dr Edwards, former Reserve Bank board member and leading economist.

He also welcomed Opposition Leader Bill Shorten’s plan to take the tax rate for those earning more than $180,000 to 49.5 per cent permanently, an idea slammed by Dr Edwards’ former boss Paul Keating, who labelled it a punitive tax gouge.

“I don’t think a change of 2 cents in the dollar on very high incomes is going to make quite that much difference,” Dr Edwards told The Business.

The bank levy does not trouble him and he praised the Government’s “courage to recognise we need tax increases”.

“I think they should scrap the corporate tax cut as well and we’d get to surplus a little more reliably and little more rapidly,” he said.

It is on the bank levy that the two men part.

“It looks like a populist policy based essentially on the unpopularity of the banks and it’s an easy target for the Government to raise revenue,” Mr Fraser, a former RBA governor, said.

“It won’t hurt the economy in any obvious way but it won’t lead to a sustainable society that politicians talk about wanting, a more prosperous and fair society.”

When put to him that the Government believed it was fair the banks should pay a levy particularly given the taxpayer support they receive, Mr Fraser suggested the tax should be across the board.

“If Scott Morrison believes it is OK to chase big profits, then it should also look to pharmaceutical, mining, technology companies to name a few,” he said.

“If there is this kind of capacity there that the Treasurer thinks that there is in the banks [to pay more tax] then it is elsewhere, and a fair tax would not be discriminatory on the unpopularity of the banks but would actually pursue [them all].”

He suggests a progressive company tax, similar to the income tax system, where the more a business earned the more it paid.

“It’s at least worth thinking about, we already have two rates of tax for business based on turnover,” he said.

He backed former Treasury boss and now NAB chairman Ken Henry’s calls for an inquiry into the bank levy, if the reports that the Government did not consult with industry or regulators were true.

“If there hasn’t been appropriate consultation, that’s a no, if the Government wants to make significant changes to taxation, if they don’t consult adequately with all the stakeholders before they determine what they are going to do … that is a serious mistake and governments run a real risk in getting things wrong,” he said.

Mr Fraser dismissed the argument the levy would even up the playing field for smaller banks, saying that would only happen if the big banks increased their lending rates dramatically as a result, which he did not believe would happen.

The temptation for future governments to raise the bank levy to plug budget holes would be too great to resist, Mr Fraser said, because there was nothing to stop them.

“There is no clear coherent framework for determining budgets, for determining government spending and revenue measures, and that’s the problem — everything is ad hoc, in large part driven by ideologies and lobbyists,” he said.

 

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Economy, Uncategorized

It is not wages but other factors are driving up business costs

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 By Joe Montero
Wages are not a major cause of rising business costs. This is a bold statement in the face of all the rhetoric claiming the opposite to be true. This does not make it less true.

One qualification must be made. Wages do figure highly in small business. But this diminishes as the size of the operation increases. What follows concerns big business. The focus is important because big business is the most decisive part of the Australian economy.

Note that this is not an exhaustive examination, but a brief sketch of what goes on.

Looking back over history shows that real wages tend around what it costs to raise an average family. This constant, was recognised by the landmark Harvester case in 1907, and regardless of whether it admitted or not, the truth of it shown  the need of the average household to use all of its income to maintain its accustomed position.  If real labour costs remain relatively constant, they are not likely to be the cause of rising real costs over the economy as a whole.

From time to time there is some departure from this rule, depending on the relative strength of the unions and employers and the short-term labour demand and supply factors. But over time, the norm asserts itself.

From the view-point of a business, operations are based on the overall costs of production. This does involve labour costs. It also contains the costs of providing the premises and equipment and materials needed to operate the business, plus taxes and other impositions placed by society. Only the first two are going to be considered here, because they are the most important.

Labour differs from the others in that the bigger the volume, in terms of units over a specified time period, the less the labour cost in each.  Put another way. If one wage produces 1 unit in an hour is made and if this is changed to produce 10 in the same hour, the cost of labour has dropped to one tenth of what it was. It is the reason why the cost of labour is called variable capital.

Conversely, the cost of the premises and the equipment (other less important inputs are left out for ease of explanation) used, cannot be spread out over a larger volume in the same way. The cost remains the same for each unit, regardless of the quantity. This is why economists call this fixed or constant capital, depending on the school of thought. Increasing the volume of business increases the cost of this capital proportionally.

Fixed or constant capital has another property that differentiates it from variable capital. Investment in variable capital can be changed easily. The other capital cannot. The premises and equipment used come in precise units and at a certain point reach full capacity. Shifting to a new place to do business, redesigning it, or buying a new machine is expensive. Further expansion requires major new investment, which adds considerably to the costs of running the business. Times of rapid technological change add further to this problem.

The pressure to contain costs is the major driver for business expansion. More so, when the market is tight, because it is the smaller players that are most likely to fall off the perch. It is this that pushes forward the imperative for increased productivity. Increased productivity simply means spreading a given quantity of labour used over more units.

In an economy that is in truth shrinking and business opportunities with it, the tendency is to exploit labour to cover the rising cost of fixed or constant capital. Hence the drive to remake the labour market through the creation of flexible casualised work, cut wages growth and attack penalty rates. The real wage is falling  in the present period. The degree to which this falls below the natural rate, marks the extent of a falling standard of living.

While some individual businesses may gain from this, in the aggregate it is another story. Putting wages below their natural real level contracts the economy further. This will translate into fewer business opportunities and a fall in the aggregate rate of profit. How this occurs is another story.

The final word is that rising costs is what is driving the call for assistance through less tax on business.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Economy

Pensioners to be target of welfare card cut

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 By an age pensioner

A leaked federal government document shows the government’s intention to take concession cards from pensioners and it will cost an individual up to $49.10 per fortnight.

All welfare payments under $20.02 will be scrapped.  Retirees who do not qualify for the full pension because of superannuation or assets, but receive the nominal amount, will not qualify for the health care card.

For retires, the cost of health, including prescription drugs can be formidable. These pensioners will also lose the pension rate car registration, license and council rates etc. Most of these people are not wealthy. Many have already had their pension cut via the recent change to the assets test and are in financial stress.

Some people on disability support and carers also face the loss.

Australian Council of Social Services (ACOSS) chief executive Dr Cassandra Goldie warned the government against welfare changes, saying Australia already has one of the most targeted systems of ­income support.

“Once again, this kind of proposal targets people on low and modest incomes to make savings,” Dr Goldie said.

It is extraordinary that as the exposure of the treatment of welfare recipients through Centrelink continues to unfold, the Turnbull government is going for yet another measure to raise funds from some of the most vulnerable Australians. The government chooses to ignore the  evident public concern.

The suggestion that this is necessary to control the budget, convinces almost no-one. It is common knowledge that this comes at a time when the same government, refuses to act on corporate tax evasion and siphoning off funds to tax free havens. Practices that put a bigger hole into government finances that is saved by welfare cuts.

A good part of the reason for the demise of former treasurer Joe Hockey and why Turnbull replaced Tony Abbott as prime minister, was that they sighted the same target. Malcolm Turnbull promised then that his would be a more caring government.

There are a lot of Australian who feel let down by the betrayal of this promise.

Economy

Multinational tax dodgers are the real leaners

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Michael West: The New Daily

Nowhere is the impotence of politicians and regulators more costly than in their failure to stand up to multinational corporations dodging tax.The Conversation

The Tax Office now publishes an annual list of Australia’s 1900 largest companies, which shows their revenue, profit and tax expense. Only 600 of the entities on this list actually pay income tax at the statutory rate of 30 per cent (bear in mind, these include trusts such as Sydney Airport whose members incur the tax liability).

More than 600 of the entities on the list pay no tax at all. That’s zero tax on $A330 billion worth of income: these are Australia’s real leaners, not our lifters.

The list is a good thing; transparency is a good thing. Yet there are serious deficiencies with this ATO data. The key cause of these deficiencies is the failure of companies to lodge proper financial statements.

To demonstrate this, we selected a couple of companies from the list at random and analysed their financial statements. These entities, the local offshoot of Wall Street banking giant Goldman Sachs and the nation’s biggest brewer SABMiller, show an income tax rate of 0 per cent over the past two years.

Company Total income Taxable income Calculated shortfall
Qantas Airways Ltd $15.4b $211.7m $464m
Origin Energy Ltd $12.2b $0 $366m
Lendlease Corporation Ltd $8.7b $0 $263.8m
ExxonMobil Australia Pty Ltd $8.4b $0 $253.9m
Glencore Investment Holdings Pty Ltd $7.7b $0 $233.6m
EnergyAustralia Holdings Ltd $7.3b $0 $219.1m
Australian Postal Corporation $6.3b $0 $190.6m
Viva Energy Australia Ltd $6.3b $0 $189.3m
Glencore Investment Pty Ltd $4.9b $108.1m $149.1m
BHP Billiton Aluminium Australia Pty Ltd $4.9b $495m $148.7m
Shortfall is calculated with imposed ceiling of 90% on tax deductible expenses.

Goldman Sachs Holdings ANZ Pty Ltd generated $A634 million in annual total income. This holding company displays the usual signs of a tax-dodging multinational including:

  • ownership through Hong Kong
  • a subsidiary in the Cayman islands
  • the creation of a new holding company at the top of the group followed by a mega-million-dollar return of capital
  • related party transactions and balances with next to no disclosure of their financial effects
  • misleading financial statements and disclosures provided to the corporate regulator, the Australian Securities and Investments Commission (ASIC).

For its part, SABMiller in Australia is six times the size of Goldman Sachs. It rakes in $A3.5 billion in total income via its surefire business model of selling beer to Australians, one of the world’s pre-eminent beer-drinking populations.

When we called SABMiller to ask if the company felt it was pulling its societal weight, we received this response:

In FY2015, our total tax contribution in Australia exceeded $A1.4 billion. This included both our own taxes and those we collected on behalf of the Australian government, such as excise and customs duty, goods and services tax and employment-related taxes.

Points to SABMiller for actually responding. Goldmans didn’t return calls. However, lumping in taxes collected for governments – beer excise, GST, payroll tax and so forth – is obfuscation when the subject of the story is corporate income tax.
How do they do it?

One of the tools of trade of the multinational tax avoider is keeping a low profile and keeping stakeholders, including the Tax Office, in the dark while maintaining the pretence that everything is kosher.

The financial statements of the holding companies of both Goldman Sachs and SABMiller in Australia are frankly useless. While claiming to follow the accounting standards, they conceal the true state of the financial affairs of the group.

Dozens of companies that formerly lodged proper “general purpose” financial statements quietly switched to the inadequate “special purpose” accounting regime in recent years. These “special purpose” accounts are a favoured device of the Big Four accounting firms.

With these financial statements, Goldman Sachs and SABMiller, and their auditor PwC, take the implausible view that a holding company that controls billions of dollars in assets is unaccountable to the public for the activities of the group, including its subsidiaries.

Both holding companies – and bear in mind eBay and a host of other multinationals do the same – have deliberately chosen not to file audited consolidated financial statements with ASIC.

The decision not to consolidate means there is no audit or assurance of accounting balances, which the Tax Office might otherwise rely upon in its enforcement activities.

In filing special purpose accounts, the directors of these holding companies are claiming that nobody other than their masters in the US and the UK are entitled to access audited financial information.

It is a hollow claim, but one ordained by the Big Four accounting firms, EY, Deloitte, KPMG and PwC. PWC, the auditor of SABMiller Australia, opines:

Our [2016 audit] report is intended solely for the members of SABMIller Australia Pty Ltd and should not be distributed to or used by parties other than SABMIller Australia Pty Ltd and the members.

If this is so, why does Australian law require that the financial report and audit report be made available for public consumption on ASIC’s database? Can PwC not be relied upon to conduct a statutory audit?

“It’s all legal,” is the catchcry. Yet Australia’s company law supposedly put a stop to non-consolidation by holding companies in the early 1990s following the corporate crash of Adelaide Steamships.

Nonetheless, the accounting firms have brought back the non-consolidation ruse for their billion-dollar multinational tax-avoiding clients. So it is now up to the government to change the law to make it clear: no loopholes, so Australian holding companies of multinationals with billions in assets or income must prepare and lodge audited consolidated financial statements.

Section 297 of the Corporations Act requires that financial statements give a true and fair view. SABMiller Australia reported income of $A0.0001 billion in its statutory accounts for 2015 but $A3.5 billion to the Tax Office. The difference is largely attributable to non-consolidation of subsidiaries in the financial statements lodged with ASIC.

ASIC could rule on this today and enforce the present laws by insisting on proper financial reporting. Or if amendments were required, legislation would be a simple process. All it requires is political courage in the face of powerful vested interests striving to conceal their true financial state of affairs.