01/05/2012 - 09:16

Analysis: interest rates, taxes, budgets and other disasters

01/05/2012 - 09:16


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Interest rates down today. Taxes up tomorrow. The timing in that statement is not quite right, but over the next few weeks Australians will discover that far more is being taken from their pockets by tax increases than is being put back by lower interest rates.

That’s why celebrations after the expected cut in official interest rates by the Reserve Bank later today will be short-lived.

Rather than acting as a significant stimulus for a national economy which has stalled, the rate cut will provide a short-lived boost to confidence that will fade as the Australian Government pushes ahead with its drive to achieve a balanced budget.

To hit that target the government has only two tools at its disposal. Cost cutting and tax increases, neither of which will boost confidence, stimulate household spending, or create jobs, especially in the shell-shocked east coast manufacturing sector.

The spending cuts will come in next week’s budget, along with some tax increases. However, the biggest of the tax rises, and one which represents the greatest unknown is the $23 a tonne tax on carbon dioxide emissions which is scheduled to start on July 1.

Some businesses have already started to book thumping losses from the projected impact of the new tax with east coast power company, Macquarie Generation, writing $1.1 billion off the value of its assets because of the carbon tax.

More big asset-value write-downs will follow as business struggles to cope with the world’s harshest tax on carbon pollution.

True believers in the carbon tax argue that it is required to force Australians to switch their energy consumption habits while also stimulating the development of alternative and renewable energy sources.

Over time, that is an admirable objective. Done too quickly and it will damage the economy, and the fading support for a government which has more than enough trouble on its plate already.

Unfortunately, Australia now has a government in a hurry to try and put the mistakes of the past behind it, as well as wanting to be seen to be doing something about the future – a perfect recipe for mistakes.

It would be dishonest to say that anyone knows precisely how Australia can dig itself out of the economic mess into which it has fallen, but that a starting point in the blame game should be the Treasury Department.

It is Treasury which has committed a series of unpardonable mistakes, starting with multiple botched attempts to design a mining super-tax that works, and then botching forward tax estimates which failed to recognise the sharp fall in company tax caused by the stalled east coast economy.

For some reason, Treasury kept looking at the rapid growth in the mining-led WA economy and imagined that its good fortune would rub off on the rest of the country.

It hasn’t, as can be seen in an alarming job creation statistic. Over the past four years 50 per cent of the jobs created in Australia have been in some form of government service, whether that be in health, education or administration.

That ratio, in a country where the private sector is the major employer, is unbalanced and one of the reasons why the government is desperate to find more cash by raising taxes, and enforcing spending cuts.

Just as the carbon tax makes theoretical sense to some people, especially the Green Party which is propping up Australia’s troubled government, so too does a rush to make up for a budget shortfall, if only so the government can deliver on a political promise – no matter what the real cost to the economy.

That’s why today’s cut in interest rates, welcome as it is, should be seen as recognition that Australia’s economy is not the “miracle” that the Treasurer, Wayne Swan, claims, and that it will continue to deteriorate as rising taxes outstrip private sector investment.


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