19/04/2016 - 13:07

Financial crisis a 50-50 call

19/04/2016 - 13:07

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Spot the difference in these two statements: one in two households rely on pensions to make ends meet; and one in two reliant on public purse’.


Post-GFC austerity measures weren’t popular in Greece. Photo: iStockphoto

Spot the difference in these two statements: one in two households rely on pensions to make ends meet; and one in two reliant on public purse’.

There’s not much between them, which is why everyone in Australia should be aware of what happens to a country when 50 per cent of the population becomes a drain on government finances.

The first statement comes from a story in Britain’s Guardian newspaper last June about the crumbling finances of Greece. It carried a headline: ‘Unsustainable future? The Greek pensions dilemma explained’.

The second statement is a headline from the front page of the latest edition of The Weekend Australian newspaper, with the underlying story saying that: “Nearly half of voters in the looming federal election will rely entirely on government payments for their income”.

There is a difference between households on a pension (Greece) and 50 per cent of a population reliant on the public purse, but not much. And the fact remains that government, in its many forms, is the principal source of daily cash for half the population.

It is a situation that begs a question: who’s making the money to support those who are not?

According to The Weekend Australian, the answer can be found in a study by Australian National University researcher Ben Phillips.

Mr Phillips found that, excluding public sector workers, only 43 per cent of the Australian adult population were net taxpayers last year. In other words, just 43 per cent of adults put more into the system than they took out.

Australia is not alone in having a wealth-creation problem, and the country is almost certainly a long way from plunging into the bog where Greece finds itself.

Unfortunately for Australia, the advantage it enjoys over Greece could be simply a matter of time; the Greeks have been working harder for longer to trash their economy than Australia.

There is another connection that ties Australia to Greece and that’s the democratic political system Australian inherited, which requires politicians to make promises that invariably involve spending taxpayers’ money in order to win their support or, to put it more bluntly, buy their vote.

In Greece, the promises made by more than 100 years of appalling government have largely focused on the pension system, which encouraged early retirement (younger than 50 years in some cases) and discouraged business investment.

The result is that Greece spends 17.5 per cent of its gross domestic product on government-funded pensions, easily the highest in Europe. And that figure is destined to keep on growing, as last year there were 400,000 unprocessed pension applications.

Youth unemployment is running at more than 50 per cent in Greece and the population is ageing alarmingly, with 20.5 per cent of Greeks over 65.

Australia has a long way to go to catch up to those measures of the Greek crisis but if the current political game of undeliverable political promises continues to be played, the gap will become a lot narrower.

Budget challenge

The next test of the Australian vote-buying process kicks off on May 3 when Treasurer Scott Morrison delivers his first budget in what is already a pre-election period, a time when more undeliverable promises will be made with your money (if you’re one of the minority net taxpayers).

It is unusual for one media outlet to comment on what another has reported, but in the case of The Weekend Australian story it is a topic that must not be allowed to die because it is critical to the future of the country as it rushes towards its ‘Greece moment’.

In case you missed what The Australian reported, and you might have because other media outlets appear to have ignored the analysis, or consider it to be of lesser importance than a post mortem of weekend football matches, then here’s a summary of the key points.

• 44 per cent of voters, or almost 6.4 million people, are either public sector employees (1.89 million in total) or wholly dependent on federal government pensions (4.48 million).

• Those numbers grow further when private sector workers who receive more in welfare than they pay in tax are added.

• A plan to simplify 75 forms of federal government financial assistance and supplements has not been followed up.

Because the Australian political system with its Greek and British roots is based on spending promises, it is highly unlikely that the government or opposition will ever agree on a solution based on a deal to cut government spending – a step regarded as a sure-fire way to lose an election.

That only leaves one other way for a solution to evolve, and that’s a financial crisis of the sort seen in Greece and could involve a run on the currency, which explodes the value of $US (or euro) denominated international debt.

A hint that a financial crisis will force the political process came from one of the big ratings agencies last week, when Moody’s Investors Services warned that a failure to deliver genuine spending restraint would lead to higher taxes.

No prize for guessing that higher taxes will only apply to the 43 per cent of net taxpayers.

 

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