27/05/2010 - 00:00

Growth gives Australia options others lack

27/05/2010 - 00:00

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Finding a balance between cost cutting and generating fresh investment will serve Australia well.

AUSTRALIAN investors might dislike the proposed new super tax on mining profits, but at least we still have a growth industry to tax. In Britain, where Bystander last week listened to strident criticism of our mining tax, there is virtually nothing left to tax – and that’s a much bigger problem.

In time, fingers crossed, Australia will resolve the disputes swirling around the resource super profits tax and not too many projects will be cancelled. Some will, but not all.

One reason for that small flicker of optimism is that, while attending a mining investment conference in London, Bystander was told by a seasoned London banker that: “Your new tax really is so awful that it will be watered down.”

However, until changes are made to the super profits tax, or share prices fall far enough, it seems likely that Australian resource companies are off the radar screens of most British and European investors. We are effectively in the sin bin for the next six months, or until the uncertainty ends.

It’s a far worse situation in Europe where time in the sin bin is likely to last a decade, or more.

Riots in Greece over austerity measures, such as reduced pensions and pay cuts for civil servants, are just the start of a dreadful time in Europe, a region with a track record of destabilising the world when times are tough, as was last seen in the 1930s.

Nothing like that is likely to happen, yet, but there is no doubt that profound damage has been caused by the global financial crisis.

Effectively, the GFC is not over in Europe. It has simply entered a new phase, as a region which thought it could make ‘lifestyle’ an industry is discovering that nations really do have to make things to survive, and cannot exist as a coffee-shop culture.

Somewhat perversely, the difference between Australia and Europe is demonstrated by the resource profits super tax because when a country, business, or individual tries to get out of a financial mess there are only two ways – work harder to generate profits, or cut costs.

In Australia, thanks to continued strong demand for our resources, we have the work harder option, which means we can also tax harder to pay back the money borrowed to stimulate the economy during the worst of the GFC.

In Europe, the work harder/tax harder option is dead, for two reasons. Firstly, the population is old, and the declining number of young people has never learned how to work hard.

Secondly, there are no growth industries in Europe, which is trying to make products that are available cheaper from China.

In a big picture sense, the decline of Europe is the natural outworking of the migration of money from the Western to the Eastern world – where we sit.

But the cost-cutting option being adopted in Europe will cause deep unrest among its 300 million people, and will become a zero-sum game because cost cutting is not an end in itself. Cost cutting does not encourage the investment essential to service the debts incurred by the region’s cosy lifestyle.

Australia can cut costs and it can generate fresh investment. The trick will be in getting the mix right – a point we have not reached yet, but hopefully will.

Olympic-size headache

ONE of the great hopes for Britain over the next two years is an expected influx of tourists for the 2012 London Olympics, an event that seems, unfortunately, to be heading for disappointment rather than celebration.

The problem is that London simply will not cope with many more people. Two years out from the event the city has already hung up a ‘full’ sign.

By that Bystander does not mean that all the beds are taken, it’s more a case that the infrastructure cannot cope. Roads are hopelessly clogged, even with a road congestion tax.

The underground is choked, when working, and power supplies are entering a critical phase with ‘brown outs’ a possibility unless more power stations are built, which seems unlikely given the lack of capital and industrial growth to pay for the power.

Last week, a British power generation company put on hold plans for a new gas-fired power station because of weak electricity demand as the economy limps along, which might not be a bad thing as a few months ago the country’s gas supplies dropped to two days (yes, two days) of reserves.

Roll all the evidence of a city (and country) stretched to breaking point and then ask where will the money come from to pay for improvements; more debt?

Not likely is the answer to the debt question because the entire country is already running a budget deficit of Greek-like proportions and rapidly reaching the point where no-one will lend it any more.

And even if it could go on borrowing, the declining value of the pound means that the country has to work harder to service its foreign debts and, as mentioned earlier, hard work seems to be off the entire European agenda.

Not treading water

IN the US it’s a different matter. Over there, in a country frequently criticised for being too hard on its own people, the green shoots of recovery are real because it has the options of growth and cost cutting.

With almost no social welfare safety net the US approach is sink or swim. Most people choose to not sink, they get jobs no matter how demeaning or low paid. Europeans prefer to think ‘the state’ owes them a living, never bothering to ask where the state gets its money from or why anyone should have such a sense of entitlement.

Bystander was fortunate on his latest jaunt around the world to see three economies in the space of two weeks: Australia, where the tax debate rages; Europe, where there is little left to tax; and the US, where fear of failure is real and hard work recognised as the only option.

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“War is how the Americans learn geography.”

Anon

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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