Does Excessive Government Spending Make You the World’s Best Treasurer?

Australian federal Treasurer Wayne Swan is copping a lot of flak.

In fact, we’ve jabbed him in the ribs once or twice ourselves.

Take the front page of today’s Australian Financial Review (AFR):

‘Treasurer Wayne Swan was warned four months ago the minerals resource rent tax wouldn’t raise any revenue in the first quarter and possibly throughout the rest of the financial year, threatening Labor’s budget surplus.’

Yesterday, shadow Treasurer Joe Hockey said:

‘The tax has failed. I have never heard of a tax that doesn’t raise a dollar.’

What on earth is Mr Hockey going on about? To our mind a tax that doesn’t raise a dollar is the kind of tax we’d vote for (if we believed in voting). In fact, we’d like to offer Mr Swan a few words of encouragement.

Perhaps he could extend the mining resource rent tax (MRRT) formula to income tax, GST, superannuation tax, company tax, and every other tax. Imagine that; the government wouldn’t raise a single dollar of tax. The money you earned would stay in your pocket…how radical.

So far from being pilloried, we welcome Mr Swan to the libertarian, free market, anti-tax fold.

Unfortunately, we don’t expect Mr Swan to stick to his no-tax policy for long. Because based on what we’ve seen overseas, Australia is heading for its own fiscal cliff, and that means higher taxes and more government debt

The way the Aussie mainstream media and politicians react, you’d think that Aussie politicians and bureaucrats are geniuses.

That somehow, in a world of expanding credit, rising government spending and economic busts, the Aussie big-wigs are smarter than everyone else.

But it’s not surprising the dopey mainstream has that view. After all, they hear it all the time from the people they adore…the politicians and central bankers.

Take this from a speech by Reserve Bank of Australia Head of Financial Stability, Dr Luci Ellis:

‘It would likewise be a mistake to conclude that just because housing markets in some countries have caused problems, they always will, in all countries. The US market is quite unusual. Housing booms have to end sometime, but they don’t have to end in tears. Among other things it takes the passage of time and diligent attention from the regulators to ensure housing booms don’t end in a harmful bust, but it can be done.’

In other words…wait for it…that’s right…all together now…

Australia is Different

Hmm. Not so different after all.

We turn to page three of today’s AFR to read the following story:

‘The new $850 million Soul tower at Surfers Paradise on the Gold Coast has fallen into receivers’ hands after more than 100 apartments bought during the boom were not settled by their purchasers….

‘The 288-apartment Soul project had $400 million worth of pre-sales during 2006-07. Not one apartment in the tower sold for less than $1 million. The four-level penthouse made a record $16.85 million when it sold off the plan in 2006.’


Seeing what’s happened to the rest of the Gold Coast property market, we’ll bet on a sales price under $7 million…if they can sell it at all. Even ‘marvellous water views‘ won’t save the owner from a big loss…and you can’t get more marvellous than 73 floors above Queensland’s Gold Coast.

So, if you believe Dr Ellis, housing busts don’t have to end in tears. And apparently Aussie regulators have done a top job making sure a bust doesn’t happen here.

Tell that to Gold Coast property investors.

But this is only part of the story. The Aussie economy is following the rest of the Western world as though it was following a cooking recipe…

Government Spending Cuts or Higher Government Debt?

One of the big stories told by the Australian government and its supporters is that the Aussie government debt position is much stronger than countries overseas.

They say the Australian government isn’t as irresponsible as those clowns in Greece, Spain, Ireland, the UK, and US who keep spending money they don’t have.

Here’s what economist Stephen Koukoulas wrote in Business Spectator this week:

‘Today’s MYEFO confirms that government spending, in real terms, will fall by a record 4.4 per cent in 2012-13. By itself, the Commonwealth government fiscal measures will cut around 1 per cent from GDP. In 2012-13, nominal government spending will fall by around $7.8 billion, the first time there has ever been such a decline. The government is using the return to trend growth as a reason for it cutting expenditure so sharply.’

It’s funny. The only time we ever hear references to ‘real terms’ and ‘nominal’ spending is when commentators talk about government spending.

Of course, there’s a reason for that. Because in reality, the government doesn’t really cut spending. In reality, the government only increases spending.

If you don’t believe us, just check out the government’s own spending forecasts. In 2011-12, the federal government spent $377.7 billion of taxpayer dollars. That equated to 23% of GDP.

Based on Monday’s estimates of this year’s spending, the government will only spend $375 billion. That’s a cut, right? It’s $2.7 billion less than last year.

Trouble is, the government had banked on getting $2 billion last quarter from the big resources companies for the MRRT. It actually received…nothing…not a penny.

That means the government’s supposedly slim surplus will shortly turn into a budget deficit. Even if we believe the government will spend less this year, it doesn’t matter, because the government is set to steal less in taxes than it will spend.

And so, to cover the deficit, the government will have to borrow more money…on top of the $254.5 billion of current outstanding debt.

This is how debt problems start. The government goes into debt, believing they can pay it back. But then something unexpected happens. So they have to go further into debt. And because their expenses are more than their income (taxes), they have to take out more debt. And on it goes.

Is it too extreme to say Australia is heading the way of the UK, US, Greece, Ireland, and Spain? No, it isn’t. Australia has ridden on the back of the Chinese Dragon for nearly 10 years, and that ride is over.

Diversify Your Money Now

Bottom line: it’s now a good time to diversify your investment exposure away from Aussie assets. One method is to buy gold. Another other way is to buy foreign currency denominated assets.

Our old pal, Greg Canavan, has warned readers to diversify out of the Aussie dollar in his China Bust report. He’s picked two specific ASX-listed assets, designed to cut your exposure to the Aussie economy.

The Aussie dollar has held up well in recent months, but as the federal government’s budget position worsens, as it issues more government debt, raises taxes, and as inflation picks up, global demand for Aussie dollars will weaken.

That’s bad news for everyone…except those with the foresight to act before it happens.


From the Port Phillip Publishing Library

Special Report:
After the Bust

Markets and Money:
The Mistake of the Mining Tax

Money Morning:
Which Economy Will Be First to Fall – Argentina or Venezuela?

Pursuit of Happiness:
Why a Return to the Gold Standard Could Actually Be Bad

Kris Sayce

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

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