July 2010

Andrew Pegler – 09 July 2010

Rarely does tax wield such an axe. But we’re one PM down and will soon be picking another. Julia’s new ballad to the tax man goes something like this.

For starters the super word has been buried under a few tonnes of iron ore and coal. Ladies and gentlemen, introducing much less combatitive-sounding Mining Resource Rent Tax (MRRT). Sure it’s still a tax but it’s one all parties can live with and, depending on the outcome of the election (Tony wants to bury it), it’ll apply from 1 July 2012.

Whether or not you agree with the idea of a mining tax, the original intent of the RSPT (RIP) was to deliver the citizenry the best possible return for the rapidly growing profits companies make from digging stuff out of our collective dirt that can’t be replaced. The plan was to use this windfall to reduce taxes, increase super contributions and build infrastructure. But then Kevin got it in the neck and the game changed a tad.

Enter the Gillard compromise.

For starters the newer, cuddlier-named tax will only apply to iron ore and coal companies whose profits exceed $50 million a year (there’s about 320 of these guys). The tax rate that will apply to their profits has been dropped from 40% to 30% – less an additional 25% extraction allowance, which means they’ll effectively pay 22.5% tax (i.e. 30% less than the 25% extraction allowance). The tax kicks in on any profits above about 12% (i.e. the government bond rate at the time plus 7%.) The remaining onshore oil and gas miners will now operate under the existing 40% Petroleum Resource Rent Tax. Problem solved for now?

The immediate impact is a $1.5 billion hole in the budget’s first year i.e. mining tax revenue down from $12 billion to $10.5. But this figure is being hotly contested so it may be more. For those of you who pay company tax your rate will go from 30% to 29% not 28% as promised by Kev. Everything else, like super contribution rising from 9% to 12%, stays the same. Pssst, small business owners … you guys will be able to immediately write off assets worth less than $5000 and depreciate your other ones (not buildings sorry) at 30%. Nice.

Dunno about you but this whole mining tax palaver reminds me of the old realpolitik adage that political parties have no permanent friends or enemies only a permanent interest in being re-elected.

Stay gold readers!

Andrew Pegler – 02 July 2010

Is it a bird, is it a plane? No it’s a President, he spells of BO and he’s taking an axe to Wall Street! Ya thoughts?

While our national interest may have been Wayneing at the recent G20 conference (a gab fest for the world’s largest 20 economies), Barack O went with a stated purpose – a need to quash greed. After an all-nighter the US Congress emerged in time to hand BO the Wall Street “reform” bill on his way to the airport. Its authors hope it will rein in what they regard as the lack of oversight and accountability that led Wall Street up excrement creek and took the rest of us with it.

The reason I think the bill will be of great interest to UBankers is because bits of it will probably get a guernsey here. The bill is sweeping in scope, which, considering BO has got enough US public support to kill an elephant, is not surprising. Highlights include:

• a new consumer-protection bureau with powers to write rules for and ban financial products.
• credit-rating agencies to be more legally accountable for their mistakes. I.e. we can sue them when they lead us astray like they did by issuing AAA ratings to subprime stinkers.
• a limit on how much banks can investment in hedge funds (investment partnership set up by a money manager).
• a limit on how much banks can invest in private equity firms (firms whose shares are held privately and not traded on the stock exchange).
• a limit on proprietary trading by banks (when banks trade shares etc. for themselves).
• the government can break up any failing financial firm, not just banks, and hit the surviving competitors with the mop-up costs rather than the long-suffering taxpayer.
• banks that securitise assets (i.e. mortgage-backed securities) will have to retain more of the risk.
• derivatives markets will no longer be left to just do their own thing.

Reactions? Free marketeers abhor the idea of government getting involved in free enterprise while a lot of people are saying “it’s about time, those Wall Street b@$(@rds got it in the neck!” But what do you lot think?

And in other news… the land of the long white ETS! New Zealand had a woman prime minister 13 years before us, and it’s just pipped us again, this time on the ETS front. NZ greenhouse gas emissions are amongst the highest in the developed world and the new NZ ETS is central to efforts to reduce this belch. Needless to say farmers are not happy but the chardonnay/lentil coalition are over the moon. Keep an eye out folks as I expect there will be much to glean.

As always I welcome your feedback and any ideas for subjects I can tackle. So go on, let us know what’s on your mind – log in and post your comments below.

Andrew Pegler – 25 June 2010

By 2050 25% of Australians will be over 65 and we’ll have twice as many 80-year-olds. Are you ready to work until you’re 100? Well are ya?

According to a guy called John Beard, director of the World Health Organisation’s Department of Ageing, we could have 100-year-old Australians still clocking on within 20 years. This comes on the back of research that shows more people are postponing retirement due to the fact we are living longer and that living costs a lot more than it used to. It used to be that at 65 you were put out to pasture but those defiant baby boomers are redefining another social icon – retirement.

With populations ageing across the globe and governments rushing to build hospitals and squirrel away money for pensions, this massive demographic shift is seen by many as a dire challenge. However, according to Mr Beard, this doom talk is off the mark because it is in fact a grand opportunity. “Sure, there will be impacts on health service delivery and pensions, but society overlooks the skills and experiences of older people”, he says.

A recent survey in the US reveals that most people of retirement age want to stay employed in some capacity and some US companies are now offering retirement-age types the option of a 1000-hour working year (about 30 weeks) where they can choose to work a few days a month or go full-time for part of the year then take the rest of the year off and play grey nomad. As John Beard points out, “future generations could one day be taking years off work to raise a child, travel or go back to school and then find themselves still working at 100″.

If all this bears out, then expect a significant and sharp impact on the traditional life pattern of education, employment and retirement. With organ and limb replacement science charging ahead we may soon be able to live for a long, long time. Personally this is delightful news because I can now lock in my second career as a Vegas croupier.

And in other news… India inflation alert! Yep that’s right. Inflation there is becoming a big problem and was just revised upwards to an annual rate of 11% in March and 10.2% in May, double the target range. A third rate rise this year is on the cards, which could dampen spending and investment. The knock-on effect is, as always, that country’s demand for our dirt.

Andrew Pegler – 18 June 2010

Europe going belly up affects us in many ways, some obvious, some not, but all form part of what’s called contagion.

Europe is copping a belting at the moment as the clutch of nations known as P.I.G.S. (Portugal, Ireland, Greece and Spain) struggle to pay their debts. Ratings agency Moody’s just cut Greece’s credit standing by four notches to junk status from A3 to Ba1 – that’s 11 notches down from AAA, which is its highest (Australia is AAA). That means Moody’s reckons Greece is a good chance of default. Interestingly, because of Europe dramas Moody’s now divides its AAA governments into the resistant, the resilient and the vulnerable, which sounds like a Clint Eastwood film to me.

Then there’s the Spaniard that’s just been thrown into the works or as I also like to put it – the strain in Spain is falling mainly on the brain. Yep, Spain is Europe’s new credit crisis. Unemployment there is about four times ours and two other ratings agencies, Fitch and Standard & Poor’s, just cut it from AAA to AA. And with European banks now refusing to lend it money, Spain is looking shakier than a matador with broken sword and nothing between him and a raging, bloodied bull but dust and moments.

So is there any reason for us to be shaking in our RM Williams? Yes and it’s called contagion – the rapid, hard-to-predict, panic-driven spread of a financial crisis. It usually rises out of a series of vicious cycles that form when confidence in a country’s ability to repay its debts goes south. Right now P.I.G.S., Germany, Britain and Hungary are enacting mind-boggling, multibillion Euro dollar austerity measures to reign in budgets and address debt. These huge cuts to government expenditure will severely erode Europe’s growth and thus constrict growth here. Why? Well it’s part of the interconnectedness of the global economy. First hit will be exports as European demand contracts. But with the rise of Asia that’s not as bad as it once was, for example, according to an article in the Fairfax Press, we export more to Thailand these days than to Germany and France combined.

The real problem is the indirect one and that’s the impact on China, which sells over 20% of its exports to Europe. That’s a big chunk of change China is set to lose and means a stall in their need for our dirt. A weaker Euro also makes our exports more expensive and thus we sell less of them. And poor ole tourism will get another belting on two fronts – firstly a declining Euro against AUD and secondly there being less Europeans travelling.

For now, only time will tell but as Crikey.com.au wrote the other day “time is a bandit. We always thought it was a traveller – Tenterfield Saddler and all that”.