Tax Reform – Digital Finance Analytics (DFA) Blog

The End Of Globalisation?

Yesterday, President Donald Trump announced broad “reciprocal” tariffs on imports from US trading partners across the world. The US will impose a minimum 10% tariff on all trading partners and slap even higher rates on about 60 countries that hold large trade surpluses with the US. For example, the reciprocal rate on imports from China will be 34%; from the European Union, 20%; and from Vietnam, 46%.

According to a White House fact sheet, the global 10% tariff will go into effect on April 5 and then will be replaced by the individualized higher tariffs on April 9.

Australia is at the lower end of the Tariffs at 10% and with America accounting for just 4 per cent of Australia’s goods exports, economists said the direct effect of Trump’s 10 per cent tariff on Australia would be modest.
But they warned the broader risk to the Australian economy was significant, with Australia’s major trading partners including China, Japan and South Korea hit with new tariffs ranging from 24 per cent to 34 per cent.

The widespread selloff in global markets makes clear that investors don’t expect any winners from the latest — and by the far the largest — salvo in a growing trade war. But they also suggest the US itself might be one of the biggest victims of Trump’s protectionist policies.

But to an extent, there is an important grain of truth here. The trend of recent years, of open trade, products being manufactured in countries with a strategic advantage of low wages, cheap energy and low environmental standards did mean the hollowing out of jobs in local markets, as can be seen by the reduction in local manufacturing in Australia.

But the conclusion is clear: globalisation as we have come to know it is over. Trumps latest actions reconfirms this. But the question is what next then. Regionalisation? Fragmentation? Worse?

UPDATE: The algorithm they used to calculate the “tariff rate” was even less sophisticated, it boils down to simple maths: take the trade deficit for the US in goods with a particular country, divide that by the total goods imports from that country and then divide that number by two.

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Who’s Telling Porkies Now?

The unelected, neo-liberal biased International Monetary Fund, one among many technocrat groups which try to impose top-down advice based on their underlying philosophy, recently released their latest advice relating to Australia. Their concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country.

This time the IMF gave a mixed assessment of recent government budgets and whether Treasurer Jim Chalmers and his state counterparts were helping the RBA to tame Australia’s worst inflation outbreak in decades, because they warned the federal and state governments that any further unexpected rise in spending will force the Reserve Bank to keep interest rates high, and that future cost-of-living relief needs to be targeted.

We are certainly seeing some evidence of that in our household surveys, the findings of which I will discuss on Tuesday on my live show at 8pm Sydney time. Some are benefiting from the payments, despite having strong cash flow and savings, whereas for those under financial pressure, the rebates are hardly touching the sides, creating a more unequal story financially speaking. Indeed, One in four mortgage holders have had to skip paying for another expense to prioritise keeping a roof over their head, according to Finder.

This is an important point, because its Dr Chalmers and Finance Minister Katy Gallagher have hinted that they plan to announce another round of household subsidies before the next federal election, as Labor tries to placate voter anger over high inflation.

They also called for a complete overhaul of Australia’s tax system and suggested the government phase out $52 billion of superannuation tax concessions and the $19 billion capital gains tax discount to fund a reduction in personal income and company tax rates.

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Is Negative Gearing The Next Target?

Interesting to see the momentum now turning to discussion of whether the Government intends to tackle negative gearing having U-turned on the tax cuts.

As The Conversation put it, there are two things the prime minister needs to get into his head about tax. One is that saying he won’t make any further changes no longer works. The other is that negative gearing doesn’t do much to get people into homes.

Australia’s Treasury has begun publishing estimates of the cost of the present unfocused system of negative gearing. Its latest, released last week, puts the cost at $2.7 billion per year, to which should probably be added a chunk of the $19 billion per year lost as a result of the capital gains concession.

Albanese is normally cautious. But as he is showing us right now with his rejigged Stage 3 tax cuts, there are times when he is not. If he really wants to throw everything he has got at building more homes, he knows what to do.

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Today’s post is brought to you by Ribbon Property Consultants.

Stage 3 Tax Revamp: A Speck In The Ocean?

Lots of noise this week about the revamped stage 3 tax cuts. It’s worth remembering first that 2 in five Australians pay no tax because they do not earn enough, so this is change is certainly not going to impact every household.

Anthony Albanese had repeatedly committed to delivering stage 3 as legislated by the Coalition – but told the National Press Club on Thursday, “When economic circumstances change, the right thing to do is change your economic policy. That’s what we are doing.”

At one level of course this is another broken promise – just like the superannuation tax cap which came in last year. Presumable the calculus is more people will benefit than not, and it’s a long time to the next election, so people will forget. We will see.

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Paying Tax And Interest Through The Nose In A Deep Per Capita Recession!

The Australian Bureau of Statistics (ABS) has released the June quarter National Accounts, which were an unmitigated disaster and confirmed that Australia is in a deep per capita recession.

The economy as measured by real GDP grew by only 0.2% in the September quarter, driven by increased government consumption and capital investment over the quarter and badly missing economists’ expectations of a 0.4% print: Growth over the year was 2.1%, less than population growth over the same period. While the population surge earlier in the year has supported demand overall, it is now rolling over and will not provide the same support in 2024. Or as Luci Ellis, at Westpac put it The Australian economy limped along in the September quarter.

Real per capita GDP has fallen for three of the past five quarters, with the March quarter revised up to flat. Accordingly, GDP per capita fell 0.3% over the year. Expenditure by households was dead flat over the September quarter and would have fallen by around 0.7% per capita. By contrast, growth in both household consumption and GDP over 2023 slowed due to sustained cost of living pressures and higher interest rates. Household consumption would have fallen even further had the savings rate not fallen to just 1.1%, which is the lowest level since December 2007.

The savings rate is now well below the ‘par’ of 6.5% and notionally implies a draw-down on the ‘additional savings’ accumulated during the pandemic – estimated at around $260bn – running at about $12bn a quarter. In total, about $43bn, or 16.5% of this reserve now looks to have been drawn down. Of course these are not equally spread across households, with many now having no buffers at all.

As Westpac put it. the policy drag on Australian households is clearly biting.