Firstly an apology for an error in our Hedge Clippings two weeks ago (May 2nd) where it was stated that the Federal budget would be handed down last Tuesday, May 6th. We were a week early, based on our misguided view that "budget night" was traditionally the first Tuesday in May.
Secondly, an apology for suggesting that the pre-budget leaks were designed to be softening us up, and that the news on the night would not be as bad as expected, and we would all thank the Treasurer for being so kind. The fact is that by and large everything on the day was well telegraphed, and therefore planned, perhaps with the exception of the Treasurers' cigar chomping, disco dancing images that somehow made it into the media.
There's no doubt there needs to be some changes made and medicine to be taken on both the revenue and expenditure side, but we can't help feel the PM's "more pain, more gain" mentality is better suited to his sporting attitude than the gentle art of persuading an electorate that the solutions that have been suggested in the budget are acceptable.
As indicated in the previous Hedge Clippings, the risk is that the spending and welfare cuts will damage consumer confidence which is the lifeblood of the economy. Added to that risk is that the PM's and his government's political goodwill has been damaged to the extent that if the budget bills are blocked in the senate, and a double dissolution is called, he might go down as one of the shorter serving PM's in history.
OK, so enough empty opinion. What's the collective remedy of the kitchen cabinet that met today after the early morning swim at LPAC over a cup of coffee?
GST:
Get on with it! Increase it to 12.5% or 15%, possibly in two tranches. OK a broken promise, but only one, as opposed to many. And it would be a brave opposition that tried to block such a move as it would prevent them increasing GST themselves down the track. The decision on widening the GST to include food, health and education was split 50/50 and therefore deferred as I didn't have a casting vote.
The joy of the GST from the government's perspective is the system is already in place, the revenue would flow almost immediately, and there would be virtually no incremental collection costs. And the higher a persons income the more they are likely to consume, which is why it's known as a consumption tax.
2015 GST revenue estimate: $54 bn. Cost of exemptions for food, health and education etc $17 bn.
Revenue benefit: $27bn in 2015 if raised to 15%, and another $15 to $20bn if broadened to include food, health and education.
Income Tax:
Increase the tax free threshold to provide relief for those on lower incomes as a result of the added costs of the increase in GST. By all means tighten eligibility for some benefits to ensure welfare is delivered to the needy, not the greedy, remembering JFK's inaugural address in 1960 "If society cannot help the many who are poor, it cannot save the few who are rich."
We assumed the tax free threshold increase would cost $10 bn, leaving the net increase from GST at 15% between $17 and $37 billion.
The new tax levy for those earning over $180,000 a year is insignificant, reportedly costing $7 a week, or two cups of coffee at that level, and an insult to those lower down the salary tree feeling the pain. GST at 15% would collect far more from the well off than the new tax levy, as well as being permanent.
Budget estimate for individual income and withholding tax is $178.8 billion.
Company tax:
Budget estimated income: $71.6bn. As a thought, why do higher earning individuals pay higher tax rates, but there's a flat tax rate for companies?
Negative Gearing on Investment Property:
Scrap it, to be phased out over 5 or 10 years to ease any sudden fall in property values. It currently cost the government $4 billion a year and is claimed by 1.2 million tax payers. Possibly retain it on newly built homes only.
Added benefit: Improves housing affordability, especially for first home buyers.
Fuel tax:
No need to break that promise, the increase in GST on petrol sales would generate far greater revenue.
Superannuation:
Now it gets tricky!
Tax concessions on "super" cost the budget $35bn. However, properly implemented super should result, as originally intended (over time) in the government not having to fund as many retirees. Estimated cost of income support for seniors (aged pension) is currently $42 bn, so provided super could only, or mainly be taken as an annuity pension rather than a lump sum, the demand or eligibility for aged welfare would reduce significantly.
As an aside, the kitchen cabinet proposed a portion of all super should be invested in Infrastructure Bonds, paying a defined income stream. More on that another day.
Conclusion:
Would all that fix the deficit estimate of $24 billion? With some adjustment we thought so, even if the calculations were on the back of an envelope, although with the benefit of the Budget Estimates provided by the government's web site.
Would it fix the PM's credibility? That might be a tad tougher, but on balance we thought he'd have a better chance with the Senate, and possibly the electorate as well.
Specific results received this week include the following PERFORMANCE and NEWS UPDATES:
The Supervised High Yield Fund returned 0.21% for March and 7.74% over the prior twelve months with a vol of 0.74%.
Optimal Australia's Absolute Trust returned 0.57% in a choppy market with annual returns of 4.62% and a volatility of 1.6%.
The Bennelong Kardinia Absolute Return Fund recorded a return of -0.63% during April with the 12 month result 7.53% and a volatility of 3.70%.
Morphic's Global Opportunities Fund returned 0.75% in April, slightly under-performing it's benchmark (MSCI ACWI in $A) and recorded 25.08% over the previous 12 months with notable Sharpe and Sortino ratios.
The Laminar Credit Opportunities Fund returned 1.03% during April and 11.81% for the year, strong returns in a low interest rate environment.
19-20 May in Sydney, IBR Conferences presents the Unit Pricing Forum. This is a 2 days forum exploring Unit Pricing operational challenges for 2014 & beyond. Topics include new APRA reporting requirements & implementation; impacts on unit pricing reporting and more.
Wednesday 21 May in Sydney: The Hedge Fund Association, in conjunction with Pricewaterhouse Coopers, is pleased to present an update on key regulatory matters currently affecting the alternative investment industry. A panel of Pricewaterhouse Coopers senior executives will provide a detailed overview of topics, as well as allowing for questions and commentary from attendees.
28-30 May 2014 in Sydney: IBR Conferences presents the Asset Allocation Conference. This event has been designed to both update and educate investors by taking an in-depth look at these more adaptive asset allocation strategies and practices and where the best opportunities for high return lay in the current climate.
If you would like your Event listed in our calendar, please contact us.
And now for something completely different this week, maybe you saw this on the news, Tara the cat, latest American hero, I wonder if she has some budget suggestions?
On that note, I hope you have a safe and happy weekend.
Best wishes,
Chris
CEO, AUSTRALIAN FUND MONITORS
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