Hotter property market poses difficulty for RBA as challenges loom for Australian economy: Robert Simeon

It would be pretty clear to most economic observers that the Australian economy faces massive challenges in the years ahead. Australia’s structural budget balance is not in a good place.

Following an unprecedented economic growth during the Howard years which brought about budget surpluses the Global Financial Crisis (with the benefit of hindsight) saw the Labor government embark on a massive spending spree (mostly unfunded) which today has the federal government living well beyond its means.

Last week we observed contractor collateral in mining’s stark retreat where a number of mining related businesses significantly scaled down their profit earnings. These announcements signified that the boom times in the mining industry are now a thing of the past where Australia will continue to see an ongoing scaling down of revenues and expansion.

Weak tax take threatens services: Treasury where the prognosis is that Australians will either have to pay more tax or expect poorer government services, the federal Treasury's Michael Parkinson warned.

“From its pre-crisis level of 23.7% the tax-to-GDP ratio fell to 20.1% in 2010-11.”

Finally, we are seeing Treasury acknowledging a much weaker tax take whilst the current settings for Treasury’s structural budget balance are yet to acknowledge this reality.

The dilemma the next federal government faces is finding new savings or new sources of revenue which has led to some suggesting a GST hike – which is an absolute joke!

Given that when the GST was introduced in 2000 it was agreed that the states would abolish taxes in compensation – which never happened.

Gillard rules out GST increase which is an expected commentary in an election year especially given at the last election the PM ruled out a Carbon Tax too.

Greiner says GST freeze juvenile – “Changing the GST rate of 10 per cent and extending its base was dependent on the agreement of all states and territories, who were the beneficiaries of the tax. But we are in a very, very difficult unprecedented public finance situation in Australia, as is the world.”

Enter Peter Costello, the architect of the GST – Tax abolition is just comic relief where he referred to NSW as “temporarily deferring” the abolition of some state taxes for 13 years – stamp duty on property transfers was one such tax that technically had been agreed for abolition.

Peter Costello says “at the economic level there is a real leadership role for a premier willing to re-invigorate the productivity agenda, restarting reform in our energy markets and our labour market. What about getting the debate back to how we can take burdens off business rather than add to them? Perhaps we could even 'temporarily defer' the introduction of any new business costs? About 13 years might be an applicable period.”

Throw in a falling Australian dollar where the Reserve Bank of Australia (RBA) has no choice but to keep cutting the cash rate or let the dollar keep rising to the detriment of the Australian economy. Australia has no choice but to enter the currency battle given interest rates in Europe and the United States are at close to zero. From what I have read and averaging out the good, bad and ugly, my prediction is that the Australian dollar will sit around 92 cents.

Earlier this month Sydney auction clearance rate sat at 78.7%, which was the highest in three years.

This further challenges the RBA given the pressure to cut the cash rate whilst balancing a hotter property market – a booming property market would spell an absolute disaster.

Again interesting to note that the property volumes continue to contract although we are seeing signs that listings will increase significantly after September 14.

This analysis would suggest that selling now may very well achieve a higher sales result given after September 14 we may very well see an over – supply in stock.

The decision last week that Ford Australia would cease operations from 2016 should not come as a great surprise given motor vehicle manufacturing has not been economically viable in Australia for years. Australia simply can’t compete with Europe and Asia on the car manufacturing front so the billions and billions of government subsidies are much better spent elsewhere.

Protecting the Australian motor vehicle industry has only seen imported cars being taxed at higher rates which then make them more expensive to the consumers. Yes, it’s unfortunate for the job losses however the writing has been on the wall for years.

All global economies are re-calibrating. In Australia’s case we urgently need intelligent governments not wasteful ones who have shown little to no business acumen. It is also becoming very clear for Australian manufacturing to be competitive we need less union input into employment contracts. If the Australian unions are so smart I’m sure Ford Australia would be more than happy to sell them their entire business as a going concern.

Robert Simeon is a director of Richardson  Wrench Mosman and Neutral Bay and has been selling residential real estate in Sydney since 1985. He has also been writing real estate blog Virtual Realty News since 2000. The RWM real estate model has sold in excess of $1 billion in database sales globally.