News That's Fit To Punt - 19/Apr/2012

Entitlement, You Say?

Joe Hockey's out in the UK thumping his chest. He says Australia and the rest of the west need to wind back welfare and  everybody should fend for themselves like they do in Hong Kong. Tony Abbott chimed in to support his Shadow treasurer by saying 'the age of entitlements' has to stop.

The funny thing is, when I see the word 'entitlement', I don't immediately think of people on welfare payments, I think kids in the Eastern Suburbs and North Shore who go to Private Schools and when they hit University, live in those colleges on campus and somehow wrangle fantastic jobs as they come out and scoot ahead in their careers and they all tell you it's hard work and nothing else and why don't those lazy dole bludgers and single mums get a job? - when in fact it's nothing but entitlement for being born to the wealthy.

So colour me Bolshy, if Tony Abbott really wants to end entitlement, he should bring in 100% Death Duties so that nobody gets an entitled leg up by dint of the birth lottery, because that's the worst kind of entitlement that gives way to the vested interest politics of this country. Truly equal opportunity would give rise to a fair and equitable society.

Anything short of that is what I'd call a bit rich, coming from the Tories.

Maggie Thatcher Much?

Meanwhile PM Julia Gillard's been brandishing her bit of Tory logic at this conference.

JULIA GILLARD will hit back at business groups and others demanding interest rate cuts while criticising her government's pledge to return the budget to surplus, saying they cannot have one without the other.

In a speech to be delivered in Perth today, the Prime Minister will say a surplus is a ''fundamental economic imperative'' that will free the Reserve Bank to start dropping interest rates, delivering relief to both households and business.

In remarks that border on pressuring the central bank, she will say that at 4.25 per cent, Australia's cash rate is well above levels in the United States and Europe and there ''is plenty of room for the RBA to move if need be''.

''To all of those calling for rate cuts, you should also be calling for a surplus, not opposing one,'' her speech notes say.

Ms Gillard will say a surplus would facilitate rate reductions and it is also important to start building a ''buffer'' in case the global economy worsens and further stimulus is needed.

I don't know if that really amounts to putting pressure on the RBA. The logic goes that if the Fed gets back to surplus then the RBA has leeway to lower interest rates and that's all she's saying. Be that as it may what she is essentially preaching is the same kind of austerity line for Australia that is being imposed on many a government around the world - even if Australia is the best placed not to follow such policies - and in many ways Julia Gillard's government is aiming to please the fiscal hawks in order to win brownie points from people who would never vote for anyway.

In saying that, I'm not advocating the Australian government be devil-may-care about its deficit, but it seems rather odd that we have this Labor PM putting on a show like a conservative. I can't imagine this kind of position is going to allow her to woo back the old social democratic vote she needs to win the middle.

There are indications that the proposed budget cuts aren't even the best policy given our deleveraging circumstance.

Here are some scenarios if rates fall 1 per cent as a result of budget cuts:

• will households save the extra cash as they are doing now? If so, the government is bringing on a recession which is clearly bad


• will households spend their extra income, providing some relief to the beleaguered retail sector? If so, growth will accelerate which is potentially good and you can expect a rally in retail stocks on this possibility. However, it would be much better to see the newly created economic space filled by expanding exporters


• will households spend the extra income and resume borrowing for housing, causing house prices to rise again? If so, the rate of deposit accumulation at the banks will fall and they will accumulate further wholesale debts in foreign markets. This would also fire up a short term cyclical stocks rally which would include the home builders. But it is very bad in the medium term and would very quickly result in either ratings agencies or the RBA stomping on the brakes


• what degree of downwards pressure will a 1% fall in interest rates place upon the dollar? This is not an easy question to answer. Interest rate differentials are only one of the five drivers of dollar value.  My guess is that such a level of cuts would push the dollar into a new trading range somewhere below parity assuming global growth remained decent, but not much lower. Thus, we’d see a boost in currency exposed stocks and some boost to the export sector more generally.

That's not a nice range of scenarios. And all this is on the offering because Julia Gillard's ALP Government is aiming for a surplus by 2013, as revenues from capital gains shrink and income taxes plateau. As the article puts it, the options are disleveraging hard or taking on more offshore debt. I guess the worst part of it is that other side wants to go even harder whilst also handing out freebies to their target electorate. We're a nation that's given the driving wheel to ethical idiots, moral cowards and sycophants to the vested interests.