Maybe not directly, but mark my words:
If the current global crisis moves from a world wide recession into a prolonged period of anemic growth (ie 5yrs+), then governments will be raising taxes against the middle class.
Governments around the world are adopting huge stimulatory fiscal packages. They learnt from the great depression, that the worst thing they can do is become restrictive during a global recession. So this time they are trying to flood the system with extra government expenditure.
Some of this expenditure will be worthy, ie infrastructure so long as it leads to future productivity increases and is not just a bridge to nowhere. Other potential worthy expenditure includes expenditure on R&D, subsidising development of new technologies, education etc again so long as it creates the ability to increase future productivity.
Others that are designed to just prop up consumer spending (or just support asset prices like the first home buyers grant) helps to cushion the downturn, BUT IT WILL ALSO SAP A FUTURE UPTURN IN CONSUMER SPENDING AS IT NEEDS TO BE REPAID THROUGH FUTURE TAXES BUT WITHOUT ANY CORRESPONDING INCREASE IN FUTURE PRODUCTIVITY, ie its a sunk cost.
Left to its own devises, the market is in a foul and fearful mood. If governments didnt intervene the world world be entering a humdinger of a depression. Things would be REALLY bad, a massive deflationary wave (much bigger than anything you are seeing currently) would be moving through all asset classes. But this would also allow the system to correct itself, which would provide greater upside when its complete.
So it gets back to my major dilemma, assuming the governments accross the globe are reasonably succussful in cushioning the current recession, with the exception of China which is drawing on its national savings, most other governments will have achieved this through increased national debt.
So at some point in time we will draw to a close of the current GFC, but what then? There are several structural changes that will be in the process of change, and these structural changes take YEARS to complete. Essentially we are going to see:
1)Governments raising taxes to finance debt repayments
2) Consumer spending patterns lag historical growth paterns for a number of years to come. Consumer expenditure as a % of GDP for Western countries HAS TO FALL to long term historical norms. For countries such as the US, this envolves a massive 10-12% of permanent GDP structural change. For Australia its less but there.
3) For export orientated countries such as China, the converse needs to happen. There current model of exporting consumer goods to Western nations financed by consumer debt has to reduce. Hence export orientated countries will need to increase their social infrastructure (such as health, education, social security, retirement savings systems) to give their consumers more confidence to spend a higher proportion of their income.
4) This problem is going to be exacerbated by an increase in the old age population. As their 'usefulness' to society diminishes, their peak earnings power declines (which has been one of the major catalysts of consumer spending), but their draw upon the system increases (healthcare, pensions etc).
5) A long term cyclical increase in private national savings. For the last 20 years consumers have been living beyond their means. They have been borrowing to finance current consumption. Borrowings have been financed through a mixture of physical asset price bubbles, (eg redraw facilities on residential property), and through sacrifice of future earnings (credit cards, personal loans etc). Not only do these historical borrowings have to be repaid, but if the underlying asset bubbles are no longer there, savings need to increase to provide a future buffer (the things our parents and grand parents have always told us to do). The longer the global financial crisis persists, the stronger will be its 'message' and the stronger the re-enforcement of this point. This point also re-enforces magnitude of points (1)-(3).
Where does Australia lie in all of this?
I continue to believe that Australia will continue opperate in the tail end of this global structural change. The tsnami of change will be focused on the US and Europe and from their into Asia (but to a lesser degree because of their build up of national savings).
Why do i believe this?
1) Australia had its time of major structural re-alignment in the 1990's. The structural changes forced upon us during Keatings recession we had to have. In the 1990's Australia went into a much larger downturn than the rest of the developed world. Hence just as we went deeper into recession in the 1990's, we will not go into a recession to the same degree in the current global recession. Things will not be good in the years to come, but they wont be as bad as other developed nations this time around. Our national cycle is currently several years out of sync with other western countries. This is the dominant reason in my opinion.
2) We were always a small player in a big world. The world doesnt really care about Australia, we are not the centre of global power, we are not the lender of last resort to the world. Hence our economy is more free to react to counter balances. At the moment we are seeing GFC centred on the US, but the US$ is actually rising, why? because in times of uncertainty, the US is still regarded as the worlds safe haven. So money actually flows to the US pushing up its currency just at a time when its currency needs to depreciate to provide an economic stabiliser.
3) We are a 'young' country. Our ship is smaller and easier to steady. High levels of immigration has reduced (but not eliminated) the future old age problem that will plague America and Europe. Our close proximity to Asia provides some key competitive export advantages raw materials, food, and education (now i think Australia's 3rd biggest export earner). As Asia's wealth increases these areas will increase in demand. Because we are a young country immigration of wealthy asians to australia will continue (you make your money in asia, but you raise your family in australia).
Effect on Government taxation:
If Australia does not go into a recession on par with other developed countries then the need to raise future taxes will also be less. However having said this, one needs to consider:
1) Reduced royalties from the deflation of the commodities boom,
2) Reduced CGT from the deflation of the stock market.
3) Reduced state taxes from property (even if property doesnt bust, state taxes will be reduced because of reduced transaction flow, and reduction in the growth rate of property prices).
4) Reduced company tax profit, especially in view of the economic structural changes that are required (eg less tax will be flowing from businesses supporting consumer expenditure)
Australia's middle class has enjoyed 15 years of reduced taxes as taxes were sourced from the sectors above. With the governments now moving into deficit to reduce the impact of the GFC, that money will need to be sourced from somewhere. Those areas that provided near term historical boosts to government revenue are no longer in play and have gone into reverse.
So where will the money come from??????
If the current global crisis moves from a world wide recession into a prolonged period of anemic growth (ie 5yrs+), then governments will be raising taxes against the middle class.
Governments around the world are adopting huge stimulatory fiscal packages. They learnt from the great depression, that the worst thing they can do is become restrictive during a global recession. So this time they are trying to flood the system with extra government expenditure.
Some of this expenditure will be worthy, ie infrastructure so long as it leads to future productivity increases and is not just a bridge to nowhere. Other potential worthy expenditure includes expenditure on R&D, subsidising development of new technologies, education etc again so long as it creates the ability to increase future productivity.
Others that are designed to just prop up consumer spending (or just support asset prices like the first home buyers grant) helps to cushion the downturn, BUT IT WILL ALSO SAP A FUTURE UPTURN IN CONSUMER SPENDING AS IT NEEDS TO BE REPAID THROUGH FUTURE TAXES BUT WITHOUT ANY CORRESPONDING INCREASE IN FUTURE PRODUCTIVITY, ie its a sunk cost.
Left to its own devises, the market is in a foul and fearful mood. If governments didnt intervene the world world be entering a humdinger of a depression. Things would be REALLY bad, a massive deflationary wave (much bigger than anything you are seeing currently) would be moving through all asset classes. But this would also allow the system to correct itself, which would provide greater upside when its complete.
So it gets back to my major dilemma, assuming the governments accross the globe are reasonably succussful in cushioning the current recession, with the exception of China which is drawing on its national savings, most other governments will have achieved this through increased national debt.
So at some point in time we will draw to a close of the current GFC, but what then? There are several structural changes that will be in the process of change, and these structural changes take YEARS to complete. Essentially we are going to see:
1)Governments raising taxes to finance debt repayments
2) Consumer spending patterns lag historical growth paterns for a number of years to come. Consumer expenditure as a % of GDP for Western countries HAS TO FALL to long term historical norms. For countries such as the US, this envolves a massive 10-12% of permanent GDP structural change. For Australia its less but there.
3) For export orientated countries such as China, the converse needs to happen. There current model of exporting consumer goods to Western nations financed by consumer debt has to reduce. Hence export orientated countries will need to increase their social infrastructure (such as health, education, social security, retirement savings systems) to give their consumers more confidence to spend a higher proportion of their income.
4) This problem is going to be exacerbated by an increase in the old age population. As their 'usefulness' to society diminishes, their peak earnings power declines (which has been one of the major catalysts of consumer spending), but their draw upon the system increases (healthcare, pensions etc).
5) A long term cyclical increase in private national savings. For the last 20 years consumers have been living beyond their means. They have been borrowing to finance current consumption. Borrowings have been financed through a mixture of physical asset price bubbles, (eg redraw facilities on residential property), and through sacrifice of future earnings (credit cards, personal loans etc). Not only do these historical borrowings have to be repaid, but if the underlying asset bubbles are no longer there, savings need to increase to provide a future buffer (the things our parents and grand parents have always told us to do). The longer the global financial crisis persists, the stronger will be its 'message' and the stronger the re-enforcement of this point. This point also re-enforces magnitude of points (1)-(3).
Where does Australia lie in all of this?
I continue to believe that Australia will continue opperate in the tail end of this global structural change. The tsnami of change will be focused on the US and Europe and from their into Asia (but to a lesser degree because of their build up of national savings).
Why do i believe this?
1) Australia had its time of major structural re-alignment in the 1990's. The structural changes forced upon us during Keatings recession we had to have. In the 1990's Australia went into a much larger downturn than the rest of the developed world. Hence just as we went deeper into recession in the 1990's, we will not go into a recession to the same degree in the current global recession. Things will not be good in the years to come, but they wont be as bad as other developed nations this time around. Our national cycle is currently several years out of sync with other western countries. This is the dominant reason in my opinion.
2) We were always a small player in a big world. The world doesnt really care about Australia, we are not the centre of global power, we are not the lender of last resort to the world. Hence our economy is more free to react to counter balances. At the moment we are seeing GFC centred on the US, but the US$ is actually rising, why? because in times of uncertainty, the US is still regarded as the worlds safe haven. So money actually flows to the US pushing up its currency just at a time when its currency needs to depreciate to provide an economic stabiliser.
3) We are a 'young' country. Our ship is smaller and easier to steady. High levels of immigration has reduced (but not eliminated) the future old age problem that will plague America and Europe. Our close proximity to Asia provides some key competitive export advantages raw materials, food, and education (now i think Australia's 3rd biggest export earner). As Asia's wealth increases these areas will increase in demand. Because we are a young country immigration of wealthy asians to australia will continue (you make your money in asia, but you raise your family in australia).
Effect on Government taxation:
If Australia does not go into a recession on par with other developed countries then the need to raise future taxes will also be less. However having said this, one needs to consider:
1) Reduced royalties from the deflation of the commodities boom,
2) Reduced CGT from the deflation of the stock market.
3) Reduced state taxes from property (even if property doesnt bust, state taxes will be reduced because of reduced transaction flow, and reduction in the growth rate of property prices).
4) Reduced company tax profit, especially in view of the economic structural changes that are required (eg less tax will be flowing from businesses supporting consumer expenditure)
Australia's middle class has enjoyed 15 years of reduced taxes as taxes were sourced from the sectors above. With the governments now moving into deficit to reduce the impact of the GFC, that money will need to be sourced from somewhere. Those areas that provided near term historical boosts to government revenue are no longer in play and have gone into reverse.
So where will the money come from??????
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