And in Australia the impacts of that dismantling will be among the most severe in the developed world. We are looking at mortgage interest rates at least doubling, but they may rise threefold, a planned tax attack on family businesses organised in trusts, higher superannuation taxes and lower real wages. And that’s just the start, with much more to come, including attempts to recover back-taxes from both factual and fictitious assessments.
Because of the vital national and global significance of these fundamental changes, this week I am preparing a series of commentaries to help people and enterprises understand what is ahead and to adapt. I will start today with just how the world and Australia is set to change.
High debt is now much more dangerous to individuals, enterprises and governments. The grand spending plans announced in the Federal election campaign will be reviewed and in particular the ballooning growth of aged care and disabilities will be examined.
For Australia, the fact that this total national transformation has erupted in the first two weeks of a new government is stunning, given it was not discussed in the election campaign.
But what is happening in Australia is part of a total change in the global outlook for inflation and interest rates. As confidence erodes, global share, property and bond markets are on the edge of their seats awaiting announcements, hoping for glimmers of hope that inflation has peaked.
The word “recession” is sprinkled around the globe like confetti but far more important is the total directional change.
We are fortunate that our newly-elected government and our Reserve Bank have recognised that there is global crisis. Prior to the June 7 Reserve Bank meeting, I presented two options to our central bank.
Option one was to move slowly on interest rate hikes because as the Commonwealth Bank had warned, lifting interest rates by more than 1.25 per cent would have dire economic consequences. But option one risked a total inflationary explosion and eventually interest rates of 10 to 17 per cent.
Option two was to recognise that the Reserve Bank had made big mistakes and will begin correcting the situation with much higher interest rates. They chose option two.
Unprepared, the nation was shocked.
High inflation – and therefore higher interest rates – are not transient but are going to become part of the global landscape in the medium term.
In Australia the most dramatic event highlighting the totally changed Australian outlook was the prediction by the former RBA governor Ian Macfarlane that Australia may emerge from the current turmoil with an entrenched inflation rate of more than 4 per cent, which would require a Reserve Bank cash rate of a rate above that level. On my calculations, that would see mortgage rates in the vicinity of 6 per cent compared to less than 2 per cent a short time ago.
In my view, it is highly unlikely that such a highly respected former governor would have made such a radical statement if it was inconsistent with the views of the current RBA board. Indeed, the head of Treasury is expressing similar views.
No responsible Australian government could afford to turn its back on an unprecedented set of warnings from all the major global financial bodies.
The US Treasury Secretary and former Federal Reserve chair Janet Yellen now says that North America is facing “unacceptable levels of inflation”.
The World Bank says several years of above-average inflation and below-average growth are creating a considerable risk of so-called “stagflation” (low growth plus high inflation and interest rates).
The European Central bank has downgraded its growth forecasts and significantly increased its inflation projections as it lifts rates.
The OECD – which is headed by former finance minister Mathias Cormann and represents 28 countries, including most of the advanced economies – has slashed its estimate of global growth from 4.5 to 3 per cent and estimates that average inflation will rise to a staggering 9 per cent – double its previous forecast.
Cormann says skyrocketing food and fuel prices, severe supply chain problems and China’s massive Covid-19 closures have fuelled the global economic crisis.
But Cormann and the OECD have some advice for Australia.
Not only does the former finance minister advocate increased renewable energy generation, he suggests that the nation needs to become less reliant on personal tax base, broaden its GST base, reduce superannuation tax breaks, cut capital tax gains discounts and replace stamp duty with land tax.
These changes (a GST change is unlikely) are going to require very different strategies for savers and enterprises. I will do my best to help.
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