Structural reform inevitable

There is really little to be gained by focusing on depressing news such as the $17 billion blow out in the federal deficit or the projected stream of deficits totalling over $120 billion in the four-year forward estimate period.

For one thing, these estimates assume unchanged policies and continuing real growth of the Australian economy of 2.75 per cent a year.

While this is less growth than in the past, the Australian economy will remain healthy with affordable debt levels. However, structural reform will be needed, such as is now being forced on the communications, car and airline sectors.

The changes required will be painful for the people involved but there is recognition by the federal and state governments of the need to lessen the pain involved.The contraction of our manufacturing sector was inevitable following the floating of the currency, reduction in tariffs and the resources boom.

The counterbalance to these forces is that the flexible exchange rate, while still higher than the Reserve Bank would like to see, will help cushion the adverse impact of a decline in the fortunes of the resources sector and falling terms of trade. 

The Reserve Bank has also foreshadowed that it is unlikely to reduce the official cash rate further below the current 2.5 per cent a year. This decision is based on a considered assessment of the prospects for the economy and the realisation that the interest rate cuts already made are helping the retail and housing sectors.

A large part of the explanation for the difficult budgetary situation facing the federal government is to be found in the short-term horizon of successive governments. A key example of this has been the reluctance to take the hard decisions to meet the challenges arising from our steadily ageing population.

The ageing of the population will increase the costs of age pensions, health, welfare and disability outlays, creating pressures to change the rules and limit access to benefits. This will be essential if only to reduce the need to increase the tax burden on the working population.

With the tax-free area now set at $18,200 annually and much higher for many older people, the slower growth of income tax collections projected this week is inevitable.It will be very difficult for the present and future governments to reduce the series of tax cuts undertaken by both major parties in better times. This is why the government is foreshadowing a horror budget in May.

Just how tough it will be remains to be seen. At this stage, however, the government still needs to be aware of the possibility that severe cutbacks could be self-defeating if they adversely affect the growth of the economy.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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