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Hedge Clippings | 05 April 2024
US Federal Reserve Chairman Jerome Powell pushed back expectations for an early (and multiple) cut to interest rates, saying they're still likely, but only at "some point" this year, saying that "solid growth, a strong but rebalancing labour market, and inflation moving down towards 2 per cent on a sometimes bumpy path" was going to make the timing of an easing - and possibly even the outcome - anything but certain. The same can be said about the timing of a rate cut in Australia, with expectations being pushed out, and the market pricing in only a 10% chance of a move (down) at the RBA's May meeting. The AFR reported this week that the median forecaster in their survey of 39 economists is tipping November before there's a cut, but their expectations have been extended for the past year.
Other uncertainties remain - including significant geo-political risk as a result of the horrors of Gaza, and the war in Ukraine which has now dragged on for 2 years. (Actually, 10 years if you include Russia's annexation of Crimea in April 2014, and their invasion of Ukraine's Donbas region in August of the same year. In fact, according to Wikipedia the last 10 years have just been the tip of the iceberg as far as Ukraine's invasion record is concerned, with the Mongols laying siege to Kyiv way back in 1240, and the Russians first invading in 1654.
Fast forward, and closer to home, this week former RBA Governor Philip Lowe left the golf course and weighed into politicians over the way Australia's taxation system works, which he said was not fit for purpose - specifically that the GST is too low, and income tax is too high. Longer term readers of Hedge Clippings will note this has been a regular and recurring theme of our Friday afternoon soap-box, but Lowe acknowledged that his call was likely to fall on deaf ears in Canberra. Former Treasury Secretary Dr. Ken Henry - author of the 2009 Henry Tax Review and its 138 (mostly ignored) recommendations - would no doubt agree, although his Review's terms of reference specifically excluded changes to the GST.
That didn't stop Henry demanding change at a book launch earlier in the week, saying that successive governments (of both persuasions) have been and are wasting time, saying we shouldn't be surprised if Australians "avoid and evade tax whenever and wherever they can." Personal income tax accounted for just over 50% of Commonwealth tax receipts in 2023, and are forecast to rise to over 58% in 40 years' time, by which time the "economic dependency ratio", which measures the number of people aged 65 and over relative to those of any age who are employed, is expected to increase from 33.2 per cent to 45.4 per cent. Needless to say we won't be around to witness that in 2064, but we're not leaving our children, and their children, in a very good place.
Incremental changes aren't the answer according to Henry: One hundred thousand years of incremental reform won't get us where we need to be in five years," he said. Sadly, his call for urgency will end up in the waste bin, along with the recommendations in his tax review 15 years ago.
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