Federal Budget 2009 highlights

[disarray]

china is financing our budget to the tune of $500 million a day. even buffet said countries like australia risk losing sovereignty by being bought out by foreign interests.

our government is rubbish. it has been for a long long time now.

 

[MrBurns]

I just dont dislike Rudd, I hate the little ear wax eating pricks guts.......there that feels a bit better.

 

[MrBurns]

Turnbull is doing really well, making Rudd look like an idiot.

 

[Julia]

can anyone tell meWHO we are borrowing all this money from?



.

As obviously none of us knew the answer to this, I sent an email to "Money Morning" with the question. Their response today is as follows:

But for today an apt dose of reader mail:



"The government continues to borrow at unprecedented levels. No one I have asked knows from whom this money is being borrowed and on what terms. Do you know the answer to this?"


It just so happens we do know the answer. Actually there are two parts to it. The buyers and the sellers - obviously.

A few weeks ago Dan Denning upstairs at the Daily Reckoning brought to attention the workings of a government department called the Australian Office of Financial Management (AOFM).

You can access the department's website here. This is what the front page of the website tells you:


"The Australian Office of Financial Management (AOFM) is a specialised agency within the Treasury portfolio responsible for management of Australian Government debt. The AOFM's activities include the issue of Treasury Bonds, Treasury Notes, management of the Australian Government's cash balance, and management of a portfolio of debt and investments."

"The AOFM aims to manage Australian Government net debt at least cost, subject to an acceptable level of risk, and to contribute to supporting financial market efficiency."
Not surprisingly there hasn't been too much activity at the AOFM in recent years. Not since the bond market was almost closed down a few years ago.

Since late last year however, well according to today's Australian Financial Review (AFR), the AOFM will be increasing staff numbers by 10% from 30 to 33. That's not a big number. But what is a big number is this...


"The total face value amount of Treasury Bonds on issue at end-June 2009 will be around $79 billion, an increase of around $30 billion on end-June 2008."

"Treasury Bond issuance in 2009-10 is expected to be around $60 billion. After accounting for maturities of $6.0 billion this represents a net increase of $54 billion in the face value amount of Treasury Bonds on issue."

"The face value amount on Treasury Bonds on issue at end-June 2010 is projected to be around $133 billion."
Boy, those guys know how to raise money. So, by June 30th 2010, the total amount of government debt on issue will be $133 billion, compared to around $50 billion at June 30th last year.

It's not surprising the AOFM is increasing staff numbers. So far this year it has held 31 bond tenders. And we're only in May. From 2006 through until 2008 there were a total of 41 issues. By the time this financial year ends, the AOFM will have held a further twelve tenders.

That means in the six months of this year the AOFM will have held more tenders than in the entire previous three-year period.

In fact yesterday the AOFM issued another $700 million in debt. All of it snapped up by investors. With an average yield of 3.86% that will cost taxpayers $27 million in interest payments by this time next year.

But of course that isn't a one-off. Remember, debt will stand at $133 billion by the end of June next year. And the interest cost on that? For one year, you the taxpayer will pay a total of $5.13 billion in interest.

That's about $500 per year for each taxpayer. Doesn't sound like much? Don't forget, that's just the interest. And that will be charged each year the debt is outstanding.

And there's still the principle to pay back as well...

Which if you spread across the roughly ten million employed persons, equals around $13,000 each.

Look, we could go into more detail and make it more complicated, but some things don't need to be made more complicated. There is one simple fact which the mainstream media, commentators and analysts have missed. And that is there is no such thing as a good or manageable or acceptable level of government debt.

You could argue there is no such thing as government debt if we're being picky, because the debt is completely underwritten by the taxpayer. Taxpayers that are about to be hit with $133 billion of debt at a time when they are least able to afford it.

But I said there were buyers and sellers of the government debt. The sellers are the AOFM. But who's buying this stuff?

Do you remember part of the reason why the US has got itself into a big hole? OK, there's a bunch of reasons. But one reason is that it became over reliant on the consumer. Credit was easily available and so people spent up big. They mistook that spending for wealth.

The US government burdened its industry with so many rules and regulations that it became uncompetitive. So business sent manufacturing off shore, or they closed up shop in the face of stiff competition from Asia.

Foreign companies received billions of dollars as payment for goods sold to the US, but either had nowhere else to invest the money or keen to keep their currencies weak to encourage more exports they didn't bother converting those dollars back to their own currency. They bought US government debt instead.

And so, the US government issued more and more and more of the stuff. "An economy doesn't need to produce anything if these suckers accept our IOUs" they must have thought.

Of course now, realization has hit that without production an economy cannot survive.

Which brings us to who's buying Australia's debt? Again, a visit to the AOFM website spills all the beans. Here you can view the presentation given in Dubai by the CEO of the AOFM, Neil Hyden.

In other words, our beloved policy makers have set themselves on course to repeat the same mistakes that hapless public servants have committed overseas.

Worse than that is it's creating the perfect storm for inflation. In the short term there will be demand for sovereign government debt both domestically and from overseas. This is likely to increase the price of bonds and decrease the yield. But it will only be for the short term.

You see, as with any non-market driven actions it has what the mainstream call 'unintended consequences.'

As we've written with the housing market, government involvement always leads to a distortion of supply and demand. So, in the short run there will be a big demand for Australian sovereign government debt. After all, there isn't much "quality" debt being issued at the moment - remember it's all relative.

But as more and more debt is issued the appetite from investors will become less and less. Either because they already have enough invested or because of the over-issuance, investors are now demanding a higher yield.

Think of it this way, the more debt on issue the less valuable or scarce existing and new issues become. Therefore the price must be lower. And if the price is lower then equally the yield must be higher. Think of it another way, if you already own a large amount of something (debt for instance), then your appetite to buy more is less. So you will pay less for it at a higher yield.

But even worse than that is the impact on corporate equity and debt raising. If government debt is viewed as risk-free, then corporate debt and equity has to be priced at a premium to reflect the fact that it is not risk free.

This means that as yields on government debt rises, yields on corporate debt must also rise. In other words, the cost to a company to raise finances becomes more expensive thanks to the distortion created by the government.

It creates a spiraling effect, from which it's difficult to emerge.

The endgame is rampant inflation. We're already seeing higher inflation even though the official statistics aren't showing it yet.

The massive stimulus packages and wasteful infrastructure spending by the government is preventing prices from falling - which is what should happen in a recession. This means that as the cost of money rises, prices are rising from a previously inflated point rather than from a depressed point.

Eventually foreign investors will realize that apart from Australia's natural resources, there is little else for them to buy with their Australian dollars and a flight from the Aussie dollar will follow.

This will put even greater pressure on interest rates, and make imports even more expensive pushing inflation up further.

It's a dark scenario. And it's inevitable if policymakers continue down the path of debt fuelled spending. Australia's one exit point from this mess is the reincarnation of the resources boom.

But even with that, it will only delay the inevitable unless current policies change.

 

[Stan 101]

One positive on this budget is the upgrading of the Bruce Highway from Sarina north to Cairns. Having to drive it at least once a month from Cairns to Mackay gives one a chance to have a faith in their god. The road south of the Hinchinbrook range to Ingham is a deathtrap as is the section north of Babinda and the road souht of Ayr.

This road is so poor that I prefer to ride a motorcycle south as opposed to a car to avoid the 30cm continuous "divits" in the #1 highway on the eastern seaboard.
Having B Double trucks being forced into the opposing lanes due to poor road condition is just a basic road skill one must learn to avoid on this part of the Bruce highway.

I fail to recall the previous government allocating funds for major upgrades in this area.


cheers,

 

[Calliope]

As obviously none of us knew the answer to this, I sent an email to "Money Morning" with the question. Their response today is as follows:

Julia, that is a frightening scenario. But I would hate Turnbull's task of convincing the demographic group that prop up Rudd's popularity that he is really Australia's biggest danger. He aims to ruin the country and then shoot through to the top job at the UN.

 

[Trevor_S]

As obviously none of us knew the answer to this, I sent an email to "Money Morning" with the question. Their response today is as follows:

What the hell ? they didn't actually answer your question and waffled on for pages (albeit an interesting treatise none the less), are they politicians ? Surely it's a one liner ie X, X and X...

 

[Julia]

What the hell ? they didn't actually answer your question and waffled on for pages (albeit an interesting treatise none the less), are they politicians ? Surely it's a one liner ie X, X and X...

Yep, they lost me about half way through. What I gathered before my eyes glazed over, though, was that considerable funds are raised via government bonds.
You could email them and express your objections? At least I attempted to find the answer. Sent the same question to "Business Spectator" from whom no reply has been received as yet.

 

[disarray]

and who is buying the bonds ...... ?

you do special deal for iron ore with us yes?

 

[Julia]

Entirely likely. But your ordinary Aussie investor is also going to buy them I suppose.

 

[Bill M]

Entirely likely. But your ordinary Aussie investor is also going to buy them I suppose.

Hi Julia, yeah that article certainly doesn't say where the money is being loaned from. I was a bit disappointed about not seeing the much touted "Inflation Linked Government Bonds" come out. We would have took those on if the rates were enticing enough.

What I don't understand is why a lot of Aussie companies borrow from US institutional investors and not from the Aussie Public and Superannuation funds. Classic example is the APA Group. They just organised a loan from the US at 565 basis points above the treasury rate. This would mean that they would have to pay between 8 and 9% for this loan. Why wouldn't they just issue bonds locally for 6 or 7%? Doesn't make sense to me. We are starved here of decent bond issues. Look at Tabcorp and the AMP Bonds, well up from issue price and they basically raised as much as they wanted.

 

[metric]

well done julia. thank you. pity mainstream didnt commit as much time to this as andrew johns....."morality play..". but that is why morality plays are printed. distract the sheep..




.

 

[aleckara]

Hope my reply isn't too big either Julia.

they did answer it kind of. He mentioned presentations in Dubai and articles have mentioned China and Japan. And he mentioned a side effect not known to a lot of people - foreign debt is what keeps our dollar high in the short term and makes our exports less attractive making the issue of paying down foreign debt worse.

Australian's as a whole don't really save much cash. Our historical saving rates are abysmal yet we are the happy consumerist society. Where do you think all the money comes from? Well if Australia isn't saving Aussie dollars foreigners must be. The basics of current accounts are simple - if you as a country spend more than you earn, you have to borrow the difference. If you can't borrow to make the difference in theory the local dollar should adjust downwards until imports are no longer affordable and you are spending as much as you earn. In a country with no production this drop will have to be severe.

Keynesian economics (i.e the idea of stimulating in recessions) was invented in a world where globalisation was barely in its infancy and as such the debt really was only owned predominately by local investors. With local production and local money sourced from foreigners stimulus breaks because foreigners provide you the money to buy their goods - so they are no worse off but you have more debt. Production is the only way to get out of this mess, but the system has structured this so it does not make sense for locals to do so.

 

[YELNATS]

How it affects me:

1. Now we MUST wait until 67 to get a Pension

2. Superannuation co contribution has dropped to $1,000 down from $1,500

Nothing else directly affects us.

The co-contribution is a furphy anyway. I thought I was going to get the full $1500 this year, as my taxable income was below the threshold where the payment starts to decline. Not so, the amount is based on gross assessable income, which for me was quite a bit higher, so I only get a mere pittance.

However, the greatest problem with the budget for me and many others approaching retirement is the halving of the concessionally taxed superannuation contribution amount from $100,000 to only $50,000.

The government wants us to fund our own retirement, but is pulling the carpet away from under our feet, thereby increasing the number of retirees applying for the pension and therefore future federal deficits.

One year we have encouragement to self-fund our retirement, the next we have disincentives to do so.

I had a 2 hour session with my accountant yesterday and he was appalled at the surprise budget changes, indicating that Messrs Rudd and Swan don't understand what they have done or what they are doing.

Do I detect a whiff of incompetence in Canberra?

 

[Bill M]

The co-contribution is a furphy anyway. I thought I was going to get the full $1500 this year, as my taxable income was below the threshold where the payment starts to decline. Not so, the amount is based on gross assessable income, which for me was quite a bit higher, so I only get a mere pittance.

Yeah that's right for 2008-2009 to get the full $1,500 you must earn $30,342 or less and then it is reduced at the rate of 5 cents per dollar up to $60,342.

However, the greatest problem with the budget for me and many others approaching retirement is the halving of the concessionally taxed superannuation contribution amount from $100,000 to only $50,000.

Whilst that is a real pain there is still the option of putting up to 150K per year after tax, that has not been changed.

The government wants us to fund our own retirement, but is pulling the carpet away from under our feet, thereby increasing the number of retirees applying for the pension and therefore future federal deficits.

Yes I agree with that and I think it is very wrong. Raising the age to 67 years is a cheap nasty whack but they are clever, they did it in a way not to affect the near term coming online pensioners but the future pensioners are too far away from that time to worry about it. In other words those under 53 y/o don't worry and those over are taken care of. That single issue would make me as a swinging voter go the other way.

One year we have encouragement to self-fund our retirement, the next we have disincentives to do so.

One of the main reasons most of my investments are OUTSIDE of super is because of continuous tampering with super. Back in the late 80's all Investment Advisor's and Planners were saying that super was the best way to go and that at age 55 you can get all your money out or take a pension and retire. Then Government of the time PULLED THE BLUDDY RUG from under us, they jacked up the preservation age to 60, thank you very much for all the previous lies.

Incidentally, I still have most of my savings outside of super, mostly because of things you highlighted and the continuous changes. What's to say the clowns won't say "now you have to wait until 65 to get your money"? Never ever trust Government.

I had a 2 hour session with my accountant yesterday and he was appalled at the surprise budget changes, indicating that Messrs Rudd and Swan don't understand what they have done or what they are doing.

Do I detect a whiff of incompetence in Canberra?

I only have one bit of advice for the Government, Leave our Super and Dividend Imputation alone, let those that want to fund themselves to do so without continuously changing the rules.

 

[ROE]

and who is buying the bonds ...... ?

you do special deal for iron ore with us yes?

Apparently a lot of smart people , I also like bond especially the index-linked bonds
Bonds out perform equity in the last 10 years and if you want 30 years
it also out perform the equity market as well

Don't know why people bother invest with superfund they cant even beat the damn bond market

Bond is a grow slowly, never go backward type of investment and adding in time and compounding a potent combination for decent return