The best advice tax dollars can buy

Robin Bowerman, Head of Retail at Vanguard Investments Australia.
Robin Bowerman, Head of Retail at Vanguard Investments Australia.

EVERYONE likes to know the inside story.

This week we got a real insider perspective from the most unlikely source – the Treasury.

It is traditional that when a new government is elected one of the first things the senior ministers receive is a confidential briefing from Treasury on the state of economy, the budget, specific challenges and policy issues that the new government is expected to deal with.

Treasury prepares two briefing papers – one for a government that is re-elected; the other for a victorious Opposition.

This election has been unlike any other in a number of ways and that trend continued this week with Treasury publicly releasing – after a series of requests under the Freedom of Information Act – the contents of the so-called “Red Book”.

For investors this is an invaluable insight into the economic and policy agenda prepared by some of the smartest and most influential of public sector advisers.

This is the best advice that our tax dollars can buy – so it seems reasonable that it is shared more widely than has been historical convention.

For policy nerds it doesn’t get much better than this. Interested in Treasury’s thoughts on population growth, China and India’s emerging economies, climate change, the proposed national broadband network, water resources … then look no further than the website.

Reading the documents give you an insight into what Treasury advisers are thinking and advocating – except for the sections that are blacked out - although even that adds to the feeling of getting an insight into what the Canberra powerbrokers deal with.

The good news is the economic outlook. Positive but challenging is Treasury’s description with the prediction that our economy will return to full capacity over the next year. While it flags some potential short-term weakness as stimulus measures are withdrawn, in the medium-term it believes that the economy will be underpinned by an emerging, if somewhat variable, global recovery and mining boom.

Treasury is pointing towards strong employment growth and “exceptionally high levels of business investment” in the coming years. Household spending though it believes will be weaker because of increasing interest rates and a stronger currency.

That said Treasury is leaving Treasurer Wayne Swan and Prime Minister Julia Gillard in no doubt that real risks remain on the global economic front.

It sees two key risks for Australia:

  • Our reliance on short-term external debt – largely in the form of offshore borrowings by our banks
  • Highly indebted households, together with high house prices, “further heighten the vulnerability of the economy to shocks”

And it makes the point strongly that one thing the government must do is maintain credibility in fiscal policy terms or run the risk of losing the confidence of global capital markets.

It reiterates the need for longer term tax reform – not surprising perhaps given the chair of the report on the Australia’s Future Tax System was none other than Dr Ken Henry, Treasury secretary.

Treasury says that as a medium-sized open economy, and with increasing integration of international capital markets, it will be important to “shift taxes away from domestic investment towards other less mobile tax bases such as land, resources and consumption”.

There is also one paragraph that may alarm some people with a self-managed super funds. Clearly Treasury does not like the impact SMSFs have on the public purse.
According to Treasury “the superannuation system is leaking revenue, with self-managed super funds now the tax minimisation vehicle of choice. Better enforcement and acceptance of the Cooper recommendations are part of a solution to plug some structural gaps”.

It may be the dawn of a new government but when it comes to super and rule changes it seems some things never change.

Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.

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