On 9th May Eurozone finance ministers announced a rescue package valued at €750 billion Euros or US$1 Trillion. (In case you don’t know. That’s 1,000,000,000,000 or 1 million million US dollars.). The package is in direct response to the crisis in confidence that has unfolded in Greece following revelations that Greece can no longer meet its debts

This action is an attempt to shore up confidence and prevent the crisis from spreading to other troubled debt ridden members. The PIIGS - Portugal, Italy, Ireland, Greece and Spain are all countries within the Eurozone with worrying debt levels. The Eurozone is comprised of the 16 countries within the European Union that have adopted the Euro currency.

Confidence in the Eurozone and in the Euro currency has been badly shaken with revelations that Greece has been running much higher deficits than was previously known. In early 2010, it was revealed that the Greek government had engaged foreign banks including Goldman Sachs to essentially cover up the level of borrowing so as to stay within Eurozone guidelines. In May 2010, the Greek government deficit relative to GDP was estimated to be 13.6%. This is one of the highest in the world.

Greece has a long history of running government deficits to fund excessive public service salaries, pensions and social benefits well beyond the country’s means. Greece was badly affected by the global financial crisis with two of its main industries; tourism and shipping being hit hard and this only exacerbated existing problems.

Over 70% of Greek government debt is funded by foreign investors. In April this year Standard and Poors downgraded Greek Government bonds to below investment grade or “junk” status and this caused falls in stock markets across the globe.

The response by the European Central Bank (ECB) was to announce that all Greek government bonds would be accepted by the ECB regardless of the rating. This put a floor under the bonds and enabled banks to continue to operate.

There is a battle of nerves being played out in Europe where the ECB and individual governments have been taking progressive steps to counter the loss of confidence. Many think the responses have been too reactive and too slow.

Since this saga began, there have been four announced austerity measures from the Greek government aimed at reigning in excessive spending and with a view to bringing the country into surplus after 2012. This has led to strikes and civil unrest, which has further spooked investment markets.

All of the affected countries have followed with austerity announcements in Spain, Italy, Ireland and Portugal. Following the election of a new coalition government, the UK has also followed suit. These are healthy, long overdue developments demanded by uncertain investors. The long-term effect will be better-managed economies. In the short term, there is concern this fiscal tightening will push Europe back into recession.

In response to this concern, European finance ministers have said that not all countries in the Eurozone will be cutting spending. The stronger economies headed by Germany will keep existing policies in place. These strong export economies will also be assisted by the recent sharp falls in the value of the Euro.

There have been comparisons made between what is happening in Greece and what happened in the US following the collapse of Lehman Brothers. The concern is that there will be a rerun of the global meltdown that followed. However, there are significant differences in this case.

One key difference is that the rescue package was unveiled before an actual collapse and that has done a lot to restore confidence in Greece and the other troubled economies. In addition, each of the troubled economies have moved to contain spending and reign in their budgets. They have all acted relatively quickly.

The response has been much quicker and more co-ordinated than occurred in Asia during the crisis of the 1990’s.

Clearly, growth in southern Europe is going to be subdued and in some parts negative for some time and that’s going to have an impact on global activity. But to counter this, we are starting to see good signs of growth in the US and the emerging economies are clearly running at a different speed. With these counterbalances, it is unlikely that the troubles in Europe are going to be enough to drag the global economy down.

Andrew Condell

Back to Top

We have summarised below the key changes announced in the recent federal government Budget that are relevant from a personal investment perspective.

Savings Measures

50% discount for interest income - From 1 July 2011, individuals will be entitled to a 50% tax discount on up to $1,000 of interest earned on deposits held with banks, building societies or credit unions, as well as bonds, debentures or annuities. At an interest rate of 6%, the discount will apply to a savings balance of up to approximately $16,700.

 

Superannuation Measures

Super co-contribution - The matching rate for the superannuation co-contribution will be permanently retained at 100% of a person’s eligible personal non-concessional superannuation contributions up to a maximum contribution of $1,000. In addition, the salary range for qualification has been frozen for 2 years.

Superannuation Guarantee (SG) rate increase - The SG rate will be increased gradually from its current rate of 9% as follows.

2013 - 9%;    2014 - 9.25%;    2015 - 9.5%;    2016 - 10%;    2017 - 10.5%; 2018 - 11%;    2019 - 11.5%;    2020 - 12%

The SG age limit will increase from 70 to 75 commencing 1 July 2013.

Super contributions tax rebate for low income earners - The Government will make a super contribution of up to 15% of the concessional contributions made by or for individuals on adjusted taxable incomes (ATI) of up to $37,000 (not indexed), subject to a maximum limit of $500 (not indexed). This will apply from 1 July 2012 and be paid into the person’s super account in the 2013/14 financial year. This equates to a removal of the 15% contributions tax for those with ATI’s of $37,000 or less.

Concessional contributions (CC) cap increase - The CC cap for those aged 50 or more will reduce to $25,000 from 1 July 2012. This measure retains the higher CC cap of $50,000 (indexed) permanently, but only for those who have total super balances of under $500,000.

Trauma cover premiums deductible in super – Super funds will be able to claim the cost of premiums for Terminal Medical Condition (TMC) benefits effective from 16 February 2008, the date the TMC condition of release was introduced. This effectively now allows members to fund Trauma cover from pre tax dollars.

Additional Super changes effective from the 2010/11 income year:

• Commissioner of Taxation allowed to exercise discretion for the purposes of excess contributions tax before an assessment is issued;
• Increase in the time limit for deductible employer contributions made for former employees;
• Permanently allowing a claim for a deduction for eligible contributions to be made to successor super funds;

 

Taxation Measures

Increase in the medical expenses tax offset claim threshold - The threshold above which a taxpayer may claim the net medical expenses tax offset (NMETO), is to increase from $1,500 to $2,000 from 1 July 2010, and is then to be indexed to CPI from 1 July 2011. This measure reduces the benefit of the offset by up to $100.

Increasing the Medicare levy low-income thresholds - Effective from 1 July 2009, the Government will increase the Medicare low-income thresholds from $17,794 to $18,488 for individuals and from $30,025 to $31,196 for families. The threshold for single pensioners below Age Pension age will increase from $25,299 to $27,697.

Standard Tax Deductions - The Government proposes to allow a standard deduction of $500 for work-related expenses and the cost of managing tax affairs from 1 July 2012. From 1 July 2013 the standard deduction will increase to $1,000. Those with deductible expenses greater than the standard deduction amount will still be able to claim their higher expenses in the usual way.

Child Care Rebate – Currently the annual Child Care Rebate (CCR) is capped at $7,778 per child and is indexed each year. The Government will reduce the maximum CCR claimable per child to $7,500 and pause indexing for four years from 1 July 2010.

Company tax rate reduction - The company tax rate will be reduced from 30% to 29% from 1 July 2013 and to 28% from 1 July 2014.

There will be an earlier start for eligible small business with a reduction in the company tax rate to 28% from 1 July 2012. This means that small business companies will have a lower tax rate than other companies until 1 July 2014.

Small business instant write off – From 1 July 2012 small businesses will be allowed to immediately write off assets valued at under $5,000 (up from $1,000) currently and to write off all other assets (except buildings) in a single depreciation pool at a rate of 30%.

Instalment Warrants - Investor who hold Instalment Warrants will now be treated as the owner of the underlying asset for income tax purposes, with effect from 1 July 2007. This measure will not affect the treatment of non-recourse borrowing by trustees of superannuation funds.

Andrew Condell

Back to Top

The US continues to show signs that it is slowly recovering from its recession.
The US economy grew by 0.8% during the March quarter. While this was another quarter of economic growth, it was less than expected, and below the December quarter growth of 1.4%.

US unemployment remained steady at 9.7%. Manufacturing increased during March, as did retail sales, boosted by strong car sales. Housing starts also rose in March, providing much needed stimulus in that sector of the economy.

In Europe, news was dominated by Greece’s debt problems (see Europe article in this newsletter for details). In other European news, industrial production increased in early 2010, bringing the annual growth rate to 0.2%. This is the highest rate of growth in two years.

A consequence of the debt crisis has been the depreciation of the Euro against most other major currencies and an appreciation of the US dollar (flight to safety). The weaker Euro, combined with a general worldwide economic recovery is expected to assist European exporters. Counterbalancing this, is the expected contraction of household spending and effects of tighter fiscal policies being announced by European governments.

In Asia, Japanese household spending increased 4.4% for the year. Japanese industrial production rose 30% over the past 12 months. Unemployment rose 0.1% to 5.0%.

The Chinese economy continued its strong run, with real GDP increasing 11.9%. The Chinese Central Bank decided to increase its reserve ratio in an effort to dampen excessive domestic demand. The official Chinese inflation rate fell recently by 0.3% to 2.4%.

In Australia, inflation increased to an annual rate of 2.9%, the higher end of the Reserve Bank of Australia’s (RBA) target range. The RBA continued to tighten monetary policy with 0.25% increases at each of its meetings held in March, April and May. Markets are expecting the RBA to leave the official rate at 4.5% in the short term, with further rate increases later in the year.

Employment growth continued to gain momentum, with an increase in March of 19,600 jobs, up from 400 new jobs in February. Unemployment remained steady at 5.3%

The much anticipated Henry Tax Review was released in early May with a proposal for a new 40% super profit tax for the resources sector, a reduction in company tax from 30% to 28%, and a gradual increase in compulsory superannuation from 9% to 12%.

During much of April and May share markets were focussed on Europe. Markets retreated strongly following Standard and Poors’ downgrading of Greece’s rating to below investment grade. Concern then spread to other European countries having similar issues – Spain, Portugal, Italy and Ireland. Action by the European Central Bank and the International Monetary Fund (IMF) allayed some of those fears. Concerns remain as to how this debt will be dealt with however the strength of the response by the IMF and European Bank provided some confidence.

 

The Australian share market performed strongly through March and early April with the ASX 200 briefly breaking through 5000 points. The Australian share market was not immune to the European debt crisis and responded to international share market falls with a large correction in late April and May. This fall was exacerbated by the government announcing its intention to introduce a super profit tax for the resources sector as recommended by the Henry Tax Review.

In contrast to the poorly performing share market, the listed property sector continued to perform well, returning 3.7% for the month of April. It did however, experience a fall during May, giving up its April gains.

While world share markets have experienced a correction triggered by Greece, the medium to long-term picture will be greatly influenced by the efforts of the United States to continue to drag itself out of recession. The US remains the largest economy and the biggest influence on world markets. There are early signs that its economy is improving. The US Federal Reserve has also flagged that it will keep official interest rates low for an extended period. Given this environment, and notwithstanding the short-term market shocks, the outlook for shares in the medium to long term remains positive.

Brendan Gallagher

Back to Top