The most disciplined of leaders can't let go.

Abbott and Costello

Who would have thought that a disciplined politician such as Howard would find it difficult to let go.  But then, it's happened before.  While history might not repeat itself perfectly, it does have certain rhymes and rhythms according to Mark Twain. Howard had his chance to inaugurate Costello and usher in a smooth transition . But he didn't. Instead much of Australia, led by the general media, engaged in a negative reaction to Costello's bid for the role of Prime Minister.  It would be interesting to know whether or not Howard's decision to hang on is mostly responsible for Rudd gaining such an ascendant  position in opinion polls.  A position that has surely spooked the Howard government into what might rightly be called "election mania fiscal irresponsibility".

Oops - Where's the Steady Hand On The Tiller

After so many years of responsible economic management, the Howard government has engaged in a blatant vote buying exercise.  An unsophisticated and blatant exercise at that. This election might have been a real opportunity to take the good economic work of 10 years to new heights.

A Fortunate 10 Years

Australia has benefited for many years from unprecedented global economic growth. You could easily argue that Australia's current  prosperity is a remarkable fluke.  A chance situation that has resulted from us having an abundance of minerals highly sought after by China and India.  But Louis Pasteur told us that chance favours those who are ready and the Howard government certainly was. Harnessing Australia's economic fortune has been a result of the Howard governments steady hand and solid foundation that was created by the former Hawke/Keating government's financial services and labour reforms. Now after all those years why have both the current Liberal and Labor governments resorted to irresponsible proposed tax cuts?  

Budget Surplus - Opportunity Lost

Some important questions that we must all consider include:

• How responsible are the parties for offering major tax cuts? 

• With under-investment in infrastructure, transport, schools, hospitals, a largely unfunded aging population, lagging telecommunications infrastructure, and labour shortages, can a different approach yield a better long term result? How much of the budget surplus has been the result of sustained underinvestment in these and other essential services?

• A target surplus of 1% of GDP is not extraordinary compared to past boom times. Is it better to consume now or would it be better to accumulate a higher surplus and invest it wisely for a rainy day.  A time when the Chinese and Indian economies slow and demand for our minerals abates?

• Perhaps part of the surplus could be globally invested.  ADIA (Abu Dhabi Investment Authority), or Norway's and Singapore's equivalents are good models.  The application of the budget surplus in this way would give  Australia a compounding long term asset that successive governments could call upon when global growth slows. How could the Future Fund assume this role? Clarity is required.

• The government could developed a scheme (it might incorporate tax concessions or other funding innovations) that would encourage growth in Public Private Partnerships (PPP).  Such PPP would eventually lead to much needed upgrades to our infrastructure and ultimately deliver the next generation of productivity growth.  

• Surely, a simple but safe vote-buying exercise could have channeled a significant portion of the tax cut give-way directly into tax superannuation. Rudd would not have dared pursue any significant tax cuts without Howard having taken the initiative. .

That said, the government's argument that tax cuts at lower income levels will result in an increase in the participation rate has some merit - how much we do not know for certain.

Immediate Consequences of the Proposed Tax Cuts

The tax cut has heightened the chances for further interest rate increases because:

• The tax cuts is highly likely to increase consumer spending and put pressure on prices.
• The Reserve Bank of Australia is already concerned about inflation levels.

Higher interest rates would be a positive outcome for retirees who rely on term deposit interest for a regular income stream.   Many retirees are now relieved of the need to invest in illiquid debenture issues to attain a high enough yield to cater for their day to day living needs.

But will the RBA increase rates on Tuesday the 6^th of November - Melbourne Cup Day?

As a Melbournite I would have to say "they would not dare".

But the RBA might not really have to increase the Official Cash Rate which now stands at 6.50%.

The money markets have already delivered a portion of the tightening by way of a positive yield curve - much of which is yet to flow into mortgage rates.  Higher shorter rates are contributing to a stronger dollar and a failure to increase rates pre election might result in an even steeper positive yield curve.  Additional interest rate pressure has already resulted from the blow out in credit risk premiums initiated  by the US  Sub-Prime crisis.

Thanks Paul for deregulating Australia's financial system.

Residential Rental Yields

What would the consequences of higher interest rates be now that we already have  falling housing affordability and a growing gap between housing demand and supply?  Private building approvals have been trending down for the past 6 years yet immigration is increasing.  Not surprisingly, rental yields are rising also.

Australia's housing construction sector has remained relatively depressed despite record high demand for new dwellings.  A report from research group BIS Shrapnel says housing needs have risen to 182,000 new dwellings per annum Australia wide, substantially up on the 151,000 actually commenced in 2006/07.

The forecasting group's figures suggest migration to Australia will reach 185,000 people by June 2008 - the highest inflow on record. This is in stark contrast to construction levels with supply constraints expected to see the number of dwellings commence drop from 151,000 in 2006/07 to 100,000 by June 2008. This trend is putting upward pressure on inflation (housing rental comprises 5.3 per cent of the CPI). BIS Shrapnel forecasts the Australian Bureau of Statistics (ABS) rental index will show an increase of 8.4 per cent over the year to June 2008.

Where to From Here

Bullish select residential and mixed use property developments in Sydney in 2008 and downside/capital protection of any equity based portfolio.