Economic Risks for Australia and the World

The Federal Budget & Australia

  • A key underlying risk to the recent budget is the sustainability of the government’s revenue base.
  • The capacity to raise revenue is undermined by one such trend of the composition of growth away from wages and towards corporate profits.
  • The government collects 41% of its revenue from personal income tax and is the largest contributor to government revenue. This can be compared with the average 24% tax across wealthy countries.
  • Maintaining the path to surplus which is expected to be achieved by 2021 will require a disciplined approach to expenditure.
  • The level of public debt will need to be monitored closely as well to ensure that Australia does not “fall behind with an unsustainable and uncompetitive tax system” – John Fraser. It was only in the last few weeks that ratings agency Standard and Poor’s affirmed Australia’s AAA credit rating in response to the Federal budget although it noted that the government’s strong budget condition continues to deteriorate due to numerous years of fiscal deficits.
Source: John Fraser, Secretary to the Australian Treasury

Global Outlook – Risks

  • North Korea’s nuclear aspirations and tensions with South Korea and US is currently the main geopolitical issue and incredibly problematic for the United States government due to lack of viable solutions.
  • China’s main risk would be a financial crisis and the collapse of the renminbi. These risks are low but it is expected that there will be a continued economic slowdown. This is unlikely to materially affect the US as they are in a trade deficit with China (imports > exports) and therefore don’t depend on them as much as other countries. By comparison, Australia is in a trade surplus with China (exports > imports).
  • Europe continues to be in a state of political instability, where Britain, Germany and Italy will be going to the polls in the next 12 months. A key risk would be the break-up of the Eurozone, with other nations following Britain’s example of voting to leave the EU. The probability of this happening is very low as these nations are anticipated to steer away from doing so until they see what will actually happen with the UK economy. For others in the EU, it is certainly not an option without adverse consequences. Countries looking to leave the EU will need to re-domicile their assets and liabilities into a currency that is likely to devalue and dramatically reduce the wealth of its citizens.
Source: Hamish Douglass – Chief Executive Officer and Chief Investment Officer, Magellan Financial Group
*Attended the Stockbrokers and Financial Advisers Association Conference (SAFAA) 2017