In my last post I wrote about the impact of the fiscal stimulus lump sums and their positive impact on ameliorating the impact of the GFC and job losses in Australia.  But now we need to make a decision about the rest of the fiscal stimulus measures in helping the Australian Government frame its 2010-2011 Federal Budget.

In our most recent Federal Budget submission, amongst other things, we suggested bringing the proposed personal tax cuts forward as a possible appropriate means to help stimulate the economy.  And this was the view we took to the Senate Inquiry into the fiscal stimulus measures earlier this year also.  However, since then there are signs that the worst of the GFC is behind Australia at least, and also for many other countries in our region. And the size of the Australian deficit is also a concern to many.

This time then, and as part of our organisation’s Federal Budget submission it is likely we will be considering proposing that some of the government’s fiscal stimulus measures are, to borrow a phrase recently seemingly popularised by US President Barack Obama – ‘calibrated’ back/down.

This is but one of the issues CPA Australia will be turning its collective minds to that should be addressed in our 2010/2011 Federal budget submission, and as always we are seeking your input as well. Other topics under consideration will include the proposed carbon pollution reduction scheme and the role of ‘green’ technology post-Copenhagen, environmental, social and governance issues, issues identified in the forthcoming intergenerational report (IGR III), and tax and super policy issues that should not wait for government’s response to either the Henry Review, or the Cooper Review.

If you have any comments please send them to policy.research@cpaaustralia.com.au by Friday 18 December, 2009.  All comments gratefully received – but note, all may not get up on the day.

Smooth sailing!

Were the fiscal stimulus lump-sum payments the Australian and other governments made to households to fight the affects of the Global Financial Crisis a waste of taxpayer resources, and similar to Milton Friedman’s often quoted analogy of throwing money out of a helicopter?

The answer, according to research published by the Reserve Bank of Australia titled Estimating Marginal Propensities to Consume in Australia using Micro Data [PDF] on the 2nd of December 2009, is a ‘qualified no’. That is, while a proportion of lump-sum payments were spent to stimulate the economy, the research shows that a permanent tax cut may have resulted in a greater proportion of that money being spent, creating greater stimulus for the economy.

The paper does not model how Australian households spent (or otherwise treated) their lump sum received earlier this year and late last year, nor how they spent the tax cuts many received in July. The research instead models the effects of tax cuts over 2005 to 2007 and two specific lump-sum transfers – the Baby Bonus and the Carer Bonus. Having stated this, the publication still serves as a valuable piece of research that policy makers should consider before they consider future options to stimulate the economy.

The research can be read as stating that if the intention of a government is to increase consumption, then permanent tax cuts are a better policy option because a greater proportion of the cut is likely to be spent. Having stated that, the research reaffirmed the long held view that lower income households spend more of their tax cuts and lump-sum payments, hence governments should get ‘greater bang for their buck’ if tax cuts and/or lump sum payments are directed to lower income households. The research also showed that where households are especially concerned about maintaining their income, they are more likely to save any tax cuts or lump-sum payment.

As the paper says in its conclusion, the results need to be interpreted with a degree of caution, however overall, the marginal propensity to consume from a lump-sum payment such as the Baby Bonus (which is given at a time a high expenditure, particularly for families having their first child) is lower than the marginal propensity to consume from permanent tax cuts (which are perceived to be persistent).

While the research does not criticise the lump-sum payments made by the Australian Government, the paper does support the recommendation CPA Australia made to the Government in February 2009 [PDF] and in our 2009-10 pre-budget submission [PDF], which was that the Government considers either a partial or full bring-forward of the proposed 1 July 2009 and 1 July 2010 tax cuts. This recommendation was valid in the economic environment of early 2009, but less relevant now (unless conditions dramatically change for the worse and there is a second GFC wave – but no-one is suggesting this as a possibility.)

Smooth sailing!

April Pitman, Project Manager, International Accounting Standards Board

CPA Australia, the Institute of Chartered Accountants in Australia, and the National Institute of Accountants were delighted to welcome April Pitman Project Manager, the IASB to present a comprehensive update of the project to develop a new joint standard for revenue recognition. (including where the project is going and specific application issues). This presentation was live streamed on Tuesday 2nd December and the recorded video is available for you to view below.

Background

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board are undertaking a project to develop a new joint standard for revenue recognition. In IFRSs, the new standard will replace the existing standards on revenue recognition, IAS 11 Construction Contracts and IAS 18 Revenue.

On 19 December 2008 the Boards published for public comment a discussion paper Preliminary Views on Revenue Recognition in Contracts with Customers.

In the discussion paper, the Boards propose a single revenue recognition model that can be applied consistently across a range of industries and geographical regions. Applying the underlying principle proposed by the Boards, an entity would recognise revenue when it satisfies its performance obligations in a contract by transferring goods and services to a customer. That principle is similar to many existing requirements. However, the Boards think that clarifying that principle and applying it consistently to all contracts with customers will improve the comparability and understandability of revenue for users of financial statements.

The IMF’s recent Global Financial Stability Report [PDF] — Navigating the Financial Challenges Ahead strikes a chord on a few fronts with some of us — not only because the paper’s sub-title has a nautical reference the same as CPA Australia’s ‘navigating the storm GFC site’, but mainly because many of the issues it discusses are in accord with our thinking on the appropriate way forward as outlined in our recent submission to the Senate Inquiry on the fiscal stimulus measures, and which I previously blogged.

While we are keen to ensure public debt is retired, one of the key tricks will be when to begin the withdrawal of public support for the economy, and at what speed. This will largely depend on when private and business consumption resumes its position as the driver of economic growth. In Australia at least, the central bank has begun the process of returning monetary policy to a more normal setting with its 25 basis point increase in its cash rate.

I hope you can make time to have a look for yourselves. But if not, please read the following high level insight from the IMF’s report:

• Systemic risks have been substantially reduced following unprecedented policy actions and there are some signs of improvement in the real economy.
• There is growing confidence that the global economy has turned the corner.
• There are risks as long as banks remain under strain and households and financial institutions need to reduce leverage.
• There are issues around the financing burden of fiscal stimulus, possibly crowding out the private sector and the sustainability of public sector finances.
• The challenge of appropriately disengaging public support to avoid either sparking a secondary crisis through premature withdrawal or endangering monetary and fiscal credibility through a belated exit, and that complacency now becomes a risk - banking system problems could go unresolved, and much-needed regulatory reforms may be delayed or diluted. The IMF believes policymakers should promptly provide a plan for the future regulatory framework that mitigates the build-up of systemic risks, grounds expectations, and underpins confidence, thereby contributing to sustained economic growth.

And — of course — smooth sailing!

A few weeks ago the government agreed to another inquiry into the government’s fiscal stimulus measures.  Our organisation has been an advocate of fiscal stimulus measures as an essential economic tool to combat the economic slowdown following the GFC for some time, and we confirmed this last year in our pre-budget submission [PDF], which stated …

“It was only some 12 months ago that, as a nation, we were considering policy options to, among other things, address the risk of inflation. However, circumstances changed considerably in that period, with inflation being all but eliminated as a major threat to the economy. Instead, the global financial crisis and the collateral economic fallout now arguably present the greatest risk to both the Australian economy, as well as all other economies around the world. Many economies are now either in negative growth or recession. To help ensure Australia’s economy does not follow this pathway, it is expected that the government may need to implement further stimulus measures in the short term“.

Not only did we support the government’s approach at the time, we also suggested they consider bringing forward personal tax cuts proposed to kick in from 1 July 2009 if necessary.

Given that at that time, and as we are now largely in uncharted economic waters, it was pleasing to see support for our position from the International Monetary Fund (IMF) who released Staff Position Note shortly after our pre-budget submission titled ‘Fiscal Policy for the Crisis’ [PDF], supporting government spending to help ameliorate the impact of the GFC on slowing economies around the world, and including cutting taxes if necessary.

CPA Australia also reiterated its position regarding appropriate fiscal stimulus measures in the Senate Inquiry on similar in February 2009.  And we now have had the opportunity to consider more fully our support for the fiscal stimulus package by way of the current inquiry.

It is not possible for us to really determine how much fiscal stimulus is too much and whether it has been spent on all the right things.  But the evidence that the fiscal stimulus measures have assisted the Australian economy in remaining one of the best if not the best performing economy in the world over the last two quarters and lends a lot of weight to support the government’s initiatives in this regard.

As strategic business leaders and advisers, we are very interested in return on investment (ROI) as a useful indicator as to how to and where additional investment in the economy should be allocated.  As the government’s fiscal stimulus spend is really an investment in the economy, jobs, productivity and the future, we are interested in the ultimate ROI and how long it will be before we return to surplus.  This remains to be seen.

Take a look at CPA Australia’s latest submission [PDF], and let us know your thoughts.

Smooth sailing.

While the Australian economy may have dodged a ‘GFC bullet’, agribusiness managed investment schemes (MIS) may not be so fortunate.

Yesterday the Parliamentary Joint Committee on Corporations and Financial Services (PJC) tabled its report [PDF] on the Inquiry into aspects of agribusiness managed investment schemes.

Some 80 odd pages in length, the report makes only three recommendations, with many issues being deferred for further consideration and probable inclusion in the other PJC’s broader current inquiry into financial services, due to report later this year.

One of the PJC’s recommendations was that the government consider investigating and modelling the effects of quarantining losses from non-forestry agribusiness MIS investments, so that these losses can only be offset against future income from the same MIS.  Such a review would be welcome.  But I can’t help but wonder if this recommendation is based on the misapprehension that the pooled investments under the spotlight get some kind of special or concessional treatment not available to other businesses or primary producers.  They don’t.  And to implement a measure that scrapped deductions in the year in which they were incurred would effectively be the death knell for many agribusiness projects in Australia.

This might be a good thing in some cases, as I haven’t met too many people over the years who have made a lot of money out of investing in agribusiness MIS.  But there is much more at stake here.  The government needs to carefully consider it’s next steps in relation to agribusiness MIS in line with not only consumer protection, but also the broader policy objectives of Australian investment, productivity and jobs.

It was also disappointing the PJC has not pursued CPA Australia’s recommendation that — as there is insufficient publicly available data on the past performance of agribusiness MIS to inform investors — ASIC (or another government body) should research and publish this information; see p56 para. 4.33 of the report.  This would enable the market (i.e. consumers/ potential investors) to make better informed investment decisions.

Now that would be a review that we would fully support.

Smooth sailing!