By MoneyMorning.com.au
The Australian Government just gave away a dangerous secret.
A secret that will have a real and dramatic impact on your standard of living.
If issues like the rising cost of living, the gyrating Australian dollar and the carbon tax have been making you anxious, well, I’ve got bad news for you.
This threat to your financial freedom is graver than all of those issues put together.
But luckily, this cloud has a silver lining.
Getting tipped off now gives you a chance to fight back. Let me explain…
Dr Martin Parkinson spilled the dangerous secret I’m talking about in a speech last week.
Dr Parkinson has been the Secretary to Australia’s Department of the Treasury for the past three years. He’s also been a board member of the Reserve Bank of Australia since 2011.
He’s earned respect from both sides of politics.
So you can assume that when it comes to the Australian economy, he knows what he’s talking about.
That’s why it should ring alarm bells for you that Dr Parkinson has drastically lowered his expectations about Aussies’ living standards over the next decade.
In fact, the Treasury Secretary — Joe Hockey’s great mate — is painting a terrifying picture of Australia’s economic future.
Dr Parkinson is pointing to a dystopia where ‘the exceptionalism of this “lucky” country will become just a distant, ironic memory and our children may really end up “doing it tough”.’
With this speech, Treasury is trying to gently break a message to you: taxes are going up, and income growth is slowing, if not stopping.
The $13,000 cut to your income
Three factors are conspiring to choke Australians’ growth in income and living standards: falling terms of trade, an ageing population and weak productivity growth.
Even if the nation’s productivity increases at its long-term average, incomes will only grow 0.7% per year over the coming decade. That’s a deep cut from than the annual increases of 2.3% to which many have become accustomed.
Let me put that in clearer perspective for you.
That deep cut will lead to a $13,000 per person gap between ‘what Australians might hope for and expect, and what might come to pass on the basis of a reasonably benign scenario’.
The chart below shows the width of that gap.
We all like to stay optimistic about our prospects for future wealth, but according to Dr Parkinson, it may be time to ratchet down expectations.
The really scary part is that those forecasts rely on the Australian economy to deliver another 10.5 years of economic growth. By 2024 this would work out to 33 years of uninterrupted growth.
That’d be a heroic achievement, one practically unmatched in modern economic history.
The chart below puts that expectation in perspective. It shows the longest periods of growth since the Second World War (excluding the rebuilding of Japan).
While this plays out, the government has to figure out a way to fund some expensive policies. According to Dr Parkinson, by 2023 spending on health will have risen by 79% to $116 billion per year. Pension payments will cost an extra $39 billion a year.
Who do you think will pay for that?
Well, if Australia continues on the current path, taxpayers will shoulder more and more of the burden of all this government spending. Mr Parkinson makes that clear with the three pie charts below.
Personal income tax will rise from 49% of total tax to a whopping 56% if the government doesn’t make drastic changes to the current tax mix.
What’s the solution?
Well, all of this is a coded message. Treasury is telling the government to expand the GST.
As you should know, that hits low and middle-income workers hardest. Calling it a tough political sell is an understatement.
But Australia faces hard choices on spending and taxing.
What’s an investor to do?
One thing’s for certain: the central banks around the world won’t deviate any time soon from their globally coordinated program of money printing.
There’s every chance that this might end in tears by some time early next decade.
But until that point, central banks will keep pumping money into the economy, and asset prices will continue to rise.
There’s one effect of this huge monetary experiment that can’t be argued; it pushes up the price of risky assets.
That means if Aussies want to bridge that $13,000 gap between their rosy expectations and cold, hard reality…they’d better get investing.
The silver lining
The one positive out of this mess is the fact that the government has tipped you off — maybe inadvertently — ahead of time.
Here’s the message. Interest rates are staying low and incomes will fall.
That means you’ll need to add an extra income stream if you want to maintain your standard of living.
You can choose from a few different ways to earn that extra income.
If you’re lucky enough to find a bank that will lend to you, investing in tenanted property is one option.
In fact, if you follow the 18-year cycle that our property guru Phil Anderson has identified, the biggest boom of all time may be brewing. Phil’s wildly bullish on the next 15 years.
But I prefer investments that are open to investors great and small.
That means Australian shares…specifically, shares that reward you in one of two ways.
The first reward is dividends. The cautious way to get them is by investing in blue-chip, large-cap Aussie shares.
The second reward is capital growth. If you’re investing in shares that don’t pay a dividend — as in most parts of life — if you want more return, you have to take on more risk.
But if you pick the right Australian stocks…you can enjoy profits that make that $13,000 income gap look like a mere rounding error.
At Australian Small-Cap Investigator, we look for shares that offer both of those rewards.
I’m not saying you should invest all of your cash in speculative small-cap shares.
As always never invest more than you can afford to lose.
But I am saying this. If you want to get ahead of the game that Dr Martin Parkinson has foreshadowed…you’d better get investing.
Cheers,
Tim Dohrmann+
Small-Cap Analyst, Australian Small-Cap Investigator
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