“Running costs have gone crazy” complains Sydney restauranteur Jared Ingersoll at the same time the Australian events industry warns it’s being crushed by a higher dollar.
While the closure of an inner city cafe doesn’t mean that much, a bigger warning about Australian costs comes from Royal Dutch Shell who have put their gas investments on hold due to project blowouts.
Natural gas investments are the core of Australia’s economic policies with the country’s Asian Century report identifying energy exports as being the country’s main revenue earner over the next quarter century.
Costs of doing business in Australia have been steadily on the increase since the Howard government introduced the GST which triggered Australia’s transition to a high cost country.
It didn’t have to be that way but Howard’s addiction to middle class welfare meant what should have been a opportunity to reform the economy during the mid 2000s was squandered with gifts handed out by one of the highest spending governments in Australian history.
While Whitlam at least spent money on bringing sewers to the suburbs, Howard spent his on subsidies to rich schools and parking permits to self-funded retirees.
It would take a brave government to undo Howard’s work which isn’t something we can expect from the populist and cowardly Australian Labor Party that lacks any of the honesty or strength required to confront the whining middle classes about their unsustainable entitlements.
Which makes the election announced last week interesting. In her election announcement the Prime Minister made a mention of dealing with the high Australian dollar, which at least shows the Labor Party sees there’s a problem – although they certainly don’t have the stomach to make the tough decisions required.
On the other side of politics though it’s all unicorns and magic puddings. Tony Abbot and his friends are partying like it’s 1999.
The Liberal Party policy paper released last week is notable for not acknowledging the global financial crisis and maintaining that taxes can be cut while Howard’s middle class welfare state can be expanded.
The best example of the Liberal’s addiction to middle class welfare is their promise to introduce a parental leave scheme. As their Strong Australia policy document explains;
Paid parental leave ought to be paid at a person’s wage rate, like holiday pay and like sick pay, because it is a workplace entitlement, not a government benefit.
Not only does the Liberal Party believe that high paid workers should get subsidies for their nannies, but that employers should pick up the bill, just like holiday and sick pay.
Middle class welfare and a massive business cost increase to boot.
In a Smart Company poll last week, the small business readers overwhelming endorsed the Liberal Party.
They should be careful what they wish for.
For those worried about getting Australia’s high cost base down there are serious debates to be had about our tax and welfare systems along with tackling issues like high property prices, over-regulation, aging population and workforce skills.
Most importantly, we have to define what Australia wants to be in the 21st Century.
Little, if anything about these issues will be discussed before September and in the meantime the Dutch disease will slowly strangle Australian business. We need better.
Not to mention the national debate that isn’t happening about what type of economy Australia should aim for after the mining boom runs its course. The nearest we’ve come so far is when RBA said house building could replace it. Hilarious!
By the way, the link to the article about the Grays and their $150k p.a. struggles is exquisite.
I have to say finding that quote was the most depressing two hours of my life as I made the mistake of reading some of the comments to sections to various blogs discussing it. The level of middle class whining about how hard it is to live on 150, 250 or 400k a year and why they deserve fat globs of taxpayers subsidies had me considering immigrating to Ulan Baator.
What it did illustrate is how tough it’s going to be for a future treasurer to unwind all of this. In one respect I hope its Joe Hockey and Tony Abbot that have to grasp this particular nettle.
Disappointed you didn’t mention Blue Poles in the same breath as the Whitlam government ! Either (a) a huge waste of taxpayer money or (b) a prescient investment both culturally and financially …. depending on your politics of course !
Talking of high cost base, here’s a snippet of my last 2 weeks travels: simple meal for 2 in Perth seaside cafe $110; simple dinner for two in Hong Kong restaurant $50; 1 course lunch for 2 in upmarket English town $43. The Perth meal included one alcoholic drink instead of non-alcoholic, and 1 dessert. The Chinese meal included 2 dessert dishes. The English meal had 4 non-alcoholic drinks but no desserts. Paul, where is all the money going in Australia ? Landlords ? Can’t imagine it’s waitress wages …?!
Good comparisons Keith, I’d answer the ‘where’s the money going?’ question with four factors – rent, overheads, distributor costs and required rates of return.
Business owners in Australia need to make a quick buck in order to pay their mortgages and other costs, so if they aren’t making a big mark up they may as well get a job with the public service. This is why retail and accommodation is so expensive.
On top of the proprietor’s markup, there is a whole network of ticket clipping distributors and wholesalers. In the restaurant industry, these people are far more profitable than the restaurants themselves.
For instance, did you know there is only one major wholesale distributor of foreign cheese in Australia? Those who can get around Manassan Food’s control, like Italian and Greek grocers, sell cheese substantially cheaper.
I’ve covered overheads in a previous post and, as Jared Ingersoll’s at the beginning of the post indicates they have been soaring in recent years.
Rent is the killer though, commercial rents are high and creeping up. I never cease to be amazed at the boasts that Sydney’s Pitt Street Mall is one of the most expensive shopping strips in the world.
Making matters worse, is that there isn’t a huge differential to rents on Pitt Street to those in suburban and regional centres. As opposed to most other countries where commercial rents drop away quickly as you move away from the prime locations. This is one reason why Australian businesses concentrate in Melbourne and Sydney, why bother moving out when the rents aren’t much cheaper?
Overall, it’s a pretty tough bunch of problems. I think we need a recession to face them.
What an excellent blog. I will be sure to come back here often. Yes, the anvil of debt is heavy and everything must contort to carry it, not just the fingers touching it.
The effective income-after-debt of most households is roughly the same. This is because of clever computerised bank lending software which calculates the maximum amount allowed to be borrowed by a household. Flipping it around, these algorithms are really calculating income remaining after debt. That’s why they ask you how many kids you have and what bills you pay each week. Everyone lies about the bills and credit cards.
All banks use roughly the same model, everyone wants to borrow as much as they can so I feel no pity for them, but remaining income will be roughly the same depending on numbers of kids and other data entered into the program at the time. The variable for this algorithm is the amount available to be borrowed. Income remaining is a fixed calculation.
It is hardly surprising then that the “wealthy” are crying for subsidies when they’re earning 150K+ a year but only ever seeing a fraction of it. For example, and I don’t know exactly what figures are involved, but earn 150k with 2 kids, a couple of credit cards, and the computer leaves you with an effective income of around 50-60k, perhaps less. The rest is vapourised by debt repayments.
Truly, the 150k people need to start to live like 50k people but what happens to the economy when they do? I would say they have already started, and it is already happening.
I’d agree, the sensible folk – and they are the majority – know neither the government spending or the bank debt isn’t sustainable and are adjusting accordingly.
How that spins out for governments and business whose long term plans are based up debt driven consumption remains to be seen however.
I genuinely worry for the people who haven’t received the memo. This folk are sleepwalking into a world of pain.