The Federal Government is expecting a bigger budget deficit this financial year than originally forecast.

The updated budget papers predict a $41.5 billion deficit, which is almost $1 billion more than the July forecast.

Key points: Budget to return to black in 2012/13 with $3.1b surplusProjected budget surplus in 2012/13 down $400mBudget deficit to increase to $41.5b in 2010/11Unemployment rate to fall to 4.5% by June 2012

Treasurer Wayne Swan’s release of the Mid-Year Economic and Fiscal Outlook (MYEFO) confirmed predictions that a rising Australian dollar would hinder the Government’s bottom line.

But while the 2010-11 budget forecast has blown out, the Government is still on track to return a surplus of $3.1 billion in the 2012-13 financial year.

This compares with the $3.5 billion predicted by Treasury and Finance in the Pre-election Economic and Fiscal Outlook (PEFO) released in July.

The economic update also shows employment conditions will continue to strengthen, with the jobless rate falling to 4.5 per cent by 2012.

A return to surplus by 2012-13 was one of the Labor Government’s key election pledges.

Mr Swan says it is the fastest positive turnaround in the budget in more than 40 years.

And he says the Government is determined not to repeat the mistakes of the past.

“We put our fiscal rules in place in February last year because we understood that as we moved to strengthen the economy we had to formulate the exit strategy for the future,” he said.

Mr Swan says he is optimistic about Australia’s economic future.

“A strong economy is an economy that creates jobs, creates opportunities for people,” he said.

“What they (the figures) represent is hundreds of thousands of more Australians in work.

“To be coming back to surplus in three years, well ahead of any other major advanced economy, is something that we should all be optimistic about.”

Mr Swan also defended changes to the revenues generated from the minerals resources tax.

He says the revised forecast for the tax relates to the change in the exchange rate.

“What we’re dealing with is solely here the exchange rate effect. That’s why tax [revenues] overall are down about $10 billion. It largely reflects lesser company profitability,” he said.

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Australia’s surging dollar will not derail plans to get the national budget back into surplus by 2013 despite its impact on tax revenue, Australian Prime Minister Julia Gillard said on Sunday.

In the last week the Australian dollar <AUD=D4> has strengthened beyond parity with the US dollar, hitting successive record highs over several days. On Friday it hit a 28-year high of $1.0183, the highest since the currency was floated in 1983.

The rise has fuelled concerns about the indirect impact on taxation revenue, particularly from Australia’s key commodities exports, which are mostly priced in U.S. dollars.

In a television interview, Gillard told Channel Nine the budget would be returning to surplus “in 2012-2013 as promised”, referring to Australia’s fiscal year which ends in June. However, she admitted that the “high Australian dollar has had an impact on revenues”.

These would have impacts for the government economic outlook and a new resource rent tax on mining profits, but Gillard said she was determined to seek new savings.

“We are going to keep up the discipline and we will bring the budget back to surplus as promised,” she said.

Treasurer Wayne Swan said the strong Australian dollar would inevitably affect tax revenue.

“The higher dollar means our exporters bring home less income and that flows through to reduced company and resource taxes,” he wrote in a weekly economic note. “Commodity export earnings are particularly affected, because they are contracted in U.S. dollars.”

During the global economic crisis, Australia’s Labor government spent a huge fiscal surplus accumulated under the former conservative government to prop up its economy.

The move helped the country avoid going into recession but also sent the budget into deficit.

The Australian dollar’s recent surge has been driven by a strong economy, strong international demand for Australia’s resources exports, a surprise interest rate hike by the central Reserve Bank of Australia last week and weakness in the U.S. dollar.

Swan has firmly ruled out any direct government intervention to halt its rise, saying the free-market mechanism in place since 1983 has served the country well

To be honest, I’d probably do more shopping from local online retailers if the postage costs were more competitive. Australia Post hasn’t really encouraged shopping online because their costs are so high.

Clearly, I’m not alone. Even more so now, thanks to our rising dollar, more and more Australians are logging on to shop overseas.

However, for many Australians, we don’t just shop online for convenience. More than ever before, we are shopping online, and sending our hard earned dollars overseas, simply because it’s cheaper to get it from America. Or China. Or Europe. Perhaps even Greenland these days!

And guess what? Aussie retailers don’t like it. The Australian retail industry is worth about $292 billion, and it’s estimated that this year Australians will spend about $6 billion online.

They think they’re losing out on a chunk of that income. Well, they are, but not a whole lot.

Quite simply, why should you pay more when you know you can get a product cheaper elsewhere?

I certainly won’t. As every other basic living cost is on the rise, every dollar saved there is another dollar towards something you really want.

In a recent interview, Russell Zimmerman head of the Australian Retailers Association is ‘crying out’ to the government to fix this problem. What problem? He cites job losses, business closing down and all other dramatic scenarios if a stop isn’t put to this madness! When will the pesky consumer learn to pay higher prices for far less options?

In 2005 the government increased the amount you could spend overseas before paying any GST or duties. As of today, if you spend less than $1,000, anything you buy overseas won’t attract a tax charge.

But, for an Australian retailer because of the volume they purchase in, they must pay taxes. It’s simply unavoidable.

Zimmerman, appealing to the government’s need for someone else’s money has reminded the government that it’s missing out on revenue, ‘There’s around $6 billion worth of goods coming in without any form of duty or GST being paid on them… there is around $600 million worth of GST the government is missing out on.’

He’s even suggested that import value be lowered to $400 and then apply duties or GST. The problem isn’t that retailers are under threat of closing down. At the moment, people shopping online is more about eating into retailer profits, which no business likes.

But what’s worrying is that he expects that government to ’save’ the industry by forcing more tax on people. Considering that online shopping accounts for little more than 2% of the entire industry you have to think they must be really desperate for sales.

Instead of trying to get the government to tax you even more and make you pay more for goods, perhaps he should be listening to why consumers are shopping online rather than in stores? That way they may get some of the business back.

Yes, a strong Aussie dollar has encouraged me, and many others to increase internet shopping where possible. Thanks to central bankers fiddling around with things, you can now get more for your money from overseas online stores.

But there’s also the choice factor. There’s a far greater variety available overseas and online. Much more than the shops offer here, and Zimmerman is missing this opportunity to hear what consumers want from their retailers.

Last time I checked, retailers were supposed to serve a purpose, but right now, that purpose isn’t being met. So consumers have voted with their dollars and spent them elsewhere.

Yet, all Zimmerman wants the government to do is to ’save the industry and job losses’. Which really means increasing the taxes you pay.

Now, if items are too expensive in Australia, doesn’t it make more sense to appeal to the government to lower the taxes and duties paid by retailers in order to remain competitive and keep Australian retailers in business?

Of course it does. But he knows that the government is never willingly going to give up a nice revenue stream.

It appears that he knows the only way the government will listen to his pleas is to increase tax on items bought overseas, rather than lower it for retailers so they can try to compete with online retailers.

So before the government listens to the boy crying wolf by gouging you for more tax, and while the Aussie dollar is worth more than the greenback, jump online and get yourself a bargain.

Yet again we have another vested interest who thinks the only way to save an industry is to tax the consumer more, rather than give the consumer what they want.

You can’t save an industry, business or country by applying more taxing because all you end up doing are hurting the very people that support it.

THE number of Australian millionaires has risen 34 per cent rise as the world’s wealthy recover most of their losses from the global financial crisis, a study shows.

Australian millionaires totalled 173,600 at the end of 2009, up from 129,200 at the end of 2008, the latest World Wealth Report by investment bank Merrill Lynch and consultancy Capgemini said.

That sees Australia rise to tenth in the world for number of millionaires, after slipping to eleventh in 2008.

The total wealth of what the report terms “high net worth individuals” (HNWI) – people with net assets of at least $US1 million ($1.15 million) excluding their home – in Australia was $US519.4 billion ($596.6 billion) in 2009, up 37 per cent on $US379.8 billion in 2008.

Managing director of Merril Lynch’s global wealth management division in Australia and New Zealand, Chris Selby, said Australians’ wealth benefitted from resilient gross domestic product (GDP) growth and national savings.

The main driver of wealth, however, was the rebounding share market, he said.

“After a horrible 2008 where (the market) was down almost 50 per cent, 2009’s growth was 33 per cent,” Mr Selby said.

“The millionaire population was a huge beneficiary.

“Australia has a very strong equity culture, so clearly the driving market capitalisations helped the wealthy.”

The US, Japan and Germany remain the world’s wealth powerhouses, home to 54 per cent of the world’s HNWIs.

Developing Asian countries posted the strongest growth in numbers of millionaires in 2009, led by Hong Kong and India.

That saw the value of the Asia-Pacific region’s HNWIs surpass Europe’s for the first time in 2009, at $US9.7 trillion ($11.14 trillion) compared to Europe’s $US9.5 trillion ($10.91 trillion).

The global financial crisis.Overall, the number of the world’s HNWIs and their value have returned to 2007 levels, indicating a recovery from

“Clearly it is as almost as though the year of 2008 never happened,” Mr Selby said.

A symptom of the crisis was a rise in spending on luxury items, such as cars, boats and jets, Merril Lynch senior vice president of investments in Australia, Peter Opie said.

Millionaires spent 30 per cent of their so called “passion investments” on those items in 2009, up from 27 per cent in the previous yea

Like many contemporary political issues, everyone has a very strong opinion regarding the proposed Resource Profits Super Tax (RPST). But as it was with the proposed emissions trading scheme (ETS), very few of us have a comprehensive understanding of how exactly it works. Fewer still are able to appraise the situation from a perspective that does not relate specifically to their own self interest. But such is the nature of these things.

Rather than get lost in the detail of the proposed tax, let us instead evaluate the situation from a broader perspective. The first thing to appreciate is that the current tax regime for mining companies is in dire need of reform, something both sides of the debate acknowledge. A tax based on the principle of economic rent is one that most experts agree is not only fairer, but also encourages investment (in essence, economic rent is the level of profit in excess of the bare minimum required to make a given economic venture worthwhile). Here too both sides are for the most part on the same page.

Where opinions start to differ is with the detail. Essentially, the miners argue that the rate of tax that is levied is too high, and the level it kicks in is too low. The Government maintains that this is very reasonable and that the miners have just gotten used to paying very low taxes for too long. They also argue that the proposed system will provide significant benefit to those projects that turn out to be unprofitable, or not highly profitable.

As is often the case, both sides have some valid points, but both are guilty of exaggeration and spin. I tend to think that a rent based tax is a great idea, and that although the details may need some adjustment, it will be of great benefit to the mining sector over the long term. Especially so when the resource boom eventually and inevitably starts to wind down.

The point I want to discuss though is the broader issue with Sovereign debt. Australia is lucky enough to have escaped the worst of the GFC, and indeed we are the envy of the western world. But the fact remains that, like so many countries, we need to ensure that our debt levels remain reasonable and under control. If we don’t we will eventually end up like Greece, and of course no one wants that.

However, there are essentially only two ways to reduce budget deficits and Government debt: cut spending or raise taxes (or both). Neither is politically palatable, as we have seen with the reaction to the European austerity measures. But be that as it may, it is unavoidable.

The Government of course knows this, and knows it needs to act sooner rather than later. The Henry review seemingly provided an answer on a silver platter: tax the super profitable miners and avoid the angst of the general population. Well, obviously it hasn’t played out like that, but only because the Government has been very bad at explaining the issue, and the facts have been tainted by very powerful and well resourced interest groups.

People opposed to a higher tax regime for the miners must understand that if it doesn’t go ahead, the Government will need to raise money elsewhere, and that could well be in the form of higher personal tax. No one will be happy with that and it will be political suicide. Otherwise the cuts to Government spending will need to be far more aggressive. Again though, voters probably won’t appreciate significant cuts to hospitals, education, welfare, infrastructure and the like.

So let’s all take a step back and understand that although the RPST is far from perfect in its current form, it has the potential to reform the mining tax regime and raise significant funds in one stroke. The miners will always and should always do what they can to maximize returns for shareholders, so we can expect them to fight tooth and nail against this, but the fact is that they can afford to pay more tax and still remain very profitable. Even in its current form the RSPT will not decimate the Australian mining industry, despite claims to the contrary.

Let’s not forget too that what they are profiting from are the natural resources that are collectively owned by every Australian, and we need to extract a decent return for ourselves. One day this boom will be all over and we will ask ourselves who reaped the lion’s share of the benefit. Most likely it will be corporate interests, and indeed they are entitled to make a decent return from their hard work. But citizens should understand that the current regime means that the country itself is not getting anywhere near its fair share.

Somewhere between the two ends of the spectrum of this debate the truth lies. Rather than get hysterical over the extremes, let’s debate the issue in a calm and objective way. This issue is a big one and requires strenuous debate, but let us first establish the facts before we all go off half cocked.

Cover all shorts and buy for long account at 135, because this is the 1/2 point between 8-3/8 and 261¾, being half of the life fluctuation and the strongest point since 150.

8-3/8 was the lowest price at which US Steel ever traded, in May 1904. 261¾ was the all-time high in September 1929 (these prices are still the all-time low and high for US Steel by the way). 135 was the 50% level or mid-point between these.

Chart 1 – Half-Point of Lifetime Range

click to enlarge

Chart 1 shows that the recent low on 21st May, Santos fell straight to this 50% level and then rebounded.

The quote from Gann also mentions that the price at 135 was ‘the strongest point since 150.’ This was another major 50% level, from a major low in 1915 to the all-time high in 1929. You can see from Chart 2 that the equivalent in Santos is the range from the 2003 low to the all-time high in 2008 that started our run of trades in February.

Chart 2 – Major Monthly Range

click to enlarge

In addition, the low of 21st May completed a repeat of the range from 27th March to 9th July 2009 – a significant range on the weekly chart. As you’ll remember from last week, it also hit the 1 x 2 trading day angle from the October 2008 low.

Chart 3 – Set-Up on 21 May

click to enlarge

Now that I have spent some time showing you the set-up, back to Gann’s instructions at the top of the article. He said ‘cover shorts and buy at 135’. Translating that to our situation, on 21st May, when Santos gapped down, opened just below the 1 x 2 angle and the major 50% level, and then moved up, we should take profits on all our short trades and go long. The exact price of the 50% level is 11.37. Last week I suggested covering shorts at 11.40, just to be certain.

With an account balance now of over $120,000, we would be able to take 50,000 CFDs and place stops 5 cents below the low of the day (just in case the market re-tests the low).

Chart 4 – Going Long

click to enlarge

On 25th May there was a higher swing bottom, confirmed on the 27th. Our rules would state to take an additional position here, as this is a First Higher Swing Bottom trade from the Number One Trading Plan.

On 1st June there was what appeared to be an Outside Continuation Day, which would also have given a signal to take an additional position. The next day, however, was actually a down day, so it became an Outside Reversal Day. We will take this up in the next issue, but note what Volume has been doing since the 21 May low.

Knowledge is Power!

ADB asks Sri Lanka to reduce size of budget

The Asian Development Bank on Friday asked Sri Lanka to prune the size of its budget to sustain economic stability as the island emerges from decades of ethnic conflict.

The Manila-based bank’s President Haruhiko Kuroda said Sri Lanka’s top priority now is to rebuild infrastructure in the island’s war-ravaged north and east; and ensure economic stability reaches everyone in the country.

“For that, macro-economic stability, particularly a sustainable budget deficit, is crucial for sustained economic growth,” Kuroda told reporters in Colombo at the end of his three-day visit to the island.

Sri Lanka’s fiscal deficit shot up to 9.7 percent of gross domestic product in 2009, above a seven percent target set by the International Monetary Fund when they released a 2.6 billion dollar bailout package last July.

“Fiscal deficit close to 10 percent of GDP is too large and must be reduced over the medium term,” Kuroda said urging the government to widen its tax net and increase government revenue.

ADB forecasts Sri Lanka’s economy to expand strongly by 6.0 percent this year from 3.5 percent last year, but Kuroda warned the Indian Ocean Island needed to trim its expenses.

“You may be able to increase growth in the short run by increasing spending and reducing taxes. But in the medium to long run if there is no prudent and sound fiscal policy, you cannot have sustained growth,” he said.

ADB Sri Lanka country director Richard Vokes said about 450 million to 500 million dollars has been earmarked to disburse in the tropical island between end 2009 and 2010.

Kuroda said about 50 percent of the project loans will be disbursed in the island’s war-ravaged north and east for reconstruction work and livelihood support.

Sri Lanka is emerging from a 37-year ethnic conflict after government forces last May, crushed the Tamil Tiger rebels who were fighting for an independent homeland for minority Tamils from the majority Sinhalese community.

The United Nations estimates some 100,000 people died in the conflict, while tens of thousands are unable to return to their villages and still live in makeshift homes.

GOLDMAN Sachs in Australia faces a potential $15 million lawsuit by former clients who have claimed the investment bank misrepresented complicated derivatives contracts that forced them to buy bluechip stocks at over-the-market odds.

Law firm Slater & Gordon said yesterday it was investigating allegations of misleading and deceptive conduct against Goldman Sachs JBWere Capital Markets, The Australian reports.

The investigation surrounds the Goldman Sachs-designed “buy below the market” options contract sold to the bank’s wholesale clients in 2007.

Slater & Gordon’s practice group leader, Van Moulis, said clients had approached the law firm and claimed they were sold the contracts as a protection against a sudden downturn in the equities market.

It was claimed the product was marketed as similar to an “American call option”, but Mr Moulis said it was a rolling futures contract. Attempts at mediation with Goldman Sachs had been unsuccessful.

“It’s a derivative-based product that was marketed and described by the bank as an option,” Mr Moulis said.

“But when you read the fine print it’s a futures contract which locks the client into buying the underlying stock at a certain strike price.

“When the market plunged, the clients were told they were obliged to buy the stock at the higher strike price.

“This particular product was marketed widely across the Goldman Sachs client base.

“It was a home-grown product.”

The potential Slater & Gordon case, which has not yet been filed in court, follows similar action against Goldman Sachs that has been taken by the former chief executive of Merrill Lynch in Australia, Greg Bundy.

Goldman Sachs in Australia refused to comment.

Australia’s proposed new tax on mining profits has prompted a fierce struggle between the industry and the government for the extraordinary riches of the Asia-led commodities boom, analysts said.

Prime Minister Kevin Rudd’s plans to impose a 40 percent levy on the so-called “super profits” of resources firms was met with anger from the nation’s most valuable export sector, which warns it will kill investment.

With mining companies’ share prices diving, resources firms hit back, accusing Canberra of essentially nationalising the industry while the opposition said it could “kill the goose which laid Australia’s golden egg”.

“The companies are crying blue, bloody murder but you would expect them to — they’ve had their eggs stolen,” BIS Shrapnel economist Frank Gelber said.

The government hopes to raise billions of dollars with the tax and use the money to “spread the benefits” of the mining boom around the country.

“Provided commodity prices hold up high, we’re taking a lot of money out of the mining sector and we’re giving it to the rest of the economy. Now there is some logic to that,” Gelber told AFP.

“But the other thing is that these guys entered into these mining projects in good faith, with certain rules, and we just shifted the goal posts. Now we’re here, both sides have to take the consequences.”

Major miners have attacked the proposal, with Anglo-Australian giant BHP Billiton saying it placed a shadow over some projects, including expansion at its Olympic Dam uranium and copper mine, and would drive investment offshore.

Rio Tinto said it was reviewing all new Australian capital projects in response to the plans, which it described as “shocking”.

And United States firm Peabody Energy cited the tax as a reason to cut its takeover bid for coal miner Macarthur, while it was also blamed by Anglo-Swiss firm Xstrata for its suspension of a 27 million US dollar copper exploration project.

Rudd has even taken a tumble in polls after announcing the levy, which could also reduce the value of Australians’ retirement savings as they are heavily invested in blue-chip stocks such as BHP.

Rudd, who is expected to call an election this year, defended the Resources Super Profits Tax, saying he had been warned that “you’re going to hear lots of people crying wolf” on the issue.

He said government modelling showed the mining industry would actually grow despite the levy because it taxed profits, not volume.

Soaring commodity prices have seen Australian exports jump significantly since 2000. Coal exports surged 123.9 percent to be worth 54.4 billion dollars (48.65 billion US) in 2008-2009 while iron ore rose 66.9 percent to 34.2 billion dollars.

Bob Gregory, an economist at the Australian National University, said the government appeared confident the mining boom — which the central bank has said could stretch for decades as China and India industrialise — was assured.

And while the tax would hit the share prices of mining firms, he was less certain it would damage the industry, which in 2008-2009 was the nation’s best export sector, earning 127.5 billion Australian dollars.

“I think the Australian government, and us the people, we don’t want to scare off large amounts of investment,” professor Gregory said.

“Even though mining investment poses all sorts of problems — by making us more reliant on China and that sort of stuff — you don’t want to take the risk of scaring off too much investment.”

Gelber said the tax was unlikely to impact those mines already producing but it was understandable the sector was “squirming on the hook” given that mining was a high-risk activity.

“Now prices are so high, all the current round of projects that are about to start or have just started, they are going to proceed,” he said.

“But what it could affect are projects when the prices are lower because the profits are lower. It’s an awfully profitable activity at these prices. But the real question is, will these prices last forever?”

James Wilson, a Perth-based research analyst for DJ Carmichael, said many companies may now be examining projects in different countries including Canada, which is reducing its corporate taxes.

“A lot of people will be looking at whether projects are better value off-shore,” he said.