The UK lesson of blundering Liz Truss and Kwasi Kwarteng’s tax U-turn
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I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 36 in our series for 2022 and today’s date is Friday October 7.
Today, I’ll be talking to Ben Gill, Head of Asia Pacific, BrainBox AI about Brisbane Airportexpanding the use of AI to reduce emissions, which marks Brisbane Airport as the first in the world international airport to leverage this technology for reducing energy consumption and achieving sustainability targets.
And I‘ll be talking to Rabobank economist Michael Every about the collapsing pound, the struggles of the RBA and the prospect of a global recession.
But now, let’s talk to Ben Gill.
The government of British Prime Minister Liz Truss was forced into a humiliating U-turn on Monday, reversing plans to cut the highest rate of income tax that helped to spark a rebellion in her party and turmoil in financial markets. Ms Truss, and her finance minister Kwasi Kwarteng, announced a new “growth plan” on September 23 that would cut taxes and regulation, funded by vast government borrowing to snap the economy out of years of stagnant growth. The plan to cut the top rate of income tax from 45% to 40% had been heavily criticised from all corners, with more than a dozen Tory MPs going on the record to voice their concerns about the move. The rebellion among Tory backbenchers forced the Chancellor to U-turn on his flagship policy and on Monday announced that the controversial tax cut would be scrapped. The plans to abolish the 45% tax rate on incomes above £150,000 a year had caused anger during the cost-of-living crisis. The plan also triggered a crisis of confidence in the government, hammering the value of the pound and government bond prices and jolting global markets to such an extent that the Bank of England had to intervene with a £65 billion ($A112 billion) programme to settle the gilt market. Truss has reversed plans to scrap the 45% rate of income tax for the UK’s highest earners. The move is a major reversal for Truss’s government, which has been in office for just a month. The scrapping of the 45% rate for the highest earners had been the least popular measure, coming at a time when ordinary Britons are struggling in a cost-of-living crisis that’s seen inflation surge to 40-year highs. The decision to reverse course is likely to put Ms Truss and Mr Kwarteng under huge pressure, less than four weeks after they came to power. Britain has had four prime ministers in the last six politically turbulent years.
Elon Musk revived his bid for Twitter at the original offer price of $US54.20 ($A83.45) a share, potentially avoiding a courtroom fight over one of the most contentious acquisitions in recent history. Musk made the proposal in a letter to Twitter, according to a filing with the Securities and Exchange Commission. Shares in Twitter climbed as much as 18% on the news, and trading has since been halted. Musk’s offer to match the original deal terms means Twitter is facing a future under the leadership of a mercurial billionaire who has spent months publicly criticising its management, questioning its value and changing his mind. It also means that his contested claims, that Twitter was lying about which percentage of users were bots, for instance, are not likely to be scrutinised in a courtroom. Musk had been trying for months to back out of his contract to acquire Twitter, signed in April. The billionaire began showing signs of buyer’s remorse shortly after the deal was announced, alleging that Twitter had misled him about the size of its user base and the prevalence of automated accounts known as bots. Musk formally quit the accord in July and Twitter sued him in Delaware Chancery Court to force him to go forward with the purchase. A trial is scheduled to begin October 17.
At their October board meeting, the RBA hiked rates by 25 basis points, increasing the cash rate to 2.6%. It marks the sixth consecutive rate rise this year and returns the cash rate to its highest level since July 2013. The fact they hiked by 25 basis points, rather than 50 basis points, is a sign that they are getting closer to a pause in rates. Typically the RBA will use a pause to assess economic conditions and determine how policy changes are impacting the economy.”
Treasurer Jim Chalmers has heightened concerns about the $243 billion cost of the stage three tax cuts for workers on higher incomes while cabinet ministers put the plans under the spotlight after financial turmoil forced a rethink on similar cuts in the United Kingdom. Vowing to put economic priorities ahead of politics, Chalmers said the government had not changed its tax policy but warned the “storm clouds” in the global economy were a major factor in looming decisions on tax and spending. The ferocious response from the financial markets to the UK policy, which forced British Prime Minister Liz Truss to drop the tax cuts less than a week after they were unveiled, was discussed in an expenditure review committee meeting of federal cabinet ministers on Tuesday. “It is not irrelevant to us because it is a cautionary tale about what can happen if you get your policy settings out of whack in a way that does not suit the economic conditions and particularly the global economic conditions,” Chalmers said. There is no consensus in federal cabinet on whether to change the stage three tax cuts because Labor voted for them in 2021 and promised to keep them when it campaigned at this year’s election, but the shock to the British government has strengthened the case within cabinet to reconsider the package. The stage three tax cuts are legislated to begin in July 2024 and abolish the 37% tax rate and apply a 30% rate to all income between $45,000 and $200,000. One option for the government is to limit the benefits of the cuts to workers on lower incomes.
Treasurer Jim Chalmers says the recession risk in many major economies had tipped from “possible to probable” as leading economists said the decline in global conditions, volatility in financial markets and rapidly rising interest rates would make it harder for Australia to escape a downturn. Economists said a recession was now a “plausible” scenario, especially if the Reserve Bank of Australia raises too far. Australia’s central bank had already raised the cash rate from 0.1% to 2.35% since May as it tries to rein in inflation spurred by global factors and a booming jobs market and persistent spending at home.
Tensions between Optus and the Albanese government have deepened in the wake of the telco’s massive data breach, with Labor accusing the company’s leadership of not co-operating over lost Medicare and Centrelink information. At least 2.1 million personal identification details, including 150,000 passport and 50,000 Medicare numbers, have been stolen in the Optus data hack. The federal government has accused telco Singtel Optus of dragging its feet on providing full details of users whose data was compromised in a data breach which the telco reported on 22 September.Government Services Minister Bill Shorten told a media conference in Melbourne on Sunday morning that a request on 27 September had sought more details about the Medicare and Centrelink data that had been leaked in the data breach. More than a week after Optus revealed 9.8 million customers had their personal information stolen through a historic failure by the company, Government Services Minister Bill Shorten said requests for help by Services Australia had gone unanswered. After first asking Optus to co-operate by supplying the information last Tuesday Mr Shorten and Home Affairs Minister Clare O’Neil said the request was yet to be met, limiting help for Australians needing new Medicare and concession cards. Optus rejected the criticism, saying it was seeking advice regarding customers whose documents had since expired. The leak of more than 10,000 individual’s details as part of an attempt to ransom Optus included more than 3200 drivers’ licences, 151 overseas passports, 110 passports, 55 Medicare cards, 55 proof of age cards, 41 photo cards, and 31 learners’ drivers’ licences. Optus has revealed more than 37,000 Medicare numbers were exposed in the data breach – about 15,000 are active. Last week, Optus buckled to Prime Minister Anthony Albanese’s demands to cover the cost of new passports, adding to the company’s mounting costs after it agreed to reimburse people for replacement drivers’ licences. Ms O’Neil, who has rejected the company’s claims that the breach was a sophisticated cyberattack, said Optus should communicate clearly to the government and their customers about exactly what information has been taken. She said emails to the 10,200 people whose data was posted online were insufficient. That group has been advised to urgently update their information.
Finance Minister Katy Gallagher has called together all the digital ministers to kick-start the rollout of a national identity system, amid calls for the government to build a new technology infrastructure that would reduce the risk of identity theft, following the Optus data breach. It comes as NSW Customer Service Minister Victor Dominello called for a decentralised identity system and the end of paper-based ID. The Optus breach has highlighted the need for a national digital identity system that would make it easier for businesses to verify a person’s identity and eliminate the need for companies to collect licence and passport numbers in the first place. Canberra has established a digital identity system to streamline access to government services such as Medicare and the Tax Office, underpinned by the MyGov website. But legislation that was drafted by the Morrison government still needs to be passed to allow the Digital ID to be used more broadly by the private sector. Ms Gallagher said Digital Identity Legislation and related issues will be discussed by relevant Commonwealth, state and territory ministers at the upcoming Data and Digital Ministers meeting in November.
Optus has commissioned an external review of how the personal data of 10 million customers was exposed in a cyberattack that has embroiled the telecommunications giant in brawl with the federal government. The company announced the review, to be conducted by consultancy Deloitte, will look at its cybersecurity systems, controls, processes and the circumstances surrounding the theft. In a statement, the company said the review was recommended by Optus chief executive Kelly Bayer Rosmarin and supported by the board of Optus’ parent company, the Singaporean telecommunications conglomerate Singtel. Both have faced criticism for their handling and communications, or lack thereof, around the hack.
Woolworths Holdings has confirmed it is actively exploring options for the possible sale of David Jones, telling its investors there would be no further flow of capital from South Africa as the chain must stand on its own feet. In a note to shareholders in the retailer’s latest annual report, Woolworth s chief executive Roy Bagattini said that after years of investment, restructures and paying down debt it was time to consider David Jones’ future. In August Mr Bagattini revealed for the first time that it is considering the sale of the 184-year-old retailer David Jones after it bought the chain for $2.1bn in 2014. Woolworths had previously distanced itself from reports that it was mulling a sale and had held discussions with interested parties and investment banks as part of the process, but at the company’s full-year results presentation to investors Mr Bagattini said the future ownership for David Jones was on the table.
Property prices are continuing to decrease nationally as higher interest rates bite, with capital city housing markets falling by up to 6% in the past three months. CoreLogic data shows that in September, properties were sold for 1.4% less on average nationally than in August. The only capital city that didn’t witness a monthly fall was Darwin, with values dropping 1.8% in Sydney and by almost as much in Brisbane and Canberra. Sydney’s property market has now dived 6.1% in the past three months, while Hobart and Canberra have also shaved off 4.5 and 4.4% respectively.
There might be yet another streaming platform heading to Australia’s shores to compete with the menu of options already crowded with the likes of Amazon Prime, Binge, Disney+, Netflix and Stan. Seven West Media, owner of Channel Seven, appears to be in the box seat to win free-to-air broadcast rights to US media giant NBC Universal’s content, one of the most sought-after catalogues left on the market. The NBCU rights include original programming from the TV and movie giant and UK’s Sky Studios. It’s believed to be the biggest catalogue in this market in terms of volume, which includes fan favourites like Law & Order, The Office (US), Parks & Recreation, Brooklyn 99 and Downton Abbey. As part of the negotiations, Seven is believed to be seeking the option to launch NBCU’s streaming platform called Peacock as a commercial partner. The potential result would ratchet up the competition between Seven and Nine Entertainment Holdings, which currently holds the NBCU rights across free-to-air Channel Nine and subscription-based streaming platform Stan.
Latitude Financial Services and Harvey Norman are being sued by the corporate regulator over advertisements that promoted ‘no deposit’, ‘interest free’ payment methods which allegedly didn’t disclose that customers could only use that payment method if they applied for and used a Latitude GO Mastercard. The Australian Securities and Investments Commission alleges that these ads from January 2020 to August 2021 were misleading because they did not disclose these terms. ASIC also alleges the true cost of using the Latitude GO Mastercard was misrepresented as establishment fees and account service fees were not adequately disclosed. ASIC said customers who signed up for the Latitude GO Mastercard between March 16 2021 and August 2021 and used the 60 month interest free payment method were liable for $537 in fees on top of the purchase amount. ASIC is seeks declarations, pecuniary penalties, injunctions and other orders against Latitude and Harvey Norman. A first court date is yet to be set.
Penfolds and Wolf Blass owner Treasury Wine Estates says about 45% of consumers are looking for more health-conscious options in wine, and it will accelerate its push into lower-alcohol, and no—alcohol wines. The company said it is part of a global trend that shows no sign of stopping and the under 35-year old age group is leading the moderation charge. Treasury Wines said on Tuesday it aimed to be a global leader in low-alcohol and no-alcohol wine and it was investing heavily in technology and systems to make it taste better. The flagship wines in the group’s portfolio in this segment are a lower alcohol version of its Matua brand called Matua Lighter, and a no-alcohol version of Wolf Blass, called Wolf Blass Zero. It also introduced a lower-alcohol version of its Squealing Pig brand. Research showed the “conscious consumer” segment was continuing to grow around the world with almost half of consumers “looking for more health-conscious options”.
And that’s it for this week. And next week, I’ll be talking to Oleg Vornik, CEO at DroneShield, a company that is creating local, high-tech jobs, creating a pathway for grads to get into complex engineering/AI/sensor fusion, and building advanced technologies in the form of counter-drone systems right out of Sydney – these protect everything from critical infrastructure, to sporting events, to airports, and more. And I’’ll be talking to CommSec chief economist Craig James about what’s ahead in the market next week.
In the meantime you can catch me on Facebook, Twitter Instagram, LinkedIn and YouTube. And if you want leave a comment. For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business on the Apple podcast store or on my website leongettler.com.
Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week.