Just over a month ago I said you should ignore the bogus Australian federal election.
I said it wouldn’t make any difference who got into power. The result would be the same.
Politicians of any party only have one goal: to stay in power once they gain power. That means doing anything…even if it means a 180 degree turn on what they supposedly stand for.
Unsurprisingly, just weeks after the election the new Coalition government has proven us right…
What was the biggest message you heard from the Coalition while they were in opposition?
That’s right, it was all about how the Labor Party was financially irresponsible. They said the government was sending the public finances into a debt spiral.
Apparently the Coalition would fix that by bringing the budget back to surplus and paying down the debt.
Not so fast. Politics doesn’t work like that. Once in power, governments figure out that they can’t really cut spending because that could annoy people. And because those people also vote, it could mean losing votes at the next election.
And so all talk of responsible government goes out the window. Instead you get what you’d expect: spend, spend, spend…
Spend, Spend, Spend
Earlier this year I attended the Bloomberg ‘Australia Economic Summit’ in Sydney.
One of the key speakers was then Coalition treasury spokesman, Joe Hockey.
Based on what I heard I knew the Coalition would be true to form. The clue was when Mr Hockey refused to commit to reversing the previous government’s ‘lost savings’ and ‘lost super’ policies.
Again, that was a surprise when you consider the cash windfall to the government of those policies.
But when I saw this report in the Age at the weekend, it brought a big smile to my face:
Treasurer Joe Hockey has reiterated that increasing Australia’s debt ceiling will be a priority for the new parliament.
‘Speaking in the United States, where President Barack Obama’s administration is battling to lift its legislated allowable level of government debt, Mr Hockey said Australia faces its own deadline.
‘”We will have to increase the debt limit to prevent Australia breaching the debt limit before Christmas,” the treasurer told Sky News on Friday.
‘A bill to raise the national debt ceiling beyond $300 billion is expected in parliament’s early sitting days, which are not yet scheduled.’
The Coalition is speaking out of both sides of their mouth. First they say how terrible it is to go into debt…and then they say it’s crucial to go further into debt.
For the record, Australian federal government debt now stands at $284.5 billion.
As I like to point out, the Liberal Party are fakes when it comes to government spending. Under the Howard government, spending and tax revenues more than doubled.
And as for the idea that Liberal governments are more responsible with taxpayer money, just look at the headlines. You can see that’s not true. The latest expenses scandal shows they’re more than happy to grab tax dollars.
The truth is for all the election talk about slashing government spending, the Coalition has no intention of cutting government spending whatsoever. As the following report from the Australian proves:
‘Federal spending will be capped to put the nation on a “credible” path to a budget surplus as the Abbott government drafts a set of fiscal rules that forces ministers to scale back outlays.
‘Cabinet ministers are to meet within weeks to finalise new guidelines as Tony Abbott and his colleagues aim to improve on Labor’s promise to limit real spending growth to 2 per cent a year.’
If you think that means anything other than the government will continue to increase spending then you’re kidding yourself.
So, why am I banging on about this?
First is to convince you that it’s pointless to get involved in politics by cheering for one side against the other.
There truly is no difference.
The more important point is to remind you that every dollar the government spends is a dollar it takes from the taxpayer. That either comes from current tax revenue or future tax revenue (in the case of government debt).
That means you have to work harder in order to make up for what the government takes from your wages. Now, when I say work it doesn’t necessarily mean getting a second job…
One of my main investing rules is that you should never invest in something just because it offers a tax break.
That said, it’s also up to you to minimise your taxes in any legal way possible. One way to do that is to take advantage of the franking credit system available on many dividend paying Aussie stocks.
In simple terms, franking credits give you a credit in your tax return for tax already paid by the company. In other words, it removes the double taxation of profits.
For example, if a company pays you a $1 cash dividend you get to ‘gross up’ the cash amount by 30% (the company tax rate) to $1.30.
From there you apply your marginal tax rate. So, if you’re in the top tax bracket of 45% you’ll pay this tax on the grossed up $1.30 rather than the cash amount of $1.
It means your effective net dividend is 71.5 cents ($1.30 — 45%). Compare that to a net dividend of just 55 cents without franking credits.
The great thing is you don’t need to do a lot of background work to find stocks that offer franking credits. Franking credits are available on most blue-chip Aussie stocks. So odds are if you already own a blue-chip stock portfolio, you’re already getting the benefit of franking credits.
Therefore, when you’re allocating your monthly cash flow you shouldn’t just think about the gross capital gains. You should look at the tax benefits of franking credits.
You may find that you’re better off buying a perceived ‘boring’ dividend payer rather than a more exciting growth stock.
But whatever you do with your investments, just remember you’ve got to increase your savings and reduce your tax burden. It’s a cast iron guarantee that once the federal government starts cranking up that debt ceiling, they’ll never stop.
PS. It’s not just blue-chip dividend stocks that offer franking credits; some small-cap dividend paying stocks provide franking credits too. Plus you can get the added benefit of explosive capital gains. If you’re looking to increase your income as the government continues to spend, spend, spend, check out one way to boost it here…