Mid-Year Economic and Fiscal Outlook - 22 October

AppId is over the quota
AppId is over the quota
Last week the Federal Government released exposure draft legislation to implement reforms to the tax concession for living–away–from–home allowances (LAFHAs) and benefits as announced in the 2011-12 Mid-Year Economic and Fiscal Outlook (MYEFO) and the 2012-13 Budget. These reforms, which represent significant employment policy and procedural changes, are summarised as follows: From 1 July 2012, LAFHAs will constitute assessable income of the employee. The direct provision of, or reimbursement of food and accommodation by employers to employees who are living away from home will still fall within the FBT net.An employee will only be eligible for an income tax deduction against the assessable LAFHA (or the employer eligible to apply the 'otherwise deductible rule') where:the employee maintains a usual place of residence in Australia for their personal use or enjoyment at all timesthe expenses incurred are reasonable and, for food, beyond a statutory threshold, andthe living away from home period at a particular work location has not exceeded 12 months.Transitional relief will be available where there was an existing employment arrangement to provide LAFHAs or benefits prior to Budget night. These will apply from 1 July 2012 until the earlier of 30 June 2014 or the time the 'eligible' employment arrangement is varied or renewed. The transitional rules apply as follows:for temporary or foreign residents: you ignore the 12 month limitation, orfor everybody else: you ignore the requirements to maintain a usual place of residence in the former location and the 12 month limitation.Broadly and practically speaking:living away from home concessions for temporary residents are eliminatedsalary sacrifice arrangements for living away from home concessions (other than certain home leave, overseas employee children education costs and relocation expenses) will cease to be attractive, andliving away from home concessions for Australian residents will be phased out by 1 July 2014, with ongoing concessions limited to specific scenarios where duplicate expenses are being incurred.Given the new legislation will be effective from 1 July 2012, employers need to promptly consider the following:Determine what living away from home benefits will continue to be provided and which will be phased out (including consideration of employment contractual and Award/EBA obligations and agreement on employee compensation arrangements, if any).Communicate these changes to employees.Update policies and procedures regarding availability and approval of such benefits.Determine which employees are eligible for transitional arrangements and 'preserve' those arrangements.Implement changes to your payroll system and processes to reflect the shift from FBT to the PAYG withholding system (recording/withholding/remitting/reporting).Keep your eyes open for further administrative guidance from the ATO (as noted in the Media Release)Please ensure you forward this information on to your Human Resources team should you believe your business to be affected.

Exposure Draft and Explanatory Memorandum Treasury Summary of Changes

Japan’s Economic Stimulus Gets Its Second Wind

TOKYO — Investors raced back into the Japanese stock market Monday after upbeat data helped dispel some recent doubts cast on the government’s aggressive pro-growth policies.

The Nikkei 225 stock index jumped 636.67 points, or 4.9 percent, to 13,514.20, the biggest single-day gain in point terms in almost five years. The broader Topix index rose 55.02 points, or 5.2 percent, to 1,111.97.

Earlier, gross domestic product data showed Japan’s economy expanded at a rate of 1.0 percent between January and March, above a preliminary estimate of 0.9 percent, thanks to an upward revision in corporate capital spending and stronger household spending. That new clip came to 4.1 percent in annualized terms, up from 3.5 percent.

Bank lending, which had stubbornly refused to grow despite years of easy money amid companies’ weariness over growth prospects, rose a robust 1.8 percent in May from the same month last year. That uptick came as a victory for the Bank of Japan, which has embarked on a bold program to pump the economy with cheap money to get businesses to borrow and invest.

Data released Monday also showed Japan’s current account surplus doubled to ¥750 billion, or nearly $7.6 billion, far above market forecasts of slightly above ¥300 billion, as a weakened yen pushed up returns on overseas investments. Last year, Japan’s current-account surplus shrunk to record levels as a strong yen hurt exporters, and an energy shortfall led to a jump in the costs of importing fuel. But a welcome drop in the yen — another consequence of the central bank’s loose monetary policies — has eased some of the pressure on balance of trade.

The fresh data came as relief for investors who had become increasingly jittery over Japan’s recovery amid signs of an economic slowdown in China, a major trading partner, and speculation that the U.S. Federal Reserve might soon start to scale back its stimulus. Mediocre U.S. jobs numbers released Friday, however, appeared to have eased concerns of a major rollback by the Fed.

The latest numbers also provide welcome encouragement for Prime Minister Shinzo Abe and his push to reinvigorate Japan’s deflationary economy with a combination of economic reforms and heavy monetary and fiscal stimulus. The so-called Abenomics initially garnered a euphoric reception by the markets, and shares surged by 80 percent. But a sudden end to the stock market rally put the spotlight on skeptics who questioned Mr. Abe’s growth plans and voiced concerns over harmful side effects.

An economic growth plan described by Mr. Abe last week underwhelmed many investors and economists who had hoped for a stronger commitment for structural reforms — for example, to overhaul a rigid, two-tier labor market. Meanwhile, the yen crept higher from its recent declines against the dollar, crossing over the psychologically important level of ¥100 to the dollar last week for the first time since early May.

Foremost in investors’ minds has been the specter of too fast a rise in long-term interest rates, which could pressure government finances by increasing the costs of servicing Japan’s sky-high public debt. Yields on benchmark 10-year government bonds, however, have stabilized following a jump in early May, helping to alleviate those concerns. The Bank of Japan could announce steps to lessen volatility in bond markets at the end of a two-day policy meeting that ends Tuesday. Economists, meanwhile, point out that a rise is inevitable as inflation takes hold in Japan.

Now, as investors take more measured stock of opportunities and risks in Japan, its stock market is likely to see a more tempered rise, said Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets. With the rise Monday, the Nikkei is still down 15 percent from a peak in mid-May, but up 30 percent since the start of the year.

“Growth from here is likely to be a lot less rapid — almost certainly a good thing for the longevity of the bull run,” Mr. Smith said in a note to clients.

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Lower economic growth seen for Britain

London – Bank of England on Wednesday given the gloomy outlook for the British economy as cut its growth outlook and said inflation in the short term will be higher than expected previously.

Weak growth and high inflation "is painful for each participant in our society" and will continue to hurt disposable income in the short term, Mervyn King, Governor of the Bank of England, said as he presented a report of the Central Bank's quarterly inflation. "The path of recovery is likely to be slow and uncertain," he said, adding that for Great Britain of "the greatest risk to recovery stems of the euro area."

The Bank of England lowered its average growth forecast for the economy this year to around 0.8% of the 1.2 percent, he forecast earlier. Inflation, which is currently at 3.5 per cent, is likely to remain above the 2% target until the middle of next year. The Bank has forecast in February that inflation will refuse to level later this year.

Britain, which is a member of the European Union, but has not adopted the euro fell back into recession since the beginning of this year. The economy is struggling, because the increasing consumer prices curbed household expenditure, bank loans continue to be tight and a decline in demand for goods from the euro-zone, Great Britain, the main export market.

Pound against the euro and the dollar fell on Wednesday, but recently an increase against the euro put additional strain on the industry of Great Britain exports by making goods more expensive. Some investors have looked to the pound, as a more secure investment option as the economic situation in the euro area deteriorated.

Mr King said the Bank of England continues to face "a difficult choice between helping the economy recover or limiting inflation, the determination of the interest rate in and the decision to add to the package of fiscal incentives

Economic Scene: Leaving the Euro May Be Better Than the Alternative

AppId is over the quota AppId is over the quota What took economists some time to understand was that Europe’s leaders didn’t much care what they thought.


“The European Commission did invite economists to present their views. It was a Darwinian process,” said Paul De Grauwe, professor of European political economy at the London School of Economics. “I was invited, but when I expressed my doubts I wasn’t invited anymore. In the end only the enthusiasts were left.”
The single currency served an overriding political objective. Like the single market before, it was conceived primarily as glue to bind Europe more closely together, tie Germany’s prosperity to that of its neighbors and prevent a third world war from the Continent, which had brought us two. A few engineering flaws wouldn’t be allowed to get in the way of such an important project.
A little over a decade since the first euro bills hit the shops in Madrid and Berlin, the euro’s design flaws have pushed much of the European Union into a deep economic pit. And political imperative is again being deployed as a major reason to stick to the common currency. “This enormously important motivation is often underestimated by outsiders,” argued the Financial Times columnist Martin Wolf, the most sober analyst of Europe’s economic maelstrom.
Yet for a project intended to draw Europe together, the euro did surprisingly little to build solidarity. German voters endured a recession two decades ago after bringing in their brethren from the Soviet bloc. They now appear unwilling to spend a pfennig to help the Greeks, Spaniards, Portuguese, Irish or Italians. Click Here!
Conceived as a tool for integration, the euro could, instead, tear Europe apart.

The longstanding political order in Greece, a country in an economic tailspin and dependent on the International Monetary Fund and its European partners to pay its debts, imploded on May 6. Voters punished the main parties for agreeing to a budget-cutting strategy that has contributed to an unemployment rate above 20 percent. With no party able to form a governing coalition, Greece is headed to new elections in June.
Turmoil — the economies of about half the countries in the euro area are shrinking — has spawned political crises across the Continent. Eleven euro area governments have fallen in just over a year. Extremist political parties are on the rise. Almost two-thirds of the population in euro zone countries still support the euro, according to the latest Eurobarometer poll taken last November.
Yet angry nationalism and mistrust are overpowering Europe’s sense of common purpose. Trust in the European Union fell to a low of 34 percent in November from 48 percent in the fall of 2009.
“The paradox would be that the monetary union that was supposed to be a steppingstone to more union becomes a steppingstone to less union,” said Mr. De Grauwe, who is also a former member of the Belgian parliament.
Social upheaval across the euro area suggests that it may be time to call it quits and try to work out an orderly process to re-establish national currencies throughout the bloc.
Europe would be in much better shape if the euro didn’t exist and each member country had its own currency. Monetary union has shackled together nations with vastly different economies, depriving them of an independent monetary policy that can help them through rough times. The interest rate and exchange rate that serve Germany also have to serve Spain, though that country has more than four times Germany’s joblessness.
The main problem is that while leaders eagerly embraced the monetary bond, they rejected its necessary complement: a central budget that would transfer money from successful regions to underperforming ones, as the United States government sends tax dollars collected in Massachusetts to pay for unemployment benefits in Nevada.
The euro fed the illusion that Greece, Spain and Italy were as creditworthy as Germany or the Netherlands, propelling a decade-long credit boom in Europe’s less-developed periphery. And it was spectacularly ill-designed to deal with the shock when capital flows to those nations suddenly stopped. Weak countries not only had to rely on their own devices; they had to do so without a currency or a monetary policy of their own to absorb the blow.
E-mail: eporter@nytimes.com
Twitter: @portereduardo
E-mail: eporter@nytimes.com Twitter: @portereduardo

Lower economic growth seen for Britain

London – Bank of England on Wednesday given the gloomy outlook for the British economy as cut its growth outlook and said inflation in the short term will be higher than expected previously.
Weak growth and high inflation "is painful for each participant in our society" and will continue to hurt disposable income in the short term, Mervyn King, Governor of the Bank of England, said as he presented a report of the Central Bank's quarterly inflation. "The path of recovery is likely to be slow and uncertain," he said, adding that for Great Britain of "the greatest risk to recovery stems of the euro area."
The Bank of England lowered its average growth forecast for the economy this year to around 0.8% of the 1.2 percent, he forecast earlier. Inflation, which is currently at 3.5 per cent, is likely to remain above the 2% target until the middle of next year. The Bank has forecast in February that inflation will refuse to level later this year. Britain, which is a member of the European Union, but has not adopted the euro fell back into recession since the beginning of this year. The economy is struggling, because the increasing consumer prices curbed household expenditure, bank loans continue to be tight and a decline in demand for goods from the euro-zone, Great Britain, the main export market.
Pound against the euro and the dollar fell on Wednesday, but recently an increase against the euro put additional strain on the industry of Great Britain exports by making goods more expensive. Some investors have looked to the pound, as a more secure investment option as the economic situation in the euro area deteriorated. Mr King said the Bank of England continues to face "a difficult choice between helping the economy recover or limiting inflation, the determination of the interest rate in and the decision to add to the package of fiscal incentives