Are we heading for a perfect storm?

Tough times ahead according to noted economist, Ross Garnaut

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 2, 2012 11:05 am AEST

Households will need to get ready for a decade of lower incomes, higher taxes and less tax breaks, according to noted economist, Ross Garnaut.

Garnaut has warned of a long and tough China-induced downturn in Australia, that will require restraint in government spending and wages growth for the rest of the decade, according to today's Australian Financial Review.

Professor Garnaut believes that tax cuts and benefits introduced since 2004 would need to be reconsidered, and that older people who had become used to virtually no taxation may be faced with having to pay taxes.

If he is correct, we may see the government forced to increase taxes and cut spending for several years. Tax breaks for superannuation could be wound back, which could see more retirees forced to pay taxes, while companies could see an increase in company tax rates and other levies.

Australia's terms of trade (the measure of our exports compared to imports) would be hit by three "mutually reinforcing negatives", he said. China's shifting focus away from heavy industrial investment and exports, which has driven demand for commodities and energy down. The second wave is Australia's reforms including the Minerals Resource Rent Tax (MRRT) and carbon tax schemes, potentially making Australia less competitive, and the third is the current global economic downturn.

A potential fourth driver is China's leaders being unwilling to unleash a repeat of the economic stimulus such as during the GFC, which would temporarily support demand for Australia's resources.

Australia's terms of trade have fallen by at least 10% over the last 12 months, according to economists, hit mainly by falling coal and iron ore prices, and more declines are likely. Falling commodity prices have seen our biggest resource stocks take a hammering. While the S&P ASX 200 Index is up almost 10% in the last 12 months, BHP Billiton Limited (ASX: BHP) has fallen 5.4%, Rio Tinto Limited (ASX: RIO) is down 13.7%, Fortescue Metals Group (ASX: FMG) has slumped 20.8%, while Atlas Iron Limited (ASX: AGO) has seen its share price halve.

The Foolish bottom line

Australia's economy needs to go through tough periods every now and then, despite the short-term pain it may cause – otherwise we could end up facing the same issues as Greece is currently, later on down the track.

If you're in the market for some high yielding ASX shares, look no further than our "Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.