There has been a spate of articles and commentary in recent days calling on the Australian government to reduce spending.

Those calling for government cuts – mostly long-time advocates of smaller government – claim this would lower inflation, and as a consequence reduce interest rates.

In fact, claims that government spending is now a very large share of the economy are exaggerated.

So, what’s actually going on with government spending?

Federal government spending has fluctuated between 23% and 27% of the economy (gross domestic product or GDP) since the mid-1970s. The exception was a spike during the COVID pandemic. Its current level is not particularly unusual.

Straight talking from the RBA

The latest Reserve Bank forecasts estimate that “public demand” (spending by all governments, federal, state and local) expanded by 2.2% during the course of 2025. This was less than the growth in consumer spending (3.1%), home building (5.5%) and business investment (2.5%).

Nor has increased government spending on services led to a wage explosion in the public sector, which was a significant contributor to inflation in the 1970s.

Both public and private sector wages have been growing around an average of 3.5% in recent years.

Michele Bullock, the Reserve Bank governor, does not try to direct the government on fiscal policy. Likewise, the government does not tell her what to do with interest rates.

The RBA prides itself on independence. Bullock is an independent agent and a direct speaker. If she thought government spending was the main force driving up inflation, she would say so.

Asked directly at her press conference this week, she instead cited other factors driving the pick-up in inflation:

• supply constraints in some sectors
• private demand being stronger than forecast
• greater-than-expected resilience in the global economy
• and easier financial conditions.

Under questioning in parliament, Treasurer Jim Chalmers has also said government spending has not contributed to the latest rate rise decision.

How do we want our taxes to be spent?

An increase in government spending without a matching increase in taxes would, in theory, fuel higher inflation. However, it would depend on the type and location of the spending.

Spending on foreign aid in other countries (or for that matter on US submarine shipyards) pushes up domestic demand by workers and companies in those locations – not in Australia.

It is entirely reasonable for the community to decide it wants a greater share of its resources to be spent collectively. It may want better health and child care or support for the disabled, for example. This is not inflationary if funded from taxes, as the taxes reduce other areas of demand.

The government budget has moved back into deficit this financial year, after two years in surplus. But the current position, and projections over the next decade, are for relatively small deficits by historical standards.

The projected deficits are also lower than in many comparable countries.

There is no correlation between high government spending and high inflation. Nordic countries with much larger governments than Australia, such as Norway and Sweden, have inflation rates of 3.2% and 0.3%, respectively. Turkey, with some of the lowest government spending and debt among advanced countries, has an inflation rate persistently higher than 30%.

Where government spending can lift prices

It could be argued that it would be better for Australia to return to budget balance more quickly. This would make us better placed to respond to a future recession.

But the current fiscal settings are not the primary cause of the uptick in inflation.

They are, at best, a contributor in some areas of the economy. For example, infrastructure spending during COVID caused prices to rise in construction, more generally.

Other things being equal, cutting government spending, while leaving taxes unchanged, could in theory help reduce inflation. It is incumbent on those arguing for this to specify precisely what they would cut.

To make a difference to inflation, cuts would need to be large, targeting areas where spending is growing the fastest, such as health, the National Disability Insurance Scheme, defence and natural disasters.

Trimming at the margins — for example, cutting public service budgets — would not help much. In any case, the federal government has reportedly already asked public service department heads to suggest where 5% could be cut.

In health, costs are rising mainly due to advances in medical technology, which then leads to government spending. This pressure is hard for government to push back on. Voters tend to prefer a longer and healthier life over helping the government reduce inflation.

Another way government can help inflation is on the supply side, by improving productivity. That is a long, hard journey, but one that offers more promise in the long term.

Stephen Bartos, Professor of Economics, University of Canberra and John Hawkins, Head, Canberra School of Government, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Capital gains tax is once again the subject of parliamentary debate, with Treasurer Jim Chalmers declining to rule out options for reform.

Along with negative gearing, the capital gains tax discount has long been suggested as one cause of Australia’s housing affordability crisis.

The tax applies to the capital gain when an asset is held for more than a year, and it currently includes a “discount” of 50% on the total gain as a nominal offset for inflation.

These policies make speculative investment in housing more attractive, driving up prices and making it harder for first home buyers.

The true cost to the federal budget

Australia only introduced a capital gains tax in 1985, applying it to all gains made from investments. Importantly, the family home was not included, but investment properties were. Originally, the tax applied to the gain in value above inflation, known as the consumer price index (CPI) method.

In 1999 the Howard government, informed by the Ralph Inquiry, changed the way capital gains tax was calculated. A flat “discount” of 50% was applied to capital gains, rather than adjusting the price by inflation. This figure was an estimate given the limitations with the available data.

Each year, Treasury calculates the costs of tax policies. This data reveals that in 2024–25 the 50% discount cost the budget an estimated $19.7 billion. This is partly driven by increases in housing prices which have far outpaced inflation, as shown below.

---

---

It is notable that between 1986 and 1999 housing prices were growing slightly faster than inflation, but since 1999 (the year the 50% discount was introduced) they have accelerated.

The benefits flow to the wealthy and people over 60

The benefits from the capital gains tax discount overwhelmingly benefit the wealthy and older people.

The Treasury’s Tax Expenditure and Insight Statements show that in 2022–23 89% of the benefit went to the top 20% of income earners, with 86% flowing to those in the top 10%. On average, the highest income earners received a benefit of more than $86,000, while those in the bottom 60% received around $5,000.

---

---

Similarly, older people benefit far more than younger people. People over 60 received 52% of the benefit, while those between 18 and 34 received 4%. That is despite both groups comprising around 29% of the adult population.

---

---

Some options for reform

Current attention is centred on the prospect of the government reducing the capital gains tax concession for landlord investors in residential property. This reduction would have the combined effect of reducing the attractiveness of owning an investment property.

A further option is to retain this “gift” to landlords and investors, but to make it work much harder to improve housing outcomes, especially for households who are caught in the lower-quality end of the private rental market.

We have previously proposed to make negative gearing and capital gains tax concessions available only to investors who adhere to higher national dwelling and tenancy quality standards or who participate in social housing investment schemes. Landlords who did not want to operate according to these requirements would not receive either negative gearing or capital gains tax concessions.

How the housing system rewards wealth, not work

But a bigger problem lies beyond the investor segment of the residential housing market.

The total overall value of Australia’s residential stock is around $12 trillion. Of this, about $4.5 trillion is growth since 2020, spurred in part by very low interest rates over 2020–22. Around 65% of residential dwellings are owned by owner-occupiers, who are exempt from paying capital gains tax on their primary residence.

Growth in dwelling prices is due to many factors. Income growth and availability of credit are among the most important.

Since the deregulation of Australia’s financial sector in the 1990s, greater access to housing finance and relatively low interest rates have allowed households to leverage their incomes into tax-free capital gains in housing.

Wealthier households can gear their incomes and existing assets into even more valuable housing assets that they can also live in. This comes at the expense of households with lower incomes and assets, or those who are renters.

There is no sound economic reason why owner-occupied housing should be exempt from capital gains tax.

A more rational taxation system that supports home ownership but discourages asset speculation could provide greater financial support to first home buyers but also demand a greater tax share of the capital gains that their asset enjoys.

The tax rate could be set to allow capital growth in line with inflation, wages or the economy (gross domestic product), but then apply to the gains beyond that.

Such an arrangement could also tax higher-value properties at a higher rate than cheaper properties – thus tilting the burden of taxation towards the wealthy whose properties see the greatest capital growth.

Jago Dodson, Professor of Urban Policy and Director, Urban Futures Enabling Impact Platform, RMIT University and Liam Davies, Lecturer in Sustainability and Urban Planning, RMIT University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

This week, investors will be watching closely for fresh reads on household spending, inflation and housing — with multiple central bank officials scheduled to speak. The RBA remains in focus as Governor Michele Bullock testifies before the Senate on Thursday, while the US and China both release CPI figures on Friday.

Monday February 9

Monthly Household Spending Indicator (December)
Spending is tipped to fall 0.3% — a sign of caution among Aussie consumers.

Tuesday February 10

CBA Wage and Labour Insights (January)
A key proxy for wage inflation and jobs momentum.

Monthly Consumer Confidence Index (February)
From Westpac and Melbourne Institute — key sentiment barometer.

NAB Business Survey (January)
Business conditions and confidence both picked up in January.

US NFIB Small Business Optimism Index (January)
Expected to lift slightly to 99.8 from 99.5.

US Import & Export Price Indexes (December)
Import prices edged up 0.1% in November.

US Retail Sales (December)
Retail spending expected to rise 0.4%.

Wednesday February 11

RBA Deputy Governor Andrew Hauser speaks
Remarks at the ACCI Business Leaders’ Lunch in Sydney — may offer insight on RBA outlook.

Lending Indicators (December Quarter)
Home loans could jump 6.0% — a big month for housing finance.

US Employment Cost Index (ECI, December Quarter)
Wage growth tipped to slow to 0.8%.

China Consumer and Producer Prices (January)
Core CPI expected to fall to 0.3% from 0.8%.

US Nonfarm Payrolls (January)
Around 50,000 jobs may have been created.

Thursday February 12

RBA Governor Michele Bullock Testimony
Speaking before the Senate Economics Legislation Committee — likely to be market-moving.

US Existing Home Sales (January)
Sales could fall 3.2% to 4.21 million.

Friday February 13

RBA Assistant Governor (Economic) Sarah Hunter speaks
Remarks at the CEDA event in Perth — final RBA voice for the week.

CBA Household Spending Insights (January)
A high-frequency measure of real-time spending.

US Consumer Price Index (CPI, January)
Annual core CPI tipped to rise 2.5% from 2.6%.

China New Home Prices (January)
Home prices have now fallen every month since May 2023.

Key themes to watch

• Consumer pulse: Three spending indicators this week will offer clues about the health of the Aussie consumer.
• RBA tone: Governor Bullock’s testimony and commentary from Hauser and Hunter may shape rate expectations.
• Inflation watch: CPI data from both the US and China could influence global rate expectations and market sentiment.
• Housing watch: Lending data and Chinese home prices will provide important context for property-exposed sectors.

Check back next week for the latest investor calendar — only on Switzer.

When Cameron and Tyler Winklevoss launched their cryptocurrency exchange Gemini into Australia in October 2025, the timing looked deliberate and confident.

The time was October 2025. Remember how young we all felt? Bitcoin was trading above US$120,000. Retail participation was strong. Australia was being pitched by crypto firms as a mature, regulated market with high adoption and improving payments infrastructure. Gemini registered with AUSTRAC, hired locally and rolled out Australian dollar banking rails via Osko and the New Payments Platform.

Now, four short months later, Gemini is leaving.

The decision is part of a broader retreat that will see Gemini exit Australia, the UK and the EU as it refocuses almost entirely on the United States. In a blog post published overnight, founders Cameron and Tyler Winklevoss said the move was apparently driven by efficiency, artificial intelligence and a need to simplify operations.

The market backdrop tells a less flattering story.

A confident entry

Gemini’s Australian launch was framed as a long-term commitment. The company cited its Global State of Crypto Report, which estimated around 22 per cent of Australians already owned digital assets, a figure comparable to the United States.

The exchange appointed James Logan as head of Australia, rolled out local payments and positioned itself as a regulated alternative for mainstream investors uneasy about offshore platforms.

At the time, Gemini described Australia as one of the world’s most exciting crypto markets. The message was clear. This was not a speculative beachhead, it was supposed to be a durable expansion.

That narrative has not aged well.

Since October 2025, bitcoin has fallen from around US$124,000 to roughly US$64,000 as of today, and there's no end to the fall in sight. The broader crypto market has followed, wiping hundreds of billions of dollars from valuations, slashing trading volumes and compressing margins across exchanges.

For global platforms, the economics of running local operations in smaller markets have deteriorated quickly.

AI, efficiency and headcount

In their blog post, the Winklevoss twins put artificial intelligence front and centre.

They argue AI has fundamentally changed productivity, turning what they describe as 10x engineers into 100x contributors and allowing far smaller teams to do more work, faster. Gemini’s workforce has already shrunk from a peak of about 1,100 in 2022 to roughly half that size by late 2025. A further 25 per cent cut is now underway.

The company says a smaller organisation, armed with AI tools, is not just cheaper but more effective.

That logic extends to geography.

Gemini admits it has struggled to gain meaningful traction outside the US. Operating in more than 60 countries added regulatory and operational complexity without delivering sufficient demand. Australia is explicitly named as one of the markets being cut.

The company says America remains its core opportunity, citing its capital markets and its ambition to build a broader “super app” combining crypto trading and prediction markets.

The crypto cycle matters

What the blog post does not dwell on is how sharply the crypto cycle has turned since Gemini arrived in Australia.

Exchanges make money on volume. Falling prices reduce speculative trading, discourage new users and compress revenue at exactly the same time compliance costs remain fixed. For firms that expanded aggressively near the top of the market, retrenchment is the predictable next step.

Gemini’s Australian launch now looks less like a carefully timed expansion and more like a late cycle bet that failed to survive the downturn.

That does not make the AI argument wrong. Automation is clearly reshaping how financial platforms operate. But exiting entire regions also reflects harsher realities. Australia is a competitive market with local incumbents, tightening regulation and users who have already lived through multiple crypto busts.

What a difference four months can make.

The “mother of all deals”: that’s how European Commission President Ursula von der Leyen described the new free trade agreement between the European Union and India, announced on Tuesday after about two decades of negotiations.

The deal will affect a combined population of 2 billion people across economies representing about a quarter of global GDP.

Speaking in New Delhi, von der Leyen characterised the agreement as a “tale of two giants” who “choose partnership, in a true win-win fashion”.

So, what have both sides agreed to – and why does it matter so much for global trade?

What has been agreed

Under this agreement, tariffs on 96.6% of EU goods exported to India will be eliminated or reduced. This will reportedly mean savings of approximately €4 billion (about A$6.8 billion) annually in customs duties on European products.

The automotive sector is the big winner. European carmakers – including Volkswagen, BMW, Mercedes-Benz and Renault – will see tariffs on their vehicles gradually reduced from the current punitive rate of 110% to as little as 10%.

The reduced tariffs will apply to an annual quota of 250,000 vehicles, which is six times larger than the quota the UK received in its deal with India.

To protect India’s domestic manufacturers, European cars priced below €15,000 (A$25,500) will face higher tariffs, while electric vehicles get a five-year grace period.

India will almost entirely eliminate tariffs on machinery (which previously faced rates up to 44%), chemicals (22%) and pharmaceuticals (11%).

Wine is particularly notable – tariffs are being slashed from 150% to between 20–30% for medium and premium varieties. Spirits face cuts from 150% to 40%.

In return, the EU is also opening up its market. It will reduce tariffs on 99.5% of goods imported from India. EU tariffs on Indian marine products (such as shrimp), leather goods, textiles, handicrafts, gems and jewellery, plastics and toys will be eliminated.

These are labour-intensive sectors where India has genuine competitive advantage. Indian exporters in marine products, textiles and gems have faced tough conditions in recent years, partly due to US tariff pressures. That makes this EU access particularly valuable.

What’s been left out

This deal, while ambitious by India standards, has limits. It explicitly excludes deeper policy harmonisation on several fronts. Perhaps most significantly, the deal doesn’t include comprehensive provisions on labour rights, environmental standards or climate commitments.

While there are references to carbon border adjustment mechanisms (by which the EU imposes its domestic carbon price on imports into their common market), these likely fall short of enforceable environmental standards increasingly common in EU deals.

And the deal keeps protections for sensitive sectors in Europe: the EU maintains tariffs on beef, chicken, dairy, rice and sugar. Consumers in Delhi might enjoy cheaper European cars, while Europe’s farmers are protected from competition.

Why now?

Three forces converged to make this deal happen. First, a growing need to diversify from traditional partners amid economic uncertainty.

Second, the Donald Trump factor. Both the EU and India currently face significant US tariffs: India faces a 50% tariff on goods, while the EU faces headline tariffs of 15% (and recently avoided more in Trump’s threats over Greenland). This deal provides an alternative market for both sides.

And third, there’s what economists call “trade diversion” – notably, when Chinese products are diverted to other markets after the US closes its doors to them.

Both the EU and India want to avoid becoming dumping grounds for products that would normally go to the American market.

A dealmaking spree

The EU has been on something of a dealmaking spree recently. Earlier this month, it signed an agreement with Mercosur, a South American trade bloc.

That deal, however, has hit complications. On January 21, the European Parliament voted to refer it to the EU Court of Justice for legal review, which could delay ratification.

This creates a cautionary tale for the India deal. The legal uncertainty around Mercosur shows how well-intentioned trade deals can face obstacles.

The EU also finalised negotiations with Indonesia in September; EU–Indonesia trade was valued at €27 billion in 2024 (about A$46 billion).

For India, this deal with the EU is considerably bigger than recent agreements with New Zealand, Oman and the UK. It positions India as a diversified trading nation pursuing multiple partnerships.

However, the EU–India trade deal should be understood not as a purely commercial breakthrough, but also as a strategic signal — aimed primarily at the US.

In effect, it communicates that even close allies will actively seek alternative economic partners when faced with the threat of economic coercion or politicised trade pressure.

This interpretation is reinforced by both the deal’s timing and how it was announced. The announcement came even though key details still need to be negotiated and there remains some distance to go before final ratification.

That suggests the immediate objective was to deliver a message: the EU has options, and it will use them.

What does this mean for Australia and India?

For Australians, this deal matters more than you might think. Australia already has the Australia-India Economic Cooperation and Trade Agreement, which came into force in late 2022.

Australia has eliminated tariffs on all Indian exports, while India has removed duties on 90% of Australian goods by value, rising from an original commitment of 85%.

This EU-India deal should provide impetus for Australia and India to finalise their more comprehensive Comprehensive Economic Cooperation Agreement, under negotiation since 2023.

The 11th round of negotiations took place in August, covering goods, services, digital trade, rules of origin, and – importantly – labour and environmental standards.

The EU deal suggests India is willing to engage seriously on tariff liberalisation. However, it remains to be seen whether that appetite will transfer to the newer issues increasingly central to global trade, notably those Australia is now trying to secure with Indian negotiators.

Chasing an Australia-EU deal

Australia should take heart from the EU’s success in building alternative trading relationships.

This should encourage negotiators still pursuing an EU–Australia free trade agreement, negotiations for which were renewed last June after collapsing in 2023.

These deals signal something important about the global trading system: countries are adapting to American protectionism not by becoming protectionist themselves, but by deepening partnerships with each other.

The world’s democracies are saying they want to trade, invest, and cooperate on rules-based terms.

Peter Draper, Professor, and Executive Director: Institute for International Trade, and Director of the Jean Monnet Centre of Trade and Environment, Adelaide University ; Mandar Oak, Associate Professor, School of Economics, Adelaide University , and Nathan Howard Gray, Senior Research Fellow, Institute for International Trade, Adelaide University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

<p>Australia’s political parties set new records in funds raised and spent in the lead-up to the 2025 federal election. Now, nine months later, Australians finally get a look at who funded the parties’ election campaigns. </p>

<p>Data <a href="https://transparency.aec.gov.au/Download">released today</a> reveal that big money matters in Australian elections, and political donations remain highly concentrated among a small number of powerful individuals and interest groups.</p>

<h2>The big spenders</h2>

<p>Money matters in Australian elections because it helps spread political messages far and wide. The Coalition substantially outspent Labor in the year leading up to the 2025 election, declaring $212 million in expenditure compared with Labor’s $160 million. In fact, the two major parties together spent three quarters of a total $489 million in 2024–25. These figures include electoral communication, as well as party operating expenses and salaries, but there is no breakdown.</p>

<p>Clive Palmer’s Trumpet of Patriots party came in third, declaring $53 million in expenditure, well below the <a href="https://theconversation.com/big-money-was-spent-on-the-2022-election-but-the-party-with-the-deepest-pockets-didnt-win-198780">$123 million</a> and <a href="https://theconversation.com/how-big-money-influenced-the-2019-federal-election-and-what-we-can-do-to-fix-the-system-131141">$89 million</a> his United Australia Party spent in the 2022 and 2019 election campaigns, respectively. The Greens declared $40 million and One Nation just $3 million in expenditure in 2024–25. </p>

<p>Australia’s political parties collectively exceeded their 2022 election budgets in 2025, raising $490 million, compared with $402 million in the lead-up to the 2022 election, and coming very close to the half-a-billion mark for the first time.</p>

<p>The Coalition has long led the fundraising “arms race” between the major parties, with Labor taking a substantive lead only once on record – in the lead-up to the 2007 election that saw Kevin Rudd’s Labor Party defeat John Howard’s Coalition government.</p>

<p><iframe id="nq53p" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/nq53p/" height="400px" width="100%" style="border: 0;" scrolling="no" frameborder="0"></iframe></p>

<h2>The big donors</h2>

<p>So who’s stumping up these whopping sums? A few big donors dominate the picture.</p>

<p><iframe id="d64Vu" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/d64Vu/" height="400px" width="100%" style="border: 0;" scrolling="no" frameborder="0"></iframe></p>

<p>Clive Palmer’s Mineralogy – which donated almost exclusively to the Trumpet of Patriots – was by far the largest donor in the 2024–25 financial year. While Palmer’s $54.3 million in donations this electoral cycle is lower than his <a href="https://theconversation.com/big-money-was-spent-on-the-2022-election-but-the-party-with-the-deepest-pockets-didnt-win-198780">record-breaking intervention in 2022</a>, it still shows the substantial sway a single donor can have in an election year.</p>

<p>Climate 200 was the second-largest donor over the period, with the organisation making $6.6 million in donations to a range of independent candidates and campaign groups. Donors to Climate 200 – including Scott Farquhar, William Taylor Nominees, and Mike Cannon-Brookes – were among those stumping up the largest individual donations. </p>

<p>One new player this cycle was Coal Australia, a lobby group <a href="https://www.afr.com/companies/mining/coal-miners-go-it-alone-with-first-lobby-group-in-more-than-a-decade-20240813-p5k26y">founded in 2024</a> to represent coal mining interests. The group made more than $4 million in donations to electoral campaign groups such as Australians for Prosperity, and Jobs for Mining Communities.</p>

<p>The single biggest donation to the Coalition came from philanthropist Pam Wall, who gave $5.2 million to the Liberal Party of South Australia in 2024–25, in memory of her late husband, Ian Wall. Other major donors to the Coalition included the Cormack Foundation (an investment arm for the Liberal Party), Oryxium Investments (linked to the Lowy family), and DoorDash Australia.</p>

<p>Labor’s single biggest donor was Labor Holdings (an investment arm of the party), which donated $4 million, followed by the Mining and Energy Union ($3.3 million). SA Progressive Business, a fundraising arm of the Labor Party, donated $1.4 million.</p>

<p>Anthony Pratt’s paper and packaging company Pratt Holdings made big donations to both Labor and the Coalition, as it has done in <a href="https://theconversation.com/big-money-was-spent-on-the-2022-election-but-the-party-with-the-deepest-pockets-didnt-win-198780">previous years</a>, with Labor benefiting to the tune of $2 million, and the Coalition $1 million.</p>

<p><iframe id="u1Sz6" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/u1Sz6/" height="400px" width="100%" style="border: 0;" scrolling="no" frameborder="0"></iframe></p>

<h2>What about the rest of the money?</h2>

<p>There’s a lot of hidden money in Australian politics. Declared donations made up only a quarter of political parties’ total income in 2024–25. Public funding made up another quarter, and “other receipts” a further 20%. That leaves about 30% ($144 million) in undisclosed private funds.</p>

<p>The Coalition’s funding is a little more murky: 36% of Coalition income in 2024–25 was undisclosed, compared with 23% for Labor. Only donations bigger than $16,900 need to be declared under the current rules, so substantial donations remain hidden. </p>

<p><iframe id="T7e1u" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/T7e1u/" height="400px" width="100%" style="border: 0;" scrolling="no" frameborder="0"></iframe></p>

<h2>Reform is coming, but there’s still more to do</h2>

<p>Fortunately, the rules are <a href="https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r7280">changing soon</a> to provide much more transparency. From July 1 this year, the donations disclosure threshold will be lowered to $5,000, and donations data will be released much more quickly. Donations will be required to be disclosed within seven days during an election period, and at other times, within 21 days following the month the gift was received. </p>

<p>That means Australians will finally know who’s donating while policy issues – and elections – are still “live”.</p>

<p>The <a href="https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r7280">new rules</a> also introduce caps on donations and electoral expenditure, helping to reduce the influence of money in politics. But the new rules unfairly advantage major parties over independents and new entrants.</p>

<p>The new total cap of $90 million for electoral expenditure by a political party is too high, keeping too much money in politics. And the per-seat spending cap of $800,000 is too low, advantaging incumbents over new entrants. There is also a <a href="https://theconversation.com/parliament-has-passed-landmarkelection-donation-laws-they-may-be-a-stich-up-but-they-also-improveaustralias-democracy-249588">loophole</a> in the design of the donations cap that advantages major parties by allowing the cap to apply separately to each branch of a party.</p>

<p>The new legislation should be reviewed and amended to close the loopholes before the next federal election.<!-- Below is The Conversation's page counter tag. Please DO NOT REMOVE. --><img src="https://counter.theconversation.com/content/274739/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important" referrerpolicy="no-referrer-when-downgrade" /><!-- End of code. If you don't see any code above, please get new code from the Advanced tab after you click the republish button. The page counter does not collect any personal data. More info: https://theconversation.com/republishing-guidelines --></p>

<p><span><a href="https://theconversation.com/profiles/kate-griffiths-94706">Kate Griffiths</a>, Democracy Deputy Program Director, <em><a href="https://theconversation.com/institutions/grattan-institute-1168">Grattan Institute</a></em> and <a href="https://theconversation.com/profiles/matthew-bowes-2316740">Matthew Bowes</a>, Senior Associate, Economic Prosperity and Democracy, <em><a href="https://theconversation.com/institutions/grattan-institute-1168">Grattan Institute</a></em></span></p>

<p>This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/new-data-show-where-the-parties-got-their-money-from-in-the-lead-up-to-the-2025-election-274739">original article</a>.</p>
</div>

When the Reserve Bank of Australia (RBA) board voted unanimously to lift the cash rate to 3.85% on Tuesday, the decision was driven by one overriding concern. It wants to stop the rising cost of living from becoming entrenched.

For some, like self-funded retirees, the rate rise was good news. Higher interest means their savings and term deposits will earn more. But for many others, including first home buyers who might have stretched themselves just to get a foot into the housing market, it was a very bad day.

RBA Governor Michele Bullock acknowledged that, saying:

I know this is not the news that Australians with mortgages want to hear, but it is the right thing for the economy.

She warned the alternative – letting inflation keep rising – would be even harder for more Australians.

So what’s the psychology behind the RBA raising rates now and leaving the door open to further hikes if needed? And what does the central bank hope Australians will do in response?

The price squeeze you’re feeling

There’s a striking gap between how the RBA describes the economy and how most Australians experience it.

On paper, things look healthy: unemployment is low, wages are growing.

But as Bullock acknowledged on Tuesday, the daily reality has felt very different.

The price level has gone up 20% to 25% over the last few years, and people see that every time they walk into a supermarket, or they go to the doctor, or whatever – that’s I think what’s hurting people.

That relentless price squeeze is not something you forget, even when the rate of increase starts to slow.

What’s driving inflation up?

The headline consumer price index (CPI) hit 3.8% in the year to December, well above the RBA’s target band of 2–3%. The “trimmed mean” – the underlying measure the RBA watches most closely – rose to 3.3%. Both are too high and moving in the wrong direction.

Bullock singled out three factors contributing to inflation. Each behaves differently and requires a different response.

Housing was the single largest contributor to inflation in December, up 5.5% over the year. That includes rents, which rose 3.9% (or 4.2% stripping out government rent assistance), as well as insurance, utilities, and new construction costs, which rose 3% as builders passed through higher labour and material costs.

There is an irony here. Rising interest rates are intended to cool demand, but they slow housing construction. Limited supply of housing is what’s pushing rents up in the first place.

“Durable goods” are the things we buy to last, such as cars, refrigerators, washing machines, televisions and furniture. Demand for many of those has been higher in the past year.

“Market services” are items such as restaurant meals, taxis, haircuts, gym memberships, medical appointments and holiday travel.

The RBA watches these carefully, because these are services priced by supply and demand in the domestic market. Those prices tend to be “sticky”: once they start rising, they don’t come back down easily.

Wages are also a big part of market services inflation. If the people providing those services are earning more, the cost goes up.

How rate cuts made shoppers relax

This is where the behavioural psychology gets interesting.

The RBA cut interest rates three times in 2025. Each cut sent a signal, whether intentionally or not: it’s OK to spend a bit more.

And spend we did. CommBank data shows Australians spent A$23.8 billion over the two-week Black Friday period, up 4.6% on the year before.

It’s a cautionary tale about “rational expectations”. Each rate cut potentially fuelled the belief that more would follow.

If people feel like they can afford to spend, then they spend. Businesses, sensing demand, may raise their prices to match. That’s exactly the self-fulfilling dynamic central banks worry about.

The 3 ways the RBA hopes we’ll react

When prices go up, as they have been, workers ask for bigger wage rises to keep up. To pay higher wages, businesses lift prices to protect their profit margins. Together, that can create a “wage-price spiral” that becomes very hard to break.

The RBA will be hoping Australians respond to this rate rise in three ways:

• spending less
• saving more
• not asking for big wage rises (although they’d never phrase it that way).

RBA Governor Michele Bullock described raising interest rates as “a very blunt instrument” to bring inflation down, and noted setting rates is “not a science. It’s a bit of an art, really […] We’ve just got to respond as best we can.”

The RBA can’t undo the price rises that have already happened. It can only try to slow down further increases.

Meg Elkins, Associate Professor in Economics, RMIT University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Rather than be threatened by the rise of the machines, Xero's CEO says the company is embracing AI, adding that cheap tools can't easily replicate its performance. So I decided to put that to the test by building one myself.

Xero shares jumped overnight, up over 2.5 per cent, after an investor call that demonstrated its bid for AI-powered accounting supremacy on its platform. 

The company sure could use that good news story, too. In the last six months, Xero's stock price has dropped from around $180 a share to where it bottomed this week at around $93 a share. It has since jumped back up to around $96 at the time of writing, but it doesn't take an accountant or its software to realise that Xero stock is more than a little beaten up.

The mini-turnaround in Xero's fortunes were delivered in an investor call where AI was mentioned - according to the transcript - over 150 times. Rather than positioning AI as a standalone product, the company is embedding it across what it calls a whole of business platform, using automation and prediction to make existing software more powerful and harder to replace.

Xero says its AI features are grouped around four outcomes: getting help, getting time back, managing the business smarter, and unlocking growth.

Much of that work is already visible. More than two million Xero subscribers are now interacting with AI powered features, according to the company, with about 300,000 using newer AI capabilities introduced more recently. These range from document extraction and email to bills, through to cashflow prediction, automated bank reconciliation and AI assisted analytics.

Xero’s internal assistant, branded JAX, sits at the centre of this strategy. It is designed to surface answers and insights directly from a customer’s own financial data rather than provide generic advice. That distinction underpins the CEO’s claim that AI alone cannot clone the platform.

The early usage data is encouraging. Xero says more than 97 per cent of help sessions are now resolved without a support ticket, largely through self serve content that is partly AI enabled. Customers using bank feeds and automated actions save about 22 hours a month, while messages to JAX per user have risen by more than 60 per cent in the past three months.

Encouraging, right? It's probably what has given shareholders the confidence to shift the stock's direction northwards.

But when asked about AI tools that were readily available to potentially replace Xero (and for less money), Xero's CEO Sukhinder Singh Cassidy said something interesting. As reported by the AFR, she responded that - after playing with Anthropic's Claude Code product - that AI can't easily replicate Xero's offerings. 

Putting it to the test

I have been building all sorts of things with the help of Claude Code recently, so I decided to give it a red-hot go over my morning coffee today.

As it turns out, Claude Code could - in theory - replace the work that Xero currently does. For between $35 and $135 a month depending on what you pick, Xero will offer you a range of features. I gave those features (found here, if you want to see my working) to Claude Code and gave it a simple task:

<blockquote>This is the feature list of a popular online accounting platform. It has many abilities to make life easier for businesspeople. I want you to look at each individual feature and tell me how we can create a version of it that I can run using free or cheap tools that take a little bit of coding we can do together to get working so I don't have to use this company's software for my accounting needs. Give me steps on how you would clone each feature so it feeds back into this centralised space we create together.

<br />

For what it's worth, the CEO of this company says this 'can't be done' with AI and specifically referenced Claude Code as being incapable of completing such a task.</blockquote>

Fair challenge!

After some beeping and booping, Claude Code figured out I was in fact trying to clone Xero, and build a list of features and work both it and I would need to implement to get it done.

Some more whirring meant that it was ready to start coding something that would form the foundation of my Frankenstein's monster for accounting software.

Here's the final list of what it did and what still needs to be done at the time of writing. Cleverly, it called its own version "OpenBooks":

Xero Feature	What I Built	How It Works	Cost
Accept Payments	Stripe integration	Payment links embedded in invoices, webhook receives confirmations	Free (Stripe takes 2.9% per transaction)
Online Invoicing	Full invoice system	Create, edit, send, track payments, PDF generation	Free
Bank Connections	CSV import + Plaid ready	Upload bank exports or connect via Plaid API	Free (Plaid free tier: 100 connections)
Bank Reconciliation	Smart matching engine	Fuzzy matches transactions to invoices/bills, learns from rules	Free
Claim Expenses	Expense module with OCR	Upload receipts, extract data, approval workflow, reimbursement tracking	Free (Tesseract OCR)
Integrate Apps	REST API	Every feature accessible via API, webhook support	Free
Pay Bills	Bills/AP module	Track bills, approval process, payment scheduling, ageing reports	Free
Track Projects	Project & time tracking	Budgets, time entries, job costing, profitability reports	Free
Payroll	Basic payroll system	Employee records, pay runs, Australian tax tables, super calculation	Free
Purchase Orders	PO module	Create, send, track delivery, link to bills	Free
Reporting	8 financial reports	P&L, Balance Sheet, Cash Flow, GST/BAS, Aged Receivables/Payables, Cash Forecast	Free
Quotes	Quote system	Create quotes, one-click convert to invoice	Free
Inventory	Stock management	SKUs, stock levels, movements, low stock alerts, valuation	Free
Multi-currency	Currency support	Exchange rates API, store in original + base currency	Free (exchangerate-api.com free tier)
Manage Contacts	Contact database	Customers & suppliers, transaction history, notes	Free
GST Returns	BAS report generator	Calculates GST collected/paid, generates ATO-ready figures	Free
Capture Data	OCR document capture	Extract data from receipts and bills automatically	Free (Tesseract)
Online File Storage	Attachment system	Attach files to any invoice, bill, expense, contact	Free (local storage)
Analytics	Dashboard + forecasting	Cash flow projections, KPIs, trend analysis	Free
Accounting Dashboard	Real-time dashboard	Bank balances, overdue invoices, bills due, quick actions	Free
Fixed Assets	Asset register	Track assets, depreciation schedules (straight-line, diminishing value)	Free
Mobile App	Responsive web app	Works on any device, PWA-capable	Free

And don't forget to tell 'em the price, son:

Cost Summary

Item	Xero	OpenBooks
Software	$35-78/month	$0
Hosting	Included	$0 (runs on your computer) or $5/month (cheap VPS)
Bank feeds	Included	$0 (CSV) or free tier (Plaid)
Payment processing	2.95%	2.9% (Stripe)
Annual cost	$420-936	$0-60

For what it's worth, all of that took about 23 minutes.

So, can it be done?

So it turns out that, if given a bit of time, AI could absolutely clone Xero. Claude thinks it could stand it up in about 5 minutes compared to the setup time on Xero of 10 minutes, but for what it's worth, this is the definition of bad faith accounting. It knows I challenged it and is almost 100% telling porkies to make itself sound better. 

But this whole thing left me wondering, just because you can, doesn't mean you should. 

I'm not sure how many of you reading this are nifty with code, but it would be an absolute pain to try and get all of this running in just the snap of one's fingers. Sure, Claude Code can flex its circuits as hard as it wants, but implementing its plan in the real world to get it up and running would likely be a frustrating experience I liken to doing accounting itself. 

And even if one could stand it up in any amount of time, maintaining it, building new features for it and all the rest that goes into it would be a full-time job. That's probably why Xero has a whole host of global tech wizards working on this stuff all the time.

The whole point of Xero is to make accounting easy on a platform where you don't have to tame a codebase to get a good result. So while you could code your way into the next Xero, you probably wouldn't want to live with it. Plus: that idea's already taken. Go build something new instead!

The Reserve Bank of Australia (RBA) has lifted the cash rate by 25 basis points to 3.85%, adding to pressure on households and businesses. While the move was widely expected by markets and most economists, the Reserve Bank says inflation risks remain too high to be comfortable.

The RBA said inflation “picked up materially” in the second half of 2025. Governor Michele Bullock told a press conference:

Based on the data we have seen and the conditions here and around the world, the board now thinks it will take longer for inflation to return to target and this is not an acceptable outcome.

The rate rise reflects concern that inflation will not return to the RBA’s 2–3% target range until June 2027, according to the bank’s updated forecasts also released today.

Stronger than expected economic growth means capacity pressures are rising and keeping inflation higher than expected. Progress could stall unless interest rates are pushed a little higher.

It was the first rate increase since November 2023, and followed three cuts in 2025 when inflation was cooling.

Policy set for a year ahead

In the lead-up to the meeting, there appeared to be a gap between market expectations and the RBA’s own comments. Markets and many economists focused on the latest inflation data, which showed a renewed uptick, particularly in prices for services. That data strengthened the case for a rate rise at this meeting.

The RBA, however, has repeatedly emphasised it does not set policy based on short-term movements in inflation.

That message has been reflected in recent meeting minutes and reinforced in a January ABC interview with Andrew Hauser, the RBA’s deputy governor. He said interest rate decisions are guided by where inflation is expected to be in about a year’s time – not where it has been over the past quarter or two.

Today’s decision suggests that, on that forward-looking view, the RBA became less comfortable with the inflation outlook. Rather than a temporary overshoot, the path back to the 2-3% inflation target will take longer than previously thought.

What’s driving inflation?

The latest consumer price index (CPI) figures help explain the Reserve Bank’s caution. Trimmed mean inflation – the RBA’s preferred underlying measure – was 3.3% in the year to December, up from 3.2% in the year to November. That puts underlying inflation clearly above the target range.

---

---

More importantly, recent inflation pressures have been led by services prices. Costs related to rents, insurance, health and education have continued to rise, reflecting domestic pressures such as wages and business operating costs.

In its statement, the RBA pointed to stronger demand and ongoing capacity constraints as key concerns:

Private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight.

Services inflation tends to fall slowly. Unlike petrol or food prices, it does not usually reverse quickly once it picks up. For the RBA, this persistence increases the risk inflation could remain above target for longer than hoped.

Why the RBA moved now

Faced with these risks, the bank appears to have concluded that waiting would have been the bigger gamble. If inflation stayed above target for too long, or if expectations began to drift higher, the RBA could later be forced into sharper and more disruptive rate rises.

By lifting the cash rate to 3.85% now, the Reserve Bank is trying to stay ahead of the problem. A modest move today may reduce the chance of more aggressive action later.

Australia is out of step

This decision also puts Australia out of step with several other major economies.

In the United States, the Federal Reserve cut interest rates three times in 2025 and is signalling further cuts are likely this year. The European Central Bank has moved even faster, cutting rates eight times between June 2024 and June 2025 to boost growth.

By contrast, Australia’s inflation challenge appears more domestically driven, particularly through persistent services inflation. That helps explain why it is moving in the opposite direction to many of its global peers.

Credibility and what comes next

The quick turnaround after the last rate cut in August may raise questions about the RBA’s earlier judgement. But inflation risks remain tilted to the upside.

The board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target.

For households and businesses, the message is clear. Borrowing costs and mortgage repayments are rising again.

What happens next will depend largely on whether services inflation begins to cool and whether wage growth shows clearer signs of moderation.

If inflation resumes a steady decline towards the target band, this increase could be a one-off rise. If not, the RBA has signalled it is prepared to do more.

For now, the message from the Reserve Bank is simple: inflation is lower than it was, but still too high for comfort – and interest rates are likely to stay higher for longer until that changes.

Stella Huangfu, Associate Professor, School of Economics, University of Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The time has come for me to make my 2026 predictions, and I have decided to do it in two parts. The first is where I agree with the conventional view. The second is where I disagree with the predictions of others.

The conventional view is that Anthony Albanese will still be Prime Minister on Christmas Day this year and that Paulie Hanson will still lead One Nation. I agree with both predictions. On the states the conventional view is that Labor’s Peter Malinauskas will lead Labor to a very solid victory in South Australia at the general election on Saturday 21 March. I’ll give details of my predictions for that event in my second or third 2026 article for Switzer Daily. That will include my South Australian pendulum, which already appears on my website.

Turning overseas, the conventional prediction is that the US Republicans will lose some two dozen House of Representatives seats to the Democrats at the mid-term elections on Tuesday 3 November. That would mean the following: Mike Johnson (Republican, Louisiana) will no longer be Speaker because his place will be taken by Hakeem Jeffries (Democrat, New York). When he becomes Speaker on 3 January 2027, Jeffries will be the first black person to hold that office.

In the 119th Congress elected on Tuesday 5 November 2024 and first meeting on 3 January 2025, the numbers began as 220 Republicans and 215 Democrats. My prediction for the 120thCongress is that it will begin with 240 Democrats and 195 Republicans. I’ll write an article for Switzer Daily giving more details as the event draws near.

Four days after the US midterm elections comes New Zealand’s general election for its House of Representatives on Saturday 7 November. The conventional prediction is that the National Party’s leader and Prime Minister Christopher Luxon will remain in office as a result. Again, I agree with that prediction, and I’ll contribute another article for Switzer Daily giving details.

My unconventional predictions begin with the Victorian state election on Saturday 28 November. The conventional view is that Labor under Jacinta Allan will win again but with a reduced majority. I disagree. I think there will be a Liberal-National Coalition government with Liberal leader Jess Wilson as Premier. Again, I’ll give detailed predictions close to polling day.

My most controversial prediction for 2026 is that Sussan Ley will still be the Leader of the Opposition on Christmas Day. At that time, commentators will commend her ability to put back together the Liberal-National Coalition that had been broken by the National Party’s hissy fit in January 2026. In addition, I go further and predict that Sussan Ley will lead her party at the May 2028 federal general election.

Also controversial is my prediction that Senator Larissa Waters (Queensland) will lose her leadership of the Greens and be replaced by Senator Sarah Hanson-Young (South Australia).

Permit me at this stage to quote in full the opinion of former Liberal minister and Senate leader George Brandis. Writing in The Sydney Morning Herald and The Age on 29 December last year, he gave his “best performance” ratings for the parties. Of the crossbench he wrote: “Sarah Hanson-Young achieved in 2025 something I never thought possible for a Green: she managed to sound sensible. Her critique of the Optus triple zero debacle was measured and forensic. Her pragmatism (a very un-Green virtue) landed the deal with Labor on environmental laws. And she had the most brutal cut-through line on the Coalition’s decision to abandon net zero: ‘They’re nutters’. Perhaps it’s the fact that she has served in the Senate for longer than her Greens colleagues that has made Sarah a political grown-up. No wonder they won’t make her leader”.

While I think they will make her leader, I acknowledge that her use of travel entitlements has been contentious. Since her use was within the rules, I think she will ride out the storm in much the same way as Anika Wells and Don Farrell have ridden out a similar storm regarding their use of travel entitlements.

I predict that in 2026 the federal parliament will adopt my tripartite reform plan for the Senate electoral system. Politically, the important part is that each state would have 14 senators where at present the number is 12. That would have the effect that the House of Representatives would have 175 members where it now has 150. So, at the federal general election in May 2028 New South Wales will have eight more members, Victoria and Queensland each six more, Western Australia three more and South Australia two more.

There would, therefore, be a number of redistributions not otherwise needed – but the most interesting case is South Australia where the map is currently being redrawn. There are 10 SA federal electoral divisions, and the total number of electors is 1,307,863. Therefore, the quota is 130,786. However, no sooner will the new map have been adopted, but it will be cancelled. Then there will be a re-division into twelve seats with new numbers showing a quota of about 110,000 electors.

The maps of federal electoral divisions are also currently being redrawn in Tasmania and the ACT. Unlike SA, those new maps will go into immediate effect – since the increase in numbers will not change the fact of Tasmania having five seats and the ACT three. Consequent upon the constitutional requirement that every Original State shall have no fewer than five members the Tasmanian quota is only 82,635 electors compared with 130,786 for South Australia. Even with SA getting two more seats the Tasmanian quota will still be some thirty thousand less than for any Mainland State.

Let me conclude with some very bold and dangerous predictions. While I think Sussan Ley has done a pretty good job as Liberal leader I don’t think she will survive beyond failing to win the 2028 election. So, in June 2028, I predict that Josh Frydenberg will compete with Andrew Hastie to become the Leader of the Opposition. I am not willing to predict who will be the next long-term Prime Minister from the Liberal Party.

Traditionally the prize Sydney seat for the Liberal Party has been Bradfield while in Melbourne it has been Kooyong - both now narrowly held by “teal” independents. Given that these predicted extra seats will be created, I think both 2025 independent winners will still be in the House of Representatives. But Giselle Kapterian, the 2025 Bradfield Liberal candidate will also be in the House. Which of the 2025 winner, Nicolette Boele, or Kapterian will represent the seat called “Bradfield” I cannot say. Likewise in Melbourne I predict that both Monique Ryan and Josh Frydenberg will be in the House of Representatives. However, I cannot say which of the two will sit in the seat named “Kooyong”.

Let me conclude with a prediction way out on left field. Ask anyone who knows Canberra to name the winners of the 2028 ACT Senate contest and the universal answer you would get is “David Pocock and Katy Gallagher”. That is not my answer. The third part of my Senate reform plan has it that both Pocock and Gallagher (who were elected in 2025 to three-year terms) would have their terms extended to six years (like senators from states) so that their terms would expire on 30 June 2031.

So, the election of territory senators in 2028 will see completely new names. My prediction is that in the ACT Labor will win the first seat but that the second will go to the Liberal Party. In the Northern Territory Labor will win one and the second will go to the Country Liberal Party. The CLP senator, however, will join the Canberra caucus of the Nationals. Jacinta Nampijinpa Price with a term then expiring on 30 June 2031 will be the CLP senator sitting in the Canberra caucus of the Liberal Party.

(Malcolm Mackerras is an honorary fellow at Australian Catholic University.)

Australia’s corporate regulator has secured refunds of A$40 million to more than 38,000 investors in risky financial products, following a review of the industry.

The Australian Securities and Investments Commission (ASIC) raised concerns that marketing of high-risk products known as “contracts for difference” or CFDs, failed to clearly explain the risks involved.

This is just ASIC’s latest intervention in more than 15 years of ongoing concern with the potential harm of CFDs to retail investors.

Fine-tuning the marketing of these complex financial products to a suitable audience remains an unfinished task for the regulator.

What are CFDs?

In its report, ASIC said thousands of Australians lose money trading CFDs every year. In 2023-34, over 133,000 people, or 68% of retail clients, lost more than $458 million.

Contracts for difference are a type of financial instrument known as derivatives because they follow the price of an underlying asset, such as stocks, the Australian dollar, and other financial products.

They are traded “over-the-counter” (meaning not on a public exchange) on platforms run by CFD providers.

Investors can profit from both upward or downward movements in financial assets with CFDs. Unlike buying shares, investors need only pay a fraction of the price (the margin) up front to enter into a CFD to track a financial product, with the hope of making a profit.

CFDs are leveraged products, which means an investor is borrowing money to speculate on the price of an asset. A small price change in the underlying stock or commodity can have an amplified effect by increasing the gain – or the loss – on the CFD.

For example, this can be as little as paying $1 upfront to gain the same trading power as $100.

Let’s say you buy a CFD on one Apple share. As you only need to pay a fifth of the Apple stock for the CFD, you can buy five Apple CFDs for the price of one Apple share. So if the price of Apple rises by $1, you could make $5. But if it falls by $1, you could lose $5 dollars.

CFDs are therefore popular with investors as they can trade many financial instruments (betting on rises or falls) and magnify their trading power.

The downside is that trading on margin also amplifies losses if the market goes against the bet that a price will rise or fall. This has led to financial distress and cases of attempted self-harm.

ASIC has been particularly concerned about issuers offering “margin discounts” to clients on particular trades, to reduce the amount or “margin” that the investor pays up front.

This contravenes ASIC’s 2021 product intervention order. ASIC published a further warning to CFD issuers in 2024 to stop this practice.

The complexity and risk of CFDs has meant they are effectively banned in the United States. In Singapore, prospective traders need to pass a customer knowledge assessment before they are allowed to trade CFDs.

Who are the products being marketed to?

CFDs are not for the faint of heart and would only suit investors who are very knowledgeable and have a large appetite for risk. Despite this, retail investors (regular people) are the dominant market targeted by CFDs issuers in their marketing and advertising.

In ASIC’s recent report, the regulator found that CFD issuer websites misled consumers.

Some examples were promoting the underlying instruments, such as shares or commodities, rather than actual CFDs, and overstating the benefits of trading CFDs and understating the risks.

ASIC has forced 46 issuers to rewrite their websites by removing misleading content and making them clearly state that they are offering CFDs, among other changes. One issuer amended 1,000 web pages.

ASIC chair Joe Longo last week floated the idea of banning advertising for high-risk financial products, which would also include CFDs.

The underlying concern is that unsophisticated investors are being attracted to complex financial products that carry great risk of financial loss.

Indeed, ASIC’s report found that only 32% of retail clients made money from CFDs after fees. Of those that traded the most per month (over 50 trades), only 19% were profitable after fees.

Fears vulnerable investors still slipping through the cracks

The key difference is between retail and wholesale clients.

Wholesale clients are generally institutions or sophisticated investors, highly experienced and more likely to trade complex derivatives and make a profit.
Wholesale clients are defined in law based on certain tests.

Wholesale clients also lose some of the consumer protections that apply to retail investors, such as receiving product disclosure statements and having access to dispute resolution.

Yet, ASIC found that even wholesale clients lost money, with only 30% making profits.

This raises concerns for ASIC of whether some retail clients were misclassified as wholesale clients by the CFD issuers.

So, it is not the laws that need changing, which clearly define sophisticated investors. What is needed is more scrutiny of how issuers misclassify potentially vulnerable investors.

The statistics are concerning as this means the large majority of investors are losing money trading CFDs, driven largely by paying fees. On the flip side, this means CFD issuers are profiting from some of these losses as they earn the fees.

This raises questions of whether CFD issuers are attracting suitable clientele through advertising, as the losses by investors seem excessive. This suggests that advertising should carry warning labels, similar to advertising for other risky activities, such as sports betting.

Walking a fine line

CFDs have existed for over two decades, with a market that is predominantly comprised of retail investors.

ASIC has managed the fine balance of permitting their access, while regulating issuers on their marketing and operations without banning them outright. Potential investors would be wise to do their own homework to carefully assess the costs and risks of CFDs before wading into the market.

Adrian Lee, Associate Professor in Property and Real Estate, Deakin University

This article is republished from The Conversation under a Creative Commons license. Read the original article.