Some facts on the RBA dividend molehill

Some really sloppy journalism surrounds the pea-sized “scandal” surrounding the desire of the RBA to keep all of its 2011-12 profit so that it could rebuild its reserve fund. While there is no doubt the RBA would have preferred to keep all of the $1.096 billion profit, it was asked by Treasurer Swan to pay $500 million as a dividend to the government.

So what?

The reporting of this issue has been at best, footloose and fancy free. But given it was driven by a part time speech writer and Liberal Party advisor, there could be some other motive to magnify this issue. I simply don’t know.

One critical error has been that the RBA dividend did not prop up the government’s attempt to return to “budget surplus this year” as reported in today’s AFR, because it went into the 2011-12 budget bottom line.

Whoops!

This point was made last year when the government released the final budget outcome in late September 2012, in which is said “a $500 million dividend [from the Reserve Bank] has been recognised in 2011-12 instead of 2012-13, based on advice from the Australian National Audit Office”.

This is that part of the mischief making shown up for what it is. Sloppy, poorly researched.

The other fanciful element of the story tries to inflate the degree to which the RBA was “raided” or the government was told by the RBA to “keep your hands off RBA earnings” and other emotive and clap trap.

The truth is that the RBA Governor, Glenn Stevens, was grilled in this issue in February and he made a few inconvenient points to those wanting to make this issue into a scandal. In particular, Stevens said, quite plainly,

• “Then the bank’s owner, which is the Commonwealth government in the person of the Treasurer, can determine how much of those earnings available for distribution he will take as a dividend.”

• “But in the end it is his prerogative; it is not open to the Reserve Bank board to say, ‘The only things that are available are X, and we are keeping this much—the rest is for you’. My preference would be to keep all of it, frankly, until we rebuild the capital, but it is the Treasurer’s prerogative to decide.”

• “In the current situation he was quite amenable to us keeping more than half of the earnings available for the year, but he wished to take the 500 dividend. That is his prerogative, and he is perfectly entitled legally under the acts to do that.”

• “It is true that the reserve fund is gradually being rebuilt. It will take some years to rebuild it in full—that was always going to happen anyway, regardless of any decision on dividend this year. It is heading in the right direction”

• “it is not my job to take account of the broader pressures that government finances are under. That is the Treasurer’s job, and he has to weigh—yes, as the custodian of the ownership relationship of the Reserve Bank—the soundness of that. But he has to weigh all the other pressures that he is under as well. He reached a judgement, and I accept the judgement. As I say, it is perfectly within the legal powers and obligations that he has to do what he has done.”

So there.

It is a pity the cub reporters making the proverbial mountain out of a mole hill didn’t spend the 45 minutes I just spend researching the issue before getting all hot under the collar on chicken feed issue.

Joe Hockey waterboards the data but still can’t make it confess

The Shadow Treasurer, Joe Hockey, sent a tweet last week where he noted that “under the Coalition, the average standard variable mortgage rates was 11 basis point lower than Labor.” That ‘average’ was my emphasis.

The tweet is here: http://twitdoc.com/view.asp?id=89684&sid=1X78&ext=PDF&lcl=2013-04-02-INTEREST-RATES-THE-FACTS.pdf&usr=JoeHockey&doc=133549552&key=key-163hp0sandrrs3iqqscr

Mr Hockey’s methodology was to choose to average the interest rates from the month the Coalition won the 1996 election (March) to when it lost in November 2007 and then compare it to the interest rate from December 2007 to February 2013 (latest published RBA data).

While there are a many, many issues to take account with Mr Hockey’s workings in this matter, it is interesting to apply exactly the same methodology Mr Hockey uses for the issues of government debt, net government interest payments and the unemployment rate.

Using the budget data, the average level of net government debt under the Howard government, that is from 1996-97 to 2007-08 inclusive, was 5.2% of GDP. That’s a fact.

In the period from 2008-09 to 2011-12, the average has been only 4.0%. Another fact.

In terms of the net interest payments of the government, they averaged 0.7% of GDP under the Howard government versus just 0.2% of GDP under Labor.

In terms of the unemployment rate, using Mr Hockey’s dates that he used for interest rates and his methodology, the unemployment rate averaged 6.4% under the Coalition and it has averaged 5.1% under Labor.

They are the facts.

It is open to interpretation how best to measure these things, but Mr Hockey is torturing the data to make it confess to what ever he wants it to say. He is not objective and his spin is a little bit embarrassing for someone likely to be Treasurer after 14 September.

Judith Sloan takes issue with me… and the bogeyman in the cupboard

Columnist for The Australian, Judith Sloan, takes me to task on the issue of Australia’s government debt in her latest column – http://www.theaustralian.com.au/opinion/columnists/labors-story-on-debt-misses-one-crucial-point/story-fnbkvnk7-1226613585777 .

Ms Sloan concludes that “the public have every right to feel nervous about public debt”, even though for her previous 2,000 words or so, she fails to mention a number of critical items that render her opinion not only misguided but patently wrong.

Sloan fails to mention in her piece the actual indicators which determine whether a particular level of government debt is a problem or not. These indicators are not opinion or a hunch or a doctrinal Tea Party like fear but simple and observable benchmarks.

Perhaps most important of all of these is the level of government bond yields, or the interest rate that a government pays on its debt. This is a good benchmark on which to judge whether or not government debt is something to be nervous about. In simple terms, if there is too much debt, yields are high. If bond yields are low and the bond market is free of government intervention, there is no fear about government debt.

The Australian 10 year government bond yield is currently around 3.3%, marginally above the record low reached in the middle of 2012. In the last 50 years, there have been only a few months, all of them in the last year, where yields have been lower than they are today. No nervousness here.

In late 2007, the 10 year government yield was above 6%, when there was no net debt. Investors now are flocking to buy Australian bonds, in full knowledge that they are a great, very low risk investment. Indeed, some investors suggest that Government debt is so low that bonds are in short supply.

If you think the bond yield is not a good proxy for whether government debt is sustainable, let’s quickly look to Italy and Spain, for example, where yields skyrocketed to 6 and 7% before the market calming influence of the European Central Bank was evident. In Greece, yields on 2 year government bonds exceeded 100% before the partial default and bail out funds arrived. Look also at Argentina over a decade ago and many other countries where high government debt has been a genuine problem.

It is also worthy of note that between 75 and 80% of Australia’s $230 billion bond market is held by foreigners . They are not obliged to hold these bonds but do so for reasons of security, financial safety and return. Nervous about government debt? I don’t think so.

Which bring us to the next point Sloan ignores in her fear campaign – Australia’s credit rating.

In November 2011, Fitch Ratings upgraded Australia’s sovereign credit rating to AAA. This meant for the first time, all three ratings agencies, the others being Moody’s and Standard & Poors, rated Australia triple-A. It didn’t happen when Australia had no net debt, never happened when there were budget surpluses, but it happened in 2011 AFTER the move to budget deficit, after it was clear net government debt was inching up and after, unfortunately for Sloan, around 200,000 jobs had been protected from the fiscal stimulus measures a couple of years earlier.

I just want to emphasise – the upgrade from Fitch was in November 2011 when the budget was in deficit. In delivering the upgrade, the first item Fitch noted was “low public debt”. Policy flexibly was also seen as a vitally important aspect of Australia’s low sovereign risk.

Having seen the recent budget numbers and debt levels, Fitch and the other ratings agencies have all retained the triple-A rating, not that Sloan would want that inconvenient fact to get in the way of a good scare story.

Another issue ignored by Sloan, which makes her nervousness about government debt a bit like a 5 year old worried about the bogeyman in the cupboard, is the fact that the Australian dollar is trading at a 28 year high. In an open economy like Australia, any concerns about government debt would show up rather quickly in a currency flight. Rather than a currency flight, there is a flood of global investor money cascading into Australia at a great rate of knots even though commodity prices and the terms of trade are falling. Indeed, the RBA reckons there is too much good news that has lead the Australian dollar to be overvalued.

I thought it also useful to point out where Sloan is befuddled with nominal dollar amounts for government spending and tax and mixing them with measures as a share of GDP. She cites dollar values for a number of items to make then appear big (whoa! An extra $72 billion of government receipts is a lot!) and then looks back in history to note some items as a share of GDP (yikes! Government spending hit 26% of GDP in 2009-10).

A classic apple and oranges exercise, although Sloan seems happy to make a fruit salad out of her ‘analysis’.

The latest Australian numbers show that government spending as a percent of GDP will be 23.8% in 2012-13. Yes, it was 26.0% of GDP in 2009-10 as the stimulus measures kicked in but only three times in the past 20 years has this ratio been lower than the 2012-13 level. So much for Sloan’s confected concern about government spending. I should add too, that this level of government spending is being delivered with the biggest ever cut in real government outlays in 2012-13, another fact Sloan is not aware of or chooses to ignore.

Sloan also chooses to muddy the waters, mixing gross and net debt concepts – a popular trick to get people really scared about debt, and then implies that Australia is at risk of replicating the economic crisis of Ireland where debt, according to Sloan’s numbers, rose from 20% of GDP to nearly 100% (the numbers are actually, according to the IMF, from a low of 12% in 2007 to 110% in 2013).

I am not sure what motivated Ms Sloan to write her diatribe. Who knows, she might actually be nervous about Australia’s level of government debt. If she is, she is in sharing that space with the Tea Party nutters who also are probably nervous about the sky falling in sometime soon.

Government debt – facts versus fiction

Last week, I wrote an article on the issue of Australia’s government debt which the Labor Party distributed via its email distribution list**.  The article is here http://campaigniq.communityengine.com/em/mail/view.php?id=1792973170&a=26848&k=8c5f3b1#facebook

I am eager for the discussion and debate concerning government debt to be elevated as there is a general misunderstanding of the issue in political circles, much of the media and the general public. This confusion threatens to unnecessarily undermine domestic confidence and global investor risk assessment when they decide whether or not to have investment funds in the Australian bond market. If the email sent by Labor has elevated the facts surrounding the issue of government debt, it has been worth it.

There was a rush of feedback on the topic and some sensible questions were raised, in particular the discussion of what the optimal level of net government debt is.

The answer to that question must be answered in some medium term context. There can be no hard and fast target for net debt that should be met each and every year. Rather, the optimal level for net government debt is dependent on the business cycle.

It is not unlike asking a company what its optimal level of debt is. If economic conditions are slow, a company would want lower debt. If there are opportunities for expansion, takeovers or if sales are strong, ramping up debt is entirely prudent as the firm aims to take advantage of favourable news. In other words, the optimal level of debt for a firm or government depends on economic conditions.

For the government, in a climate of a sustained and strong economic growth, net debt should be falling and low. The longer a strong expansion is sustained, the greater the move should be towards negative net debt (and the accumulation of financial assets) as was the case during the late 1980s and early 1990s under Hawke and Keating and during the period up to 2007-08 under the Howard government.

If in the current cycle, the economy sustains nominal GDP growth around 5.5 to 6 per cent over the next four or five years, net government debt should be eliminated by about 2017, give or take a year.

If on the other hand, the economy is less strong, or worse is subjected to a huge negative shock such as a global banking and financial crisis or a negative terms of trade shock, there are grounds for net debt to rise or at least for the path to debt reduction to be long and slow. This was certainly the approach with the Fraser government in the late 1970s/early 1980s, the Keating government as it tackled the early 1990s global recession and of course the Rudd/Gillard government as it fought to hold back the tide from the GFC.

Most of these examples show counter-cyclical fiscal policy in play and the governments undertaking such an approach did well.

Whatever the current argument, the level of net government debt has not exceeded 20 per cent of GDP in the last 45 years, a remarkable achievement given the levels of debt around the industrialised world right now.

The day after the article was published, Fitch ratings agency confirmed Australia’s triple-A rating and it cited low public debt as one of the reasons for the confirmation of this rolled gold assessment of the Australian economy.

It is an important side note that the US government has not had net debt below Australia’s current level of 10 per cent of GDP since 1915. Yet its economy over those 100 years have been remarkably strong, delivering massive riches to the bulk of its population, notwithstanding the government debt explosion unleashed a decade ago.

There is an even greater misunderstanding in terms of gross government debt, which is effectively the amount of government bonds on issue.

I have written on this in the past – here http://www.businessspectator.com.au/article/2012/11/2/interest-rates/why-government-debt-must-grow-forever  .

Clearly, for the purposes of market liquidity, a benchmark bond from which corporate and other bonds are priced and an underpinning of the futures market, gross debt is and will be an inevitable market factor for decades to come. Indeed, Australia has had gross debt year in, year out ever since Federation in 1901 and the level of that debt has never posed management problems.

If Australia’s government debt level is a top tier economic problem for Australia, it confirms just how well the economy is going. To focus on it is like highlighting Don Bradman’s duck in his last innings and ignoring the rest of his career. Context is important.

Let’s hope than in the remaining five months before the 14 September election that the economic policy debate steps up well above the issue of government debt.

If the Greens, Nationals, Liberals or Independents want to talk to me about sending economic material to their email lists, under my name, I would consider it. If it is an issue I feel strongly about and on which I have knowledge, I would be delighted to help.

The economic debate not just in the next five months but for years to come needs to focus on productivity, education, the ever shrinking tax base, getting the unemployment rate towards 4 or even 3 per cent on a sustained basis, training, skills development, workforce participation and the like. I hope we see these issues elevated in the months ahead.

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**  Disclosure. I am not a member of the Labor Party or any other political party for that matter. I did not receive any payment for the article sent out by the Labor Party and since I established my consultancy business, Market Economics in late 2011, I have received exactly the same fees for work from the Liberal Party as I have from the Labor Party.

Zero government net debt and budget surplus drivel

There have been only two governments over the past four decades that have presided over zero net government debt and Budget surpluses in the majority of their time in office – they were the governments of Gough Whitlam and John Howard.

The Whitlam government ran budget surpluses in 1972-73, 1973-74 and 1974-75 and only in 1975-76 was there a deficit; whilst at the same time, there was zero (or rather negative) net government debt in 1972-73 which ran right through to 1975-76. Only in 1976-77 with a new government did net debt turn positive.

The Howard government of course ran budget surpluses for the bulk of its time in power and managed to eliminate net government debt in 2005-06. Only in 2009-10 did net debt turn positive after there was a change in government.

These facts are largely meaningless drivel and highlight the absurd discussion at the moment about budget surplus, government debt and the debt ceiling. It also goes to show that budget surpluses and the level of net government debt are NOT the benchmarks on which economic management should be judged.

Julia Gillard: 1,000 days and now 15th longest serving PM

Julia Gillard is now Australia’s 15^th longest serving Prime Minister and today marks her 1,000^th day in the top job. Australia has had 27 Prime Ministers since Federation.

In terms of duration, she has just overtaken Australia’s first Prime Minister, Edmund Barton having overtaken the beleaguered Kevin Rudd in January.

In June, Ms Gillard will overtake Gough Whitlam and move to number 14 and when the election campaign is in full flight in August, she will then overtake John Gorton to move to number 13.

It is interesting to note that only 7 Prime Minister’s have served more than 5 years, while 6 didn’t even make 1 year.

The top three Prime Ministers, in terms of time in office, were Robert Menzies (18 years, 160 days); John Howard (11 years, 267 days) and Bob Hawke (8 years, 284 days).

The following article originally appeared in the March edition of the Melbourne Review.

http://www.melbournereview.com.au/commentary/article/never-had-it-so-good

If the electorate focuses on the economy as it votes at the Federal election on September 14, the Labor Party should win.

An era of rising wealth, sustained solid growth, near full employment and on-going lift in living standards are the material that should get an incumbent reelected.

While it is political poison to say to the general population, “you’ve never had it so good”, the cold, hard macroeconomic facts on the economy, real wages growth, wealth and incomes suggests Australians have never been richer, never been better off.

At a macroeconomic level, the economy grew by a healthy 3.1 percent through 2012, while annual inflation ended the year at 2.2 percent, in the lower half of the Reserve Bank’s target band. Right through 2012, the unemployment rate was low, holding between 5 and 5.5 percent which in fact locks in a decade where Australia’s unemployment rate has been below 6 percent. This is a remarkable achievement given global events, the near depression in the developed world and the substantial structural changes that have occurred in the local economy.

While there is nothing particularly spectacular about 3.1 percent GDP growth, 2.2 percent inflation or the unemployment holding at 5.5 percent or below, to have them occurring simultaneously is rare.

Australia’s economic history has many examples where GDP growth has been well above 3 percent, but this has normally seen inflation rise, which eats away at real incomes and forces interest rates higher. Similarly, there are many episodes where the annual inflation rate has been 2.2 percent or lower, but this has usually occurred when the unemployment rate is high and rising. To have this trifecta of excellent macroeconomic news owes a lot to the economic management of the economy and is something that is overlooked by an electorate that seems to be preoccupied with boat people, the marginal hip-pocket impact of the carbon price, the trivial levels of government debt and other ephemeral issues.

Looked at another way, there is absolutely no doubt whatsoever that whoever wins the election in September, they would be delighted to lock in a further three years where the macroeconomic numbers we have before us now are repeated each and every year of their term of office.

Frankly, it is just about impossible to do any better.

Having said that, it is clear that not everyone is sharing the benefits of the purple patch for the Australian economy. There are regions, industries and individuals that are not sharing the good times that the strong economy is delivering.

Such unevenness is inevitable whether the economy is strong or weak, but it is important to emphasise that it is not the job of the RBA to set interest rates for Tasmania or manufacturing, for example, or for the government to spend too much money propping up industries that are succumbing to the reality of extinction due to high costs, inefficiency or some other factor outside the government control.

Where the government can and should help, and this is where the current government has done well, is to provide a framework that provides a safety net for the sectors, businesses and individuals who are hurting as the rest of the economy powers ahead.

The mining tax raised revenue to boost superannuation for those not directly involved in the boom sectors. Retraining, skills and even some financial support is allocated to individuals who lose their jobs as the sectors they work in shrink. Maintaining a strong overall economy will also see job opportunities show up in the sectors in the fast lane expand.

For all of the thousands of jobs lost in recent years in Qantas, Boral, the banks, the steel and aluminum firms, Santos, Holden, Toyota and Caltex, to name a few, there are 850,000 more people employed today than there were five years ago. Presumably the bulk of the people who were proverbially “thrown on to the unemployment scrap heap” have been re-engaged elsewhere in the workforce.

On an individual level, the recent sharp rise in share prices and the resumption of what appears to be solid growth in house prices is good news for the bulk of the electorate. From the low point in 2012, the market value of the ASX 200 stock index has risen by close to $350 billion, including dividends, which will be a nice boost to retirees and those with a superannuation fund.

The rise in house prices has added around $125 billion to the wealth of residential property holders in the last three months alone. This should be pleasing to the two-thirds of the population that own a house.

Having a job, rising wealth and rising real wages is good news and cannot be due to simple dumb luck. Generally prudent monetary policy and use of fiscal policy in a counter-cyclical way has underpinned the current economic strength.

The polls are showing that the Coalition will romp in at the election in September, even though the mix of hard economic news has rarely, if ever, been better.

Stephen Koukoulas is Managing Director of Market Economics. He writes a daily column for Business Spectator.

Mr Abbott as an economic forecaster

In his Budget reply speech in May last year, Mr Abbott made the following claim:

• “Madam Deputy Speaker, from an economic perspective, the worst aspect of this year’s budget is that there is no plan for economic growth; nothing whatsoever to promote investment or employment.”

Since that speech was delivered, this has what has happened to growth, investment and jobs:

• The economy (real GDP) has grown by 1.9% in the three quarters to December 2012. This is an annualised increase of 2.5%.

• Private sector business investment has risen by 2.5% in the three quarters to December 2012 to be a thumping 70.0% higher than the  level of investment when the Coalition was last in office. The capital expenditure expectations data were, according to Westpac, “robust” with investment likely to rise a stunning 11% in 2013-14 to fresh record highs.

• Since June 2012, 53,400 jobs have been created, 30,000 of these full-time positions.

Just sayin’.

A letter to the people of Western Sydney

Dear people of Western Sydney

It is not clear exactly what issues are fuelling your apparent displeasure with the Gillard Government, but can I point out a couple of issues that you may wish to consider in terms of things that actually matter to you, your family and businesses.

Around 40 per cent of you have a mortgage. Have a look at the interest rate you are paying now versus the rate prevailing 4 or 5 years ago. The average standard mortgage interest rate is around 6.4% at the moment. In 2008, it was 9.6%. On an average Sydney mortgage of around $375,000, that is a saving of around $800 a month or close to $10,000 a year in mortgage repayments. Recall that this is a saving in after tax earnings. This is a quite massive boost to your purchasing power, simply because interest rates are low.

There are similar interest savings for the small to medium business sector borrowers.

According to various surveys, over half of you drive to work, no doubt covering many kilometres along the way. I would note that car prices have actually fallen by around 5% in the last few years and by the look of the recent news on the number of car sales, most of you will be driving nice newish vehicles. That is a good thing. Add to that the fact that the price of petrol is only a fraction (around 5%) higher than 5 years ago, the cost of owning and running a car has been well contained which is no doubt very helpful for the average household budget.

It has also been the case that wages have risen solidly, by a little over 20%, in the last 5 years. This compares favourably with a 14.5% rise in the consumer price index (inflation) over the same time. Real wages therefore have been rising by about 1% per year on average over the past 5 years. While you are paying more for electricity, in small part because of the carbon tax, you are paying less for things like clothes, household appliances, a bunch of electronic goods and overseas holidays.

Relative to wages, the cost of living for the vast bulk of people is falling.

There are a range of other national economic management issues that should be important to consider.

All three major credit rating agencies rate Australia triple-A. This is the highest possible rating. It is like your kids getting A+ in all of their exams. The final upgrade to triple-A occurred in late 2011, from the Fitch agency, under the Gillard government. Never once has a Liberal Government had triple-A rating from all three rating agencies. This matters because a triple-A credit rating helps keep interest rates and borrowing costs low. It also feeds through to the sound functioning of the banking system and whole business sector in Australia. It is a sign that the whole economy is being very well managed and well regarded by international investors.

It is also worth noting that the unemployment rate in NSW is just 5.1%. This is a very low reading when looked at over the last 35 or so years of Australia’s economic history and is certainly low compared to the rest of the world. Low unemployment is of course great news, arguably it is the best thing any government can deliver to its people.

Jobs give people income, security, well-being and an ability to build for the future. Job creation and low unemployment are a vital benchmark of good economic management. Recall that the opposite, high unemployment, leads to social disfunction, poverty and poor self esteem. Note also that the 5.1% unemployment rate in NSW compared with the national average of 5.4%.

On the topic of well-being and planning for the future, can you all have a look at your superannuation statement next time your fund sends it to you? While the extreme volatility in financial markets due to the global economic and financial crisis has seen returns fall sharply and then rebound in recent years, for anyone who has been working for the last 20 years or more, the value of super is likely to be quite high. This is your money for your retirement. Superannuation was one of these long run policy issues implemented some 20 years ago that is now yielding the returns intended for everyone who has had a job. Prime Minister Gillard has legislated for the super contribution to rise from 9% to 12% of gross income in the years ahead, meaning that all workers will be building their retirement savings over the next couple of decades.

In terms of policies that are important for the long run future, think of the education reforms, the NBN and disability insurance scheme. These are critical changes that will in time boost productivity, opportunity and common decency in Australia.

While things are far from perfect and not everyone is benefitting equally in these terrific times for the Australian economy, much of the favourable news outlined above is overlooked in the daily hustle and bustle of life.

Take some time to reflect on the good things. We are all doing pretty well, just take some time to smell the roses.

Kind regards

Stephen Koukoulas

This is an article that was first published in Crikey on 13 February 2013. Link here:

http://www.crikey.com.au/2013/02/13/myth-of-coalition-govts-howard-the-biggest-spender-of-all/