16
May
2013

A few fiscal and financial facts ahead of Mr Abbott’s budget reply

 

When Mr Abbott gets to his feet with his budget reply speech, consider the following facts.

  • Never once has a Coalition government delivered a budget that has cut government spending in real terms.
  • Around three-quarters of the “elimination of Labor’s debt” under the Howard years was from asset sales. At the same time, around 40% of Labor’s debt was inherited from the Fraser government!
  • The six highest tax to GDP ratios ever recorded were under the Howard government.
  • Since 1982-83, there have been 10 years where the tax to GDP ratio has been below 22.0%, none of them delivered by a Liberal Party Treasurer.
  •              Who’s addicted to tax?
  • Public sector infrastructure spending as a share of GDP fell to an all time low under the Howard government.
  • The mortgage interest rate is currently 6.15% – it was 8.55% when the Howard government was last in office.
  • Small business interest rates are currently around 7.0%. They were 9.1% when the Howard government lost office.
  •            Interest rates will always be lower under …

It is easy to get budget surpluses and zero government debt if you tax the tripe out of people, don’t build infrastructure and sell government assets. But think of the mess you leave behind.

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6
May
2013

Me and Ms Sloan…

 

Below is the link to the discussion I had with Ms Sloan on Lateline last Friday. The transcript is below.

http://www.abc.net.au/lateline/content/2013/s3751658.htm

EMMA ALBERICI, PRESENTER: Depending on who you listen to, Australia’s economy is either in great shape or facing serious problems arising from the public debt that’s building up to pay for Government’s spending.

Earlier this month, economist Stephen Koukoulas wrote a piece defending the Treasurer’s debt position. He complained about the nature of the economic debate in Australia and called for an end to what he argued was the spread of misinformation about the country’s financial health.

Fellow economist Judith Sloan published a response attacking both Mr Koukoulas and Wayne Swan. She claims that Australians have every right to feel nervous about government debt. Who is right? We’ll let you be the judge.

We were joined a short time ago about Stephen Koukoulas in Canberra and Judith Sloan in Melbourne.

Welcome to you both.

STEPHEN KOUKOULAS, MANAGING DIRECTOR, MARKET ECONOMICS: Thank you.

JUDITH SLOAN, CONTRIBUTING ECONOMICS EDITOR, THE AUSTRALIAN: Thank you Emma.

EMMA ALBERICI: Why should the Australian public feel nervous about government debt Judith Sloan?

JUDITH SLOAN: I think they do. I think it is right that they do. I’m sure Stephen will make the point by international standards the Australian Government debt is very low. That’s true. Do we really want to be in the basket case positions of a lot of those European countries. I think what probably unnerves them the most is the rate of change. When the Labor Government came to power there was actually not any debt. There was a negative four per cent if you see my point. There’s actually been a change of 14 percentage points into debt and that’s actually a very rapid movement. So yes, by international standards our debt is low, but in terms of rate of change, we’ve got the gold medal.

EMMA ALBERICI: Stephen, you’ve said you’re sick of the misinformation campaign, as you call it. Tell us where you think the debate has gone off the rails?

STEPHEN KOUKOULAS: It’s gone off the rails because there’s the foe focus generally on that rate of deterioration, to use Judith’s words in a level of government debt. It is interesting in that period when we’ve gone from financial assets of minus four per cent to around about 10 per cent now, it’s been the very time the rating agencies have upgraded Australia and locked in that AAA from all three rating agencies. So they don’t have any fear.

I also would notice that the bond market, the government bond market, that is, the interest rate and the level of government debt by definition that we’re talking about, the yields there are stunningly low. They’re near historical lows and the difference between our yields and those in the US for example or in Europe are not much wider than they normally with are.

So from the perspective of does it matter where is it showing up in this concern, I can’t see where it is showing up anywhere in the financial markets, I can’t see it showing up anywhere in the real economy. If it was a problem like it is in Greece or Italy, you would be in deep recession. You’d have massive austerity programs and we’re nowhere near that at the moment.

EMMA ALBERICI: Judith Sloan you don’t give the government any credit for keeping Australia out of recession for the past five and a half years. Why not?

JUDITH SLOAN: I’m not sure that’s true. I think they definitely spent too much and they wasted money. Whenever a government spends money where the costs are greater than the benefits we must be worse off. I think there was way too little attention paid to the quality of the spend. I think whoever had been in Government at the time the GFC hit they would have done something. I think probably the cash handout was what they would have done. They would have supported the banks through the deposit guarantees and the like.

I think my criticism goes beyond that. It then became a point this is quite enjoyable for a Labor government. This was pressing the right kind of buttons. So they could end up I think spending a lot of money wastefully because it was actually quite in keeping with their sort of political tendency anyway.

EMMA ALBERICI: Where the waste, or was the waste in your view?

JUDITH SLOAN: Of course, you know, they were just all over the place. The building education revolution, which was I think a very unfortunate name, we were spending way too much. The value for money was appalling. The home insulation program was a disaster and they had to cut that off. They had to kill that off.

You know let me be upfront. I’m not much of a Keynesian. I’m a great believer that this needed to get sorted out. I don’t believe in this that a government should do whatever it can to keep an economy out of recession. David, one of the executive directors of the Treasury made the point and I think he’s completely wrong. There comes a point when a recession, hopefully a mild one, actually can be quite useful and that’s what should have been allowed to be done

EMMA ALBERICI: Stephen?

STEPHEN KOUKOULAS: Oh look I’m all for avoiding recession at all costs, they’re nasty, they’re hurtful…

EMMA ALBERICI: At all costs?

STEPHEN KOUKOULAS: Well almost, if you can, if you can do it, I’m all for it. Because you just have to look at some of the information that’s coming out of the Lancet, did a survey and an analysis of the health implications of the austerity measures in a number of countries in Europe and suicide rates are up, they’re very high, 25 per cent plus unemployment rate in Greece and Spain are really hurting people, not just because they’re unemployed but there are health consequences.

I am a Keynesian and I think that the issue that we’ve got to remember in all of this and the wasteful spending which is a definition I would never use, it did keep the economy out of recession. It did cause the economy to grow. The interesting thing now about this wasteful spending is that I’m sure on Tuesday the 14th, we see the budget numbers, the share of GDP that’s accounted for by government spending will be below the average of last 25 or 30 years.

Government spending is not the problem at the moment. It is the fact we’ve got low inflation, that the terms of trade are trending lower, commodity prices are down, and the Australian dollar is very strong. We’re not seeing the automatic stabilisers kicking when the economy is doing very well.

And in fact I’m a little bit more worried about the recent softness in the economy the fact that unemployment is drifting up, that economic activity appears to be just cooling off a little bit than I am whether the deficit is going to be $18 billion on budget night.

EMMA ALBERICI: It does seem Judith that part of the debate here is around the measure of a Government’s success. How you actually define a Government’s economic management skills. We have got low unemployment trend growth, a strong investment pipeline, inflation is contained and we’ve got low interest rates. Doesn’t that demonstrate to you some level of competence in this Government’s management of the economy?

JUDITH SLOAN: Why the hell would we have been running deficits in the last three years. If it was all so hunky dory.

STEPHEN KOUKOULAS: The deficits have caused those good outcomes Judith.

JUDITH SLOAN: No, no, no, no they haven’t.

STEPHEN KOUKOULAS: You’re look at it the wrong way around.

JUDITH SLOAN: No, no, they’re violating the Treasurer’s own rules which basically he’s telling us they’re going to run surpluses on average over the course of the cycle. There’s absolutely no way this Government is going to do that. Why would they actually set up these rules themselves?

Let me put it another way. Had we not had this debt and bear in mind we’re servicing the gross debt not the net debt – forget the net debt. We’re actually spending in interest what would be the annual expenditure on the National Disability Insurance Scheme. The idea that we’ve loaded up the future taxpayers for who knows what purpose, there is a really big cost at the moment.

EMMA ALBERICI: Stephen Koukoulas?

EMMA ALBERICI: The growth argument one is one that irritates me the most. Because one thing that we’ve got to remember about the Government bond market is that it actually supports capital markets. The Treasury, APRA, Reserve Bank and financial market participants all got together a couple of years ago and decide what should we do with the bond market – that is the level of gross government debt. It will go up every year for the next 20 or 30 years I hope.

Because what we need to support the capital market is a deep and liquid bond market we have Joe Hockey talking about a 50 year bond being issued in Australia – that’s the government borrowing here money for 50 years. He’s suggesting that as far as I can tell to provide some sort of market security there that when there is another crisis or if there is another crisis in one, three, 10, 20 years time, when happens to be the banks have access to government bonds because the Government will repay them.

They’re AAA rated they’re as good as gold. The problem with the Australian level of gross debt now and this is the Basel three requirements for looking after banks in the post GFC world is we don’t have enough debt. Australia is one of two countries, the other one being Singapore, that got special dispensation because they don’t have enough debt to look after the banks and the RBA is guaranteeing the bank deposits. So we’ve got gross debt that’s ridiculously low. The question is what do we do with the bonds that we issue that we don’t need. We should be moving the discussion to the future fund, the sovereign wealth fund and things like that.

EMMA ALBERICI: Judith Sloan, I’ll pick up on something…

JUDITH SLOAN: That’s all rubbish by the way, I mean honestly Stephen c’mon, you know.

EMMA ALBERICI: What’s rubbish?

STEPHEN KOUKOULAS: Which part?

JUDITH SLOAN: This idea that we have to have all these bonds on offer and increase the gross debt. Are you kidding? You must be kidding.

STEPHEN KOUKOULAS: I’ve worked on it. Why is it wrong?

JUDITH SLOAN: The ratings agencies are looking at us and here is the story. We run a very big current account deficit which has to be funded. The ratings agency look at Australia not just in the context of the Government debt, they also look at in terms of private debt and we have lost our AAA credit rating in the past. It is very hard to get back. We’re basically been put on some kind of warning.

EMMA ALBERICI: From what I can tell we haven’t been put on any warning at all…

JUDITH SLOAN: That’s not true.

EMMA ALBERICI: In fact all three credit rating agency have reaffirmed that AAA status…

JUDITH SLOAN: Read their texts.

EMMA ALBERICI: … after the Treasurer had actually announced that he expected us to go into deficit at the budget.

JUDITH SLOAN: You asked Peter Costello how hard it was and he was a terrific Treasurer, how hard it was to win back the AAA credit rating. You really have to…

STEPHEN KOUKOULAS: He didn’t do it, he did. He didn’t do it with Fitch.

EMMA ALBERICI: This the first time in our history, if I’m not mistaken that all three credit ratings have given us a AAA. Is it not?

JUDITH SLOAN: That’s historically not interesting a thing because they haven’t been actually operating for that long. That’s not saying that much. The truth of the matter once you lose it is hard to get back and, therefore, I think it is very incumbent on this Government because Australia does not look the same as other countries. They do take into account private debt as well.

EMMA ALBERICI: How you can on the one hand suggest that the AAA ratings significant and on the other hand say it doesn’t say much all three have given us the AAA rating for the first time?

JUDITH SLOAN: I’m not saying that. I’m saying the thing to watch you want to keep hold of it and you don’t do that by continuing to spend more than you earn and continuing… I mean it seems to me that what’s going to happen on budget day, so forget the surplus, we’ve all forgotten the surplus, we’re actually going to have budget deficits over the entire forward estimates.

There’s Wayne Swan telling us his budgets rule is that they will run surpluses over the course of the cycle. How long is this cycle? This is going to be a 10 year period including the forwards. In fact 11 and there will not be a surplus in sight.

EMMA ALBERICI: Stephen Koukoulas, did the Government miss an opportunity here given we had historically high terms of trade and sets of numbers that were the envy of the world? Why weren’t we running surplus budgets?

STEPHEN KOUKOULAS: Yes. I think it would have been nice to get the surpluses and up until December the government was still forecasting one. Between December and now obviously we’ve had as we were just mentioning before a softening in the economy. The global economy has weakened. Our terms of trade are still falling. The issue as we’ll find out on Budget night, I can’t guarantee but I’m sure we’ll see it, on the revenue side the spending is not the problem at the moment. It is the fact the government is the lowest taxing government in 30 years, not by design, no, no that’s correct, it is because the economy is weak.

We’ve got low inflation, company profits are subdued, bracket creep doesn’t exist anymore which from the government perspective is bad news. The issue about whether we have a deficit, I’m going to look at the size of these deficits it does matter how big they are, I reckon that he will be one per cent of GDP or less, that’s a trivial puny amount that the rating agencies will look at for about five minutes and reaffirm our credit rating.

Bond yields will stay low. There will be foreign inflows into our economy. If there’s any sniff at all that we’re going to reduce the level of gross debt, Mr Joyce and Mr Robb were true to their word, that we’re going to reduce gross debt, there will be a capital flight out of this country that will just be quite disconcerting as foreigners get out of the bond market while they’re still liquid.

EMMA ALBERICI: Stephen you say this is all about lower tax revenue, but in fact the revenues are up not down. They’re just not up as much as the forecast had suggested they would be.

STEPHEN KOUKOULAS: Yes.

EMMA ALBERICI: So the real problem is the government spending too much isn’t it?

STEPHEN KOUKOULAS: The problem is the Treasurer misread the economy and they’re not collecting the revenue they thought.

JUDITH SLOAN: Come on Stephen. 11 per cent? You’re kidding.

STEPHEN KOUKOULAS: If the government was collecting the same revenue to GDP ratio that was the average, not the peak but the average of the Howard Government we could have a surplus of $15 to $20 billion.

JUDITH SLOAN: So what that’s just a ridiculous thought experiment. They were…

STEPHEN KOUKOULAS: So there’s no taxes coming through.

JUDITH SLOAN: They were forecasting revenue growth over 11 per cent. I can’t believe the commentators were completely sucked in. This was absolutely absurd. They were never going to get to a surplus. There’s even a theory around that they never intended to get to a surplus and now they’re going to have this coming year and into the forwards deficits again.

EMMA ALBERICI: Judith Sloan, Tony Abbott has accused Labor of booby trapping the future by boxing in the next government with big spending commitments is that what they’ve done?

JUDITH SLOAN: I’m not a political expert. But it is certainly true there are going to be some very, very hefty commitments there in the forward estimates. So short of actually changing those commitments, or ditching some very big programs, I think the budgetary challenges for a Coalition Government should they win are absolutely enormous.

EMMA ALBERICI: If the economy is doing so well, why has the Government not been able to capitalise on that? Why have they found it so hard to sell that message?

STEPHEN KOUKOULAS: It is an odd one. The issue at the moment is it that if you were to just look at the cold hard facts on the economy, GDP at three per cent, inflation at 2.5, unemployment at 5.6 per cent, interest rates where they are, I think in three years time if we’ve got those same numbers in place and they’ve averaged that to the level over the next three years, Treasurer Joe Hockey in 2016 would be delighted to see that. The reason why they haven’t sold them so well I think it is the debate has been moved on to carbon pricing and these sorts of things and Rudd being a spoiler in terms of his contribution to the political debate, and people have taken their eye off just how really well our economy is and how somewhere near the perfection the hard numbers on the economy actually are.

EMMA ALBERICI: We’ll have to leave it there. Stephen Koukoulas and Judith Sloan thanks so much for coming in.

STEPHEN KOUKOULAS: Thanks Emma.

JUDITH SLOAN: No problem, Emma.

 

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5
May
2013

Inside Business – 5 May

 

I was on Inside Business last Sunday – a very interesting dialogue with Alan Kohler, Elizabeth Knight and John Dury.

Here is the link:

http://www.abc.net.au/insidebusiness/content/2011/s3751997.htm

The transcript of the discussion is at the bottom of the link.

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30
Apr
2013

A true story about a man called Tony

 

Here’s a true story. It’s about a man called Tony.

Tony is a hard working Aussie, doing his best to provide for his family. He has a good job, but such is the nature of his work that his income is subject to unpredictable, sharp and sudden changes.

Tony’s much loved and wonderful children go to a private school and wow, those fees that he choses to pay are high. He used to have a moderate mortgage, especially given he was doing well with an income well over $200,000 per annum.

Then things on the income side turned sour.

Tony had a change in work status that resulted in his annual income dropping by around $90,000 – a big loss in anyone’s language.

How did Tony respond to this 40 per cent drop in income?

Well, rather than selling the house and moving into smaller, more affordable premises, or taking his children out of the private school system and saving tens of thousands of after tax dollars, Tony called up his friendly mortgage provider and refinanced his mortgage.

In other words, Tony took on a huge chunk of extra debt so that he could maintain his family’s lifestyle. No belt tightening, no attempt to live within his means, just more debt.

Tony was reported as saying when asked about the cut in his income and his craving for more debt, we are “soldiering on the best we can… what’s it called? Mortgage stress!” he quipped when referring to the fact that his level of debt was now many multiples of his income.

Tony also said that, “it’s true you do experience a substantial pay cut and, yes, if you are a normal family without accumulated assets, without additional sources of income, it does make a big difference”.

It sure does, Tone.

Tony is an interesting chap because he has some strong views on how the government should run its finances. He reckons the current government is addicted to debt and that he’ll cut the level of debt if ever his dream of becoming Prime Minister comes true.

When speaking of government debt, which would be the equivalent of a mortgage of $20,000 for someone earning $200,000 a year (10 per cent), Tony reckons that “we all know what it’s like when you’ve got a household budget to manage. Sometimes you’ve got to tighten your belt. Just as households have to tighten their belts when times are tough, I think that when the Commonwealth faces unforeseen expenses that’s when it should tighten its own belt.”

Hang on Tony…. Didn’t you keep on spending and consuming when you had a change in household financial circumstances? And didn’t you cover this spending of yours by boosting your debt?

Tony also said, “we are determined to make sure government exercises the same kind of restraint over its spending which businesses and households have long understood.”

Huh? Restraint? Tony, you personally borrowed like a drunken sailor!

I’m confused.

Or is there some inconsistency with Tony – what I say and what I do are entirely different things. Tony did after all say a few years back “I know politicians are gonna be judged on everything they say, but sometimes, in the heat of discussion, you go a little bit further than you would if it was an absolutely calm”.

Ah…now I see. Tony the politician says and does different things to Tony the regular bloke.

But back to now.

Always an optimist, Tony hoped that one day his income would again rise and while he waited for that day, he did in fact soldier on with his massive mortgage, massive spending and without there being a hint of belt tightening.

As luck would have it, he unexpectedly saved $10,000 a year on his interest costs by the fact that mortgage interest rates dropped a thumping 3 per cent.

I’m sure he’ll send a thank you note to whom ever helped get interest rates down so much.

And as luck would have it, Tony’s had a pay rise and he’s now on around $350,000 year. Phew.

It’s a good job Tony didn’t panic and sell his house and drag his kids out of school. Rather, he took on a bit of debt that he could easily afford as it turns out and it got him through the tough times.

 

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28
Apr
2013

Markets go the wrong way for the fiscal freaks

 

The news that weaker than expected growth in nominal GDP will see the government fall around $12 billion short in its revenue collection for 2012-13 has been met with all of the bluster, outrage and claims of incompetence from the usual sources.

For these fiscal fiends and Tea Party economists, this on-going ignorance of matters relating to the budget is no surprise, but it again constrains sensible debate over taxing, spending, surpluses, deficits and government debt.

Fortunately, there is a better and almost pure assessment of the new budget information and that is from financial markets.

If the budget news truly was a sign of poor economic management, unsustainable government finances or it was any way a concern, you can bet your life that the Australian dollar would be sold off hard and bond yields – the price of government debt – would jump.

At around 9.30am, Eastern time, with the marketing having had plenty of time to digest the news, guess what has happened in the markets?

Government bond yields have fallen  – about 3 to 5 basis points to be closer to fresh record lows, while the Australia dollar is up to be trading around 1.0285.

No sign of a capital flight from the bond market or the Australian dollar – in fact, the opposite is happening.

I think this sums up the concern most sensible and sane people have when it comes to judging the true consequences of the government having a revenue shortfall in the budget and a deficit that is still set to be 1 per cent of GDP or less.

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27
Apr
2013

Liberal Party Hypocrisy

 

The hypocrisy of the Liberal Party is astounding.

Recently, the Liberal Party picked up a comment I made in a Meet The Press Interview to claim that my comments meant that “Labor is preparing the ground for even more [tax] increases after the election” and falsely claimed that I was advocating “the case to impose the GST on education and health services.”

The Liberal Party mendaciousness flew in the face of the fact that it has been almost two years since I worked for the Prime Minister and have never spoken to her, the Treasurer or Minister for Finance for that matter on issues relating to the GST. I replied to the misleading Liberal Party email here http://www.marketeconomics.com.au/2376-the-liberal-party-me-and-the-gst .

I wonder if the Director of the Liberal Party, Brian Loughnane, will release its next E-Newsletter outlining the fact that it is the Liberal Party who are advocating a wider and higher GST to address the revenue problem.

In today’s AFR, Nick Minchin, a senior member of the Liberal Party and Finance Minister in the final six years of the Howard Government is quoted saying “the GST, in terms of its rate and scope, will have to be revisited in the medium term”.  Minchin went on, “a consumption tax is the best way to address the revenue problem”.

There you go. According to the Liberal Party, the revenue problem is best addressed with a wider scope and higher rate for the GST. If in doubt, it seems, the Liberal Party will resort to its old tricks of ramping up the tax take to cover its spending objectives.

I suppose this from the Liberal Party should be no surprise. Nick Minchin was Finance Minister when Australia’s tax to GDP hit an all time high. The Howard Government was the highest taxing government in Australia’s history and Minchin was Finance Minister when the peak level was reached.

That is something that most people would be at least a little embarrassed about, but apparently not Minchin who seems addicted to tax hikes as the solution to all the budget ills.

I look forward to Mr Loughnane putting out the next E-Newsletter saying that one of the Liberal Party’s elder states-people and the longest service Finanance Minister is advocating a hike in the GST to cover its inability to funds is spending promises.

PS:  Minchin has a stunning record as Finance Minister. The six years in Australia’s history where the tax to GDP ratio were highest were all when he was Finance Minister. Any mug can get a budget surplus if you tax the tripe out of businesses and consumers.

 

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25
Apr
2013

A surplus for its own sake is a dangerous thing

This article was posted on The Drum on 24 April. I wrote it in my role as Research Fellow for Per Capita.

The link is here: http://www.abc.net.au/unleashed/4648572.html

A surplus for its own sake is a dangerous thing

Just as you shouldn’t run a deficit if the economy is overheating, there’s nothing to be gained from running a surplus if the economy is then kneecapped, writes Stephen Koukoulas.

The current body language from those in the know is that the budget bottom line will be in deficit, not only for 2013-14, but also in the forward estimates out to 2016-17.

Treasurer Wayne Swan will be handing down his sixth budget on May 14 amid signs of low inflation, weak nominal GDP growth and, with that, ongoing weakness in government revenue.

While there will no doubt be a welter of criticism that the Government is not doing enough to bring the budget to surplus, the question for those truly interested in economic management is, does it matter?

For now, given the current economic conditions, the answer is a resounding no. Over time, of course, the question of whether there should be a deficit or a surplus is dependent on the economic cycle.

While the real economy is doing well, with GDP growth holding around 3 per cent and the unemployment rate stuck a few tenths around 5.5 per cent, the intended return to budget surplus is being undermined by low inflation and the softness in the terms of trade which are leading to weak growth in tax receipts. Barring a range of austerity spending cuts or unwelcome tax hikes, the return to a budget surplus is likely to be slow.

Of course, anyone can deliver a surplus at almost any time – the issue in striving for a hard to get surplus is the cost to the economy of cutting spending or hiking taxes to deliver that surplus.

If the deficit projection for 2013-14 is, for example, around $12 billion of 0.75 per cent of GDP, the government could cut programs totalling that amount or hike taxes to pull that cash out from the private sector (households or companies) so that it can present a surplus. It is that simple.

But having the government pulling 0.75 per cent of GDP out from the economy when it is only growing at around trend, when the unemployment rate is drifting upwards, when the global economy is fragile, would be economically irresponsible. Some simple economic modelling suggests that this sort of fiscal austerity would cut employment by around 40,000 people.

Despite the significant change in the economic circumstances over the past year, some may argue that it is entirely reasonable to stick with the surplus objective and give it a higher priority than economic growth and unemployment. It is entirely open for these views to be expressed and for these beliefs to exist, but the trade-off must always be acknowledged.

Which circles back to the fundamental question of whether a budget surplus is a means to an end or an end in itself.

The answer to that, when Australia has not had the ratio of net government debt to GDP above 20 per cent in over 50 years, is simple – the budget is a means to an end.

What is the point of running a surplus if the economy is kneecapped? Turning this concept on its head to highlight the crux of the matter, why run a deficit if the economy is overheating, there are rampant inflation pressures, and interest rates are being hiked? That latter example would be as irresponsible as pursuing fiscal austerity when an economy was slowing and the unemployment rate was rising.

The other thing to recall about the obvious fiscal shortfall that is likely to show up in the budget is that financial markets and the credit ratings agencies are aware of the fiscal outlook. It has been front page news for some time and it was back in December that Treasurer Swan acknowledged that the revenue shortfall made the surplus objective just about impossible to achieve.

And what has been the reaction?

The ratings agencies retain the triple-A rating and the Australian dollar has jumped to a fresh 28-year high. The stock market is maintaining its strength and at the same time, government bond yields have remained close to 50-year lows. Clearly, this is a complete acceptance of the circumstances that are leading to the deficit projections.

Then, of course, there is the question of just how big the projected deficits will be when the budget is handed down.

It is unlikely that any budget deficit in the out-years will be much more than 1 per cent of GDP. More likely, the deficits will be nearer 0.5 per cent of GDP which means that net government debt levels will hold around 10 per cent of GDP, a trivial amount.

The key point is that the budget is and should be used to manage the economic cycle and that when the economy is booming, it should move to surplus, reduce government debt and take some of the heat out of the economy. This action builds a pool of reserves that can be used when the economy slows which is when tax receipts weaken, government spending is boosted and the budget returns to deficit and government debt rises.

This is exactly what has happened in Australia for the last 35 years and hopefully will happen over the next 35.

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15
Apr
2013

The Liberal Party, me and the GST

 

 

I hope the decision of the Liberal Party to quote me in their Liberal E-news letter is a sign of things to come. The Labor Party did it recently and I am delighted to be involved in raising the quality of the economic debate and in boosting the understanding of economic policy in Australia, to the extent I can.

To Brian Loughnane, give me a call. I’d be very happy to help you and the Liberal Party with your economic policy agenda.

Various people have referred to me as either “one of Australia’s most influential economists” or “one of the most articulate economists in Australia”, something that I must modestly suggest may be a little strong, but who am I to argue with those assessments!

The Liberal Party E-news picked on a point I was making in a TV interview on the weekend that the GST was narrowly cast, something that Mr Hockey, the Shadow Treasurer, has noted in the past. According to a story in the AFR last year:

  • when discussing the GST, “shadow treasurer Joe Hockey had “actively called on” [State] premiers to campaign for an increase in the rate and base.”

Mr Hockey noted that if the states want a higher GST, and they “won the people over” he would agree to hike it.

There you go.

There has been not a hint from either the Prime Minister, Ms Gillard, or Treasurer Wayne Swan suggesting anything other than the GST will stay exactly as Mr Howard set it some 13 years ago. And it’s Ms Gillard and Mr Swan who are the people who set policy, not me.

I think it is the Liberal Party rather than Labor which is more likely to hike the GST, especially with the Coalition in power in most states.

Moving on, there are a couple of issues in the Liberal Party E-news that were wrong.

They say I am “Labor’s key economic advisor”, an error that any muggle could have checked with a quick call to the PMO or me. I finished being Senior Economic Advisor to Prime Minister Gillard on 1 July 2011, some 21 months ago. I left to spend time looking after my wife and family. About six months after that, I established Market Economics, a consulting firm, where I still work for a range of top shelf and quite terrific clients.

Curiously, I have received the same amount of fees, exactly, from the Labor Party as from the Liberal Party in that time, something the Liberal Party fail to acknowledge and it is something I could have clarified with them had they checked or asked.

And by the way, I was also tempted to advise Ms Gillard to stop supporting the Western Bulldogs and switch her allegiance to the mighty Collingwood Magpies. I doubt very much whether I could have got her to agree to that either, even though Stephen Conroy was very much on board!

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13
Apr
2013

Labor being bashed for being honest

 

The Labor Party is being bagged, in some quarters, for being honest. Its policy reform to enhance school education is copping some criticism because the cost associated with this reform will be funded by cuts in university funding. Whatever one might say about the merits of the decisions, the Government is being open and transparent in outlining how it will pay for its reforms.

The criticisms show a clear hypocrisy from some commentators who refuse to ask the Coalition, or hold them to account, about where the money will come from for their shopping list of pre-election commitments. To name a few, what is the impact of Direct Action on the budget? The plan to increase defence spending to 3% of GDP? The loss of revenue from abolishing the carbon and mining taxes? The list is could go on.

Any fair-minded commentator would apply the same blow torch that has been applied to the government with its fully funded policy reforms to the Coalition’s economic and budget agenda.

For the moment, the Coalition, which is likely to be in government in 5 months, is getting away with a policy obfuscation. While some Coalition policies may have merit, they will only stand up to proper scrutiny if the electorate knows how the so-called good things are funded. What will be cut and what taxes will be raised to fund them?

Will the Coalition cut school funding? Take money from health? Slash aged care? Hike the GST? There are few areas where the money can come from.

No one knows yet, but at the moment, the Coalition plans are largely unfunded and it needs to be honest about how it plans to manage the budget if it wins government in September. They need to be held to the same standard as the government.

 

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11
Apr
2013

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.

 

 

 

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