28
Aug
2012

How Howard taxed the tripe out of the public to eliminate government debt

 

A little counterfactual exercise here to examine public debt in Australia.

Here is the starting point:

The tax to GDP ratio averaged 23.4% in the 12 Budgets handed down by Peter Costello in the Howard Government.  Fact.

At the end of the Howard Government term, Australia had negative net debt (financial assets in other words) equal to 3.8% of GDP (2007-08).  Fact.

As at June 2013, net government debt will be 9.2% of GDP.  Fact.

Now let’s work on the counterfactual.

Assume the current Labor Government collected the same average amount of tax as the Howard Government – no more, no less.  That is, just to reiterate, an amount equal to 23.4% of GDP for each year from 2008-09 to 2012-13.

What would be the level of net government debt in this scenario?

Well, in 2012-13, net government debt would be – wait for it – negative 1.6% of GDP.  That is, there would be no government debt.  Fact.

And if the tax to GDP ratio held at the Howard Government average out to the end of the forward estimates (2015-16), then net government debt would be negative 3.3% of GDP in June 2016.  Fact.

Which just goes to show, if the government taxes the tripe out of the private sector, it is easy to run large budget surpluses and have no government debt.

Fact.

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14
Aug
2012

SInce the carbon tax started: Edition 7

 

The data flow covering the time period since the carbon tax started on 1 July 2012 are coming through thick and fast.

The numbers, quite unambiguously, point to the economy doing very on just about all fronts.  Share prices and house prices are both rising, business confidence and consumer sentiment is rising; jobs are being created and the unemployment rate ticked lower.

The information below makes no claim that there is a link between the pricing of carbon and the change in the variable in question.  In most instances, there almost certainly is no relationship with carbon pricing.  This exercise is an attempt to put some much needed context to the misguided debate in some quarters about how the carbon price will impact on the economy.

Indicator Change since end June 2012
Market Indicators

 

Official cash rate

No change

Australian dollar (vs USD)

+2.9%

10 year govt bond yield

+0.30 percentage points

ASX200

+4.8%

    Change in market cap of ASX

+$53 billion

 

Economic Indicators

 

RP Data house prices

+0.7%

      Change in Housing Wealth

+$28 billion

Westpac Index of Consumer Sentiment

+3.7%

TD-MI Monthly Inflation

+0.2%

ANZ job ads

-0.8%

Employment

+14,000

Unemployment rate

-0.1% to 5.2%

NAB Business Confidence

+7 points

NAB Business Conditions

-2 points

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9
Aug
2012

Since the carbon tax started: Edition 6

 

With the jobs data and more markets news, there is a little more news about the post-carbon tax economy.  The data today showed a 14,000 rise in employment and a 0.1 percentage point fall in the unemployment rate.  Financial market variables keep rolling on and they have been updated in the table below.

The data flow will be more regular in the weeks and months ahead.  I will update this post as the data comes in.

Indicator Change since end June 2012
Market Indicators

 

Official cash rate

No change

Australian dollar (vs USD)

+4.1%

10 year govt bond yield

+0.31 percentage points

ASX200

+5.5%

    Change in market cap of ASX

+$61 billion

Economic Indicators

 

RP Data house prices

+0.7%

      Change in Housing Wealth

+$28 billion

Westpac Index of Consumer Sentiment

+3.7%

TD-MI Monthly Inflation

+0.2%

ANZ job ads

-0.8%

Net change in employment                             +14,000

 

Unemployment rate                                   -0.1% from 5.3% to 5.2%

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8
Aug
2012

China’s growth a global red herring

 

This article originally appeared for Business Spectator on 8 August 2012. The link to the article is here:

http://www.businessspectator.com.au/article/2012/8/8/australian-dollar/chinas-growth-global-red-herring

China’s growth a global red herring

When I was working in Treasury a few years ago, a colleague told the story of his official visit to China. He was speaking to his Chinese counterpart in the economic forecasting section and was marvelling at the accuracy of the economic forecasts of the Chinese government. He said to his Chinese friend, “your forecasts are remarkably accurate. For GDP and inflation you are never out by more than 0.1 or 0.2 percentage points. Quite often, you are spot on. How do you do it?”

Without an overt hint of discomfort or irony, the Chinese economist answered: “John – not only do we make the forecasts, but we also compile the data.”

This background is important in judging the true momentum of the Chinese economy and with it, global growth.

It has been clear for some time now that the global economy is faltering. The Reserve Bank governor, Glenn Stevens, agrees. Yesterday when Stevens announced that interest rates in Australia were on hold, he said, “the world economy has softened. Current assessments are that global GDP will grow at no more than average pace in 2012.”

This is the same thing as saying that global GDP is more likely than not to grow at a below average pace and at best will only be average. The glass half full versus half empty approach, it seems.

How far below average and whether this period of softness extends into 2013 are the current big policy issues.

It is not easy to measure global economic growth in an accurate or timely way. Most countries publish their quarterly GDP data at least one and often two months after the end of each quarter. The world has frankly moved on well after these GDP numbers are published. The estimates of GDP are also notoriously unreliable and what might be an initially positive reading for an economy is often revised away when the statistical agency incorporates more reliable information.

The reliability of the Chinese economic data is increasingly important for estimates of global growth and for Australia what actually happens in China is critical. A decade or two ago, it didn’t really matter that much that the Chinese data were dodgy – China accounted for only 5 per cent of global GDP. But now China is close to 15 per cent of global GDP and in a couple of years will it will overtake the US as the biggest economy in the world. A misleading signal from China could have huge implications for the rest of the world.

The Chinese authorities produce GDP estimates just a few days after the end of each quarter, so they do have the virtue of being timely. But in producing such timely data, they cannot be accurate. The fact that the data are rarely revised only adds to the suspicion the numbers cannot possibly be a true reflection of the growth rate in China.

It was recently reported that Chinese GDP growth was 7.6 per cent in the year to the June quarter. The RBA’s Stevens said yesterday that “China’s growth has moderated to a more sustainable pace” and he is presumably basing this assessment on the GDP result.

But are Stevens and the rest of us being lead up the garden path?

How do we best judge the position of the global economy?

The answer is reasonably straightforward – look at commodity prices.

There is reliable and accurate price information on commodity prices on a daily, even minute by minute, basis.

Of course, commodity prices are determined by a mix of supply and demand, but it is safe to say that generalised rises in commodity prices are associated with accelerating or strong global economic growth, while global downturns inevitably will be accompanied by weaker commodity prices.

Forget Chinese GDP or US non-farm payrolls when judging global growth – look at commodity prices for the global growth pulse. Admittedly volatility in daily commodity price moves can be misleading, but if over the course of a few weeks or even months a trend forms, it is likely that the move is being driven by global fundamentals.

This brings us to recent trends in commodity prices. The current weakness in commodity prices is consistent with global economic sluggishness. The Reserve Bank’s own index of commodity prices in US dollar terms has fallen 15.2 per cent since August 2011. The base metal sub-index is down 26.8 per cent since April 2011.

The Thomson Reuters/Jefferies CRB Commodity Index is down around 11.5 per cent from its August 2011 peak, even allowing for the powerful and what will be temporary effect on some agricultural commodity prices from the severe drought in the US. In Australian dollar terms, the falls have been larger.

All of this suggests the global economy is fragile and subdued. It would be nice to see a sustained upturn in commodity prices at some time in the next few months because if we do, it is likely to be a reflection of a global recovery – and this is regardless of what the Chinese GDP data shows.

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7
Aug
2012

The RBA didn’t cut interest rates

 

I was wrong about the August meeting of the RBA Board.

I was judging the record low growth in housing credit, the near 40 year low inflation rate, the moribund global economy and a 27 year high on the AUD as reasons why the RBA should cut interest rates today.

The statement from Glenn Stevens today covered these points, more or less, but it also focused on the apparent resilience in consumer demand and absence of a deterioration in labour market conditions as the reason for keeping rates on hold.

Fair enough.

As we saw earlier this year when the RBA similarly refused to cut interest rates in the face of disinflation, the RBA can be very stubborn when it comes to its assessments of the economy.  Maybe it needs to see the global economy and commodity prices weaken more, or for the unemployment rate to rise, or the next CPI to be very low, before it delivers another rate cut.  Like in May, it can always catch up with a 50 basis point move (or more) if it falls behind the curve.

Below are extracts from the RBA Governor Glenn Stevens’ Statement:  I have highlight the hawkish points in red (pointing to strong growth and inflation risks); and highlighted the dovish points in blue (pointing to soft growth and disinflation).  Those still in black are neutral.

There seems to be more red than blue.

 

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 3.50 per cent.

Having picked up in the early months of 2012, growth in the world economy has since softened. Current assessments are that global GDP will grow at no more than average pace in 2012. Most commodity prices have declined, which has helped to reduce inflation and provided scope for some countries to ease macroeconomic policies. Australia’s terms of trade peaked nearly a year ago, though they remain historically high.

China’s growth has moderated to a more sustainable pace, but does not appear to be slowing further. Conditions in other parts of Asia have recovered from the effects of last year’s natural disasters, though the ongoing trend is unclear and could be dampened by the effects of slower growth outside the region. Growth in the United States continues, but at only a modest pace. The most significant area of weakness continues to be Europe, where economic activity has been contracting and policymakers confront the very difficult task of seeking to put both bank and sovereign balance sheets onto a sound footing, while promoting conditions for improved long-term growth

Financial markets have responded positively to signs of progress, but Europe will remain a potential source of adverse shocks for some time. Low appetite for risk has seen long-term interest rates faced by highly rated sovereigns, including Australia, decline to exceptionally low levels. Nonetheless, capital markets remain open to corporations and well-rated banks and Australian banks have had no difficulty accessing funding, including on an unsecured basis. Share markets have remained volatile, though in net terms they have generally risen over the past couple of months.

In Australia, most indicators suggest growth close to trend overall. Labour market data show moderate employment growth, even with job shedding in some industries, and the rate of unemployment has thus far remained low.

Inflation remains low, with underlying measures near 2 per cent over the year to June, and headline CPI inflation lower than that. The effects of the price on carbon will start to affect these measures over the next couple of quarters. The Bank’s assessment of the outlook for inflation is unchanged: it is expected to be consistent with the target over the next one to two years. Maintaining low inflation over the longer term will, however, require growth in domestic costs to continue their recent moderation as the effects of the earlier exchange rate appreciation wane

As a result of the sequence of earlier decisions, monetary policy is easier than it was for most of 2011, with interest rates for borrowers a little below their medium-term averages. While it is too soon to see the full impact of those changes, dwelling prices have firmed a little over the past couple of months, and business credit has over the past six months recorded its strongest growth for several years. The exchange rate, however, has remained high, despite the observed decline in the terms of trade and the weaker global outlook.

At today’s meeting, the Board judged that, with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate.

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7
Aug
2012

Commodity prices slump

 

It wasn’t reported much last week, but on the first of each month, the RBA releases its index of commodity prices.  It is worth a look.

The bottom line is that commodity prices are falling and falling fast.

In USD terms, the index of commodity prices is down 15.2% from its peak level in August 2011.

These falls, while significant, understate the global demand driven influences on Australia’s major commodity exports.  A severe drought in the US has sparked a quick sharp rise in grain prices – the sub-index on rural commodity prices in the RBA index picks this up with a rise of 8.9% in USD terms in July alone.  It will be interesting to see how rural prices go when it rains again.

The base metal sub-index in USD terms, on the other hand, is a thumping 26.8% below the peak level recorded n April 2011.  In AUD terms, the base metal index is down 27.7% from the peak of February 2011.  This is significant.

Aside from a temporary 6 month period in the first half of 2009, when the GFC was at its nadir, the level of base metal prices in AUD terms is back to the level prevailing around 2005.

You don’t have to be Glenn Stevens to see that  Australia’s terms of trade are falling.  Growth in national income is falling.  These trends are likely to show up in on going low inflation which will require the RBA to cut interest rates, perhaps a lot, over the next 6 to 12 months.

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6
Aug
2012

Now It’s Gerard Henderson getting facts wrong

 

The executive director of The Sydney Institute, Gerard Henderson, ventures into economics in today’s column in the SMH.  Here is the link.

http://www.smh.com.au/opinion/politics/toss-the-boss-palaver-leaders-economic-legacy-the-real-issue-20120806-23q5r.html

In writing about budget, Mr Henderson makes some howlers – he gets deficits and surpluses mixed up and percentage changes are wrong.  And have a guess which  direction those errors are?  Do you think they make a Labor government look worse or better?

Yep – you got it!  All of the errors make Labor look worse, not the other way around.

Below are a few things written by Mr Henderson and the facts are presented below that.  Those facts are from the Statement 10 of the 2012-13 Budget papers, pages 10-6 and 10-7.

Mr Henderson:

  • “The statistics tell the story. In 1974-75 Commonwealth outlays increased by close to 50 per cent. This equated to an increase in spending of more than 5 per cent of gross domestic product in just one year. Taxes rose by close to 30 per cent and the budget deficit increased substantially.”

According to Treasury data:

In 1974-75, Commonwealth outlays increased by 39.6%, not “close to 50%”.  In today’s dollar terms, a 10% change in government spending is around $36 billion – in a single year!  What an error.

The increase in spending as a share of GDP in 1974-75 was 3.3%, from 18.4% in 1973-74 to 21.7% in 1974-75.  Everyone knows, including Mr Henderson in his heart of hearts, that 3.3% is not “more than 5%”.  In today’s dollar terms, the difference between 3.3% and 5.0% of GDP is around $26 billion.  Whoa!

In 1974-75, tax collections rose by 30.5% – well done Gerard, you got one largely right.

But the howler of all howlers:

  • “the budget deficit increased substantially” is wrong.

In 1974-75, the Government recorded a budget surplus of 0.3%, after the Whitlam Budget of 1973-74 recorded a surplus of 1.9% of GDP (the fourth highest on record) and in 1972-73 there was a surplus of 0.7% of GDP.

Enough said.

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6
Aug
2012

Making Up Facts

 

Shane Watling, a member of the Liberal Party and production manager at Wespine Industries, had an article published by the ABC on its “unleashed” section today.

The link to the article is here.

http://www.abc.net.au/unleashed/4179752.html

In what can only be an oversight, it is hoped, the article is riddled with errors, many of which are wrong to the point that they are appear to be fabricated to try to support Mr Watling’s prejudices.

I am taking this opportunity to look at the errors of fact and in doing so, hope to alert the ABC and others to the importance of checking and then sticking to the facts.

In terms of Mr Watling’s story, I highlight some claims in his story and my comments or the facts are in blue below each quote:

  • “On paper the Australian economy is in great shape. With unemployment at around 5.1 per cent, inflation at 2.2 per cent, and GDP growing at 4.2 per cent, our economy is the envy of the world.”

For the record, the unemployment rate is 5.2%, inflation is 1.2% and GDP growth is 4.3%.  And by the way, not since 1964, has Australia simultaneously enjoyed this mix of fundamentals with a mortgage rate as low as 6.85%.

  • “Why is consumer confidence at an all-time low? “

Wrong:  the index of consumer sentiment is currently 99.1 points, well above the low of last year, well above the low under 80 reached during the GFC and well above the low that prevailed for several years during the 1991 recession.

  • “…this hides the fact that huge parts of the economy and population are struggling with some of the worst trading conditions in living memory.”

This “worst trading conditions in living memory” is not sourced.  I have check the business surveys form Dun & Bradstreet, Westpac, NAB, the ABS and Yellow Pages and cannot see where the weakness is.  Perhaps Mr Watling can provide a source for this outlandish claim. 

  • “During the decade or so leading up to the GFC in 2008, households in Australia spent more than they earned.”

That is not correct.  There have been only three quarters (ie 9 months) in Australia’s history (data back to 1949) where household spending was more than income.  All three observations were in a tight period in 2002 and 2003.

  • “So what’s the big deal if the credit card is maxed out – the house we bought for $200k last year is now worth $350k.”

There is no house price series for any city or suburb that shows an annual rise of 75%. Not one.  Not ever.  Looks like another made up fact.

  • “Australians are currently saving an unprecedented 10-12 per cent of their income.”

The most recent household saving ratio is 9.3% but I will let that pass.  That said, the same data base I cited above, back to 1949, and for every year between 1949 and 1987, the household saving ratio was above 9.3% – every year for 38 years – so much for “unprecedented.”

  • “those of us in the private sector live in a different world. We live in a world where 30 per cent or more of consumer demand has disappeared.”

I am not aware of any industry, in any state at any time that has seen a 30% fall in consumer demand.  Looks like another made up fact from Mr Watling.

Scary stuff that a someone would write this stuff, more scary that the ABC would publish it.

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6
Aug
2012

Since the carbon tax started: Edition 5

 

We now have some hard data on the post-carbon tax economy.  The data released today show a 0.2% increase in consumer prices in July, while the measure of ANZ job ads fell 0.8%.  Financial market variables keep rolling on and they have been updated in the table below.

The data flow will be more regular in the weeks and months ahead.  I will update this post as the data comes in.

Indicator Change since end June 2012
Market Indicators

 

Official cash rate

No change

Australian dollar (vs USD)

+3.7%

10 year govt bond yield

+0.19 percentage points

ASX200

+4.5%

    Change in market cap of ASX

+$49 billion

Economic Indicators

 

RP Data house prices

+0.6%

      Change in Housing Wealth

+$24 billion

Westpac Index of Consumer Sentiment

+3.7%

TD-MI Monthly Inflation

+0.2%

ANZ job ads

-0.8%

 

 

 

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6
Aug
2012

Inflation slows even with carbon tax effect

 

The TD-MI inflation gauge for July was shockingly low.  It rose a paltry 0.2% in July, even though in the month there was the impact of carbon tax induced prices rises for electricity (up 15%) and gas and other household fuel prices (up 10%).  Other price changes were generally low or negative.

My quick calculations suggest that electricity, gas and other household fuel prices  contributed around 0.4% of the monthly rise of 0.2% meaning that without the carbon induced one-off price changes, the gauge would have fallen 0.2% in July.  The RBA has made it clear that it will discount the one-off impact on prices from the carbon tax when judging monetary policy settings.

The rise in electricity and other utility prices appears to be close to Treasury estimates which is encouraging.  No nasty shocks, although there will be some lag between the start of the carbon price and its full impact on inflation.

This inflation gauge result, plus the official inflation data from a couple of weeks ago, are screaming the need for further monetary policy easing.  The RBA Board meeting tomorrow will be held with the full knowledge  that there is likely to be a period where inflation will be uncomfortably low in the absence of some near term monetary policy easing.

The RBA Board also knows that the current bubble in the Australian dollar will not only compound the disinflationary impetus through lower import prices, but its cruelling effect on exporters and domestic firms competing with imports is now substantial, further biassing inflation lower.

Rather than direct intervention from the RBA to stem the rise of the AUD, which obviously is a sensible option, a cheaper, easier and lower risk strategy to erode support for the AUD is to cut interest rates.

Let’s hope the level heads on the RBA Board prevail tomorrow and it delivers a 25 basis point rate cut.  The inflation numbers suggest the risk of cutting rates is very low – the risks associated with keeping interest rates at current settings is, conversely, high and rising.

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