20
Dec
2012

A budget deficit is more popular than Tony Abbott?

 

So a budget surplus is unlikely for 2012-13. So says Treasurer Wayne Swan.

It is unclear what the political fallout will be, but there is no doubt the government will be injured a little at least in the short term.

Or will it?

An Essential poll of 29 October showed that 37% of the population supported the return to budget surplus while 43% were opposed or in other words, supported a deficit. If the government can articulate the reasons for the likely shortfall on the budget for this year, perhaps the damage will be short lived or negligible.

That noted, it is interesting to see that in the Essential poll of 10 December, approval for Mr Abbott as Leader of the Opposition was 33%, while disapproval was 56%.

Which just goes to show that a budget deficit is 10 percentage points more popular than Mr Abbott, for whatever that’s worth.

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17
Dec
2012

The better economic manager

 

This article first appeared on the ABC web site on 14 December 2012

Link:  http://www.abc.net.au/unleashed/4427680.html

The Federal election is now less than a year away. The budget surplus, government spending, tax and debt are likely to feature prominently in each side’s efforts to convince voters that they are the better economic manager.

The Liberal Party and many conservative commentators suggest that the size of government in Australia under the current Labor Government is too big.

Opposition Leader Tony Abbott has said the current government “is addicted to taxes” and that it “is spending like a drunken sailor… mortgaging our future“. In a similar vein, shadow treasurer Joe Hockey says “Labor has shown it is incapable of cutting spending“.

Either these comments are deliberate mis-truths or reflect the lack of understanding of budget policy from people who, within a year, could well be prime minister and treasurer.

The facts of the budget show that the current government’s budgetary footprint on the economy is small, running at the lowest level in 35 years. The current small government is made up of both low tax receipts and record cuts in government spending.

The tax to GDP ratio has averaged 21.1 per cent of GDP in the five years of the current Labor Government. The highest tax to GDP ratio in those years is for 2012-13 where it will reach 22.2 per cent. Under the Liberal Party-lead Coalition, the Howard government tax to GDP ratio averaged 23.4 per cent over its 12 years in office and never once did it fall below 22.2 per cent. In other words, the tax to GDP ratio under the current government is at a level last seen during the Keating government in the early 1990s and before that, we have to go back to the 1970s to see such a low-taxing government.

The difference between the average tax level of the previous Coalition government and the current Labor Government is 2.3 per cent of GDP. In today’s dollar terms, that is around $35 billion per annum in less tax collected by the Labor Government compared with the previous Coalition government. That $35 billion lower tax take is equivalent to around $4,000 per year for every household in Australia.

The budget papers also show that the Howard government was the highest taxing government in Australia’s history. In 2004-05 and 2005-06, the tax to GDP ratio reached a record high 24.2 per cent. In addition, there have been only seven occasions where the tax to GDP ratio has been in excess of 23.5 per cent of GDP and all seven were under the Howard government.

In a similar vein, in the last 30 years, there have been 10 occasions when the tax to GDP ratio has been below 22.0 per cent of GDP and all 10 were under a Labor Government. To put simply, the Howard government was a high taxer, while the current Labor Government is a lower taxer.

In terms of government spending, there have been only five years in the four decades leading up to 2012-13 when real government spending was cut in real terms. None of those cuts were delivered by a Coalition government. All five times that there has been a cut in real government spending have been when a Labor government has framed and delivered the budget. There were three years during the Hawke government in the late 1980s where government spending was cut in real terms and there have been two occasions in the current Labor administration where such cuts have occurred.

In what should be an embarrassing fact for Mr Hockey, 2012-13 will see real government spending fall 4.4 per cent, the biggest cut ever recorded. This cut will see the government spending to GDP ratio fall to 23.8 per cent, having previously been ramped up to successfully counter the shock from the global financial crisis. This level of spending is 0.4 per cent of GDP below the average government spending level of the Howard government. In today’s dollar terms, the 0.4 per cent of GDP amounts to around $6 billion.

All of this suggests that the current government and the Labor Party more generally are low taxing and the only side of politics willing to cut spending when required.

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13
Dec
2012

Australia’s grim reaper economy versus the US

 

The Australian “grim reaper” economy, as Shadow Treasurer Joe Hockey called it today, currently has an unemployment rate of 5.2%. That is low by historical standards (average for last 30 years is 7.2%) and sits well against 7.7% in the US, 11.7% in the Eurozone and 7.3% in New Zealand, to name a few.

No one seriously expects the unemployment rate to go above 6% despite the current soft patch for growth, while the RBA and Treasury reckon it will stay near 5.5% over the next year or so.

This is a rolled gold performance in anyone’s language.

Contrast this with the US, where Chairman of the Federal Reserve, Ben Bernanke, said this morning that interest rates will be left at zero, yes zero, where they have already been for four years, and the Fed will keep printing money (US$85 billion a month in fact in quantitative easing) until the unemployment rate gets down to 6.5%.  Not the “grim” 5.2% in Australia, but 6.5%.

Looking through the labour force series and it was in January 2002 that Australia last had an unemployment rate that high!

There is a staggering chasm between the Tea Party type distortions on the Australian economy and the hard economic facts from the likes of Joe Hockey, Andrew Robb and Tony Abbott. These ridiculous comments, calling black white and up down seldom get queried in the media. It is not clear why they are not held to account other than bias or a lack of economic expertise from those asking the questions. That might be fair enough, but unrelenting negative coverage risks changing spending and investment behaviour to the detriment of the economy.

A yet-to-be confirmed revenue shortfall in the budget of about 0.25% of GDP due to an unexpected fall in the terms of trade gets Page 1 treatment and other blanket coverage because the budget may register a deficit of less than 10% of Gina Rinehart’s wealth. But then it again it might not. There are still 8 months of budget data to come before we know the budget result.

I am not sure why this matter, but it seems to be more important than holding those who may well be in government next year to account for their economic commentary and competence.

 

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11
Dec
2012

The 2013 election is looming: Is it really unloseable?

This is an article in the current edition of The Melbourne Review: Link here :

http://www.melbournereview.com.au/commentary/article/the-2013-election-is-looming

THE 2013 ELECTION IS LOOMING

On all measures, Liberal Party leader Tony Abbott is deeply unpopular. His approval rating is among the lowest recorded for an Opposition leader and his policy agenda is universally seen as shallow. Former colleagues of Abbott and Liberal Party elders are on the record saying “he has no interest in economics – he has no feeling for it”, he is “innumerate” and that his future “was not in economics”.

Against Abbott is Labor Prime Minister Julia Gillard. She leads Abbott by around 10 points in polls as the preferred Prime Minister. Gillard will be heading into the election year with the economy entering a 22nd year of unbroken economic growth. The unemployment rate is around 5.5 percent, one of the lowest in the industrialised world and real wages have been rising for 10 straight years. At the same time, mortgage interest rates are 6.6 percent, well below historical averages and 2 percent below the level of the Coalition government.

The Gillard Government has a policy agenda that includes education reform, a national disability insurance scheme and the national broadband network, all very popular policy proposals according to public opinion polling.

Despite these economic drivers being so very favourable for the Gillard Government, the common wisdom from political pundits is that the 2013 election is unloseable for Abbott. Indeed, most opinion polls have the Coalition well ahead of Labor in two-party preferred terms.

Now look back 20 years.

Common wisdom from the pundits is that the then Labor Prime Minister Paul Keating should have been soundly beaten in the 1993 election. Unemployment was 11 per cent, the highest since the 1930s Great Depression. The economy was barely climbing out of a deep recession and real wages had been falling for the bulk of the prior five years. At the same time, mortgage interest rates were around 10 percent, although this was down from the 17 percent experienced a few years before.

Confronting Keating was the Liberal Party leader, Dr John Hewson, a well credentialed economist with a blueprint for economic reform. Hewson’s so-called Fightback! manifesto included tax reform, establishing independence for the Reserve Bank and a range of other microeconomic changes designed to boost productivity.

Hewson was popular and credible; Keating was seen as arrogant and carried the weight of the recession which started under his watch as Treasurer.

It was an unloseable election for Hewson on these facts and perceptions. Yet there was a 1.54 percent swing in the two-party preferred vote to Labor and Hewson was humiliated.

There are obviously chalk and cheese differences between the economic fundamentals now and back in 1993. They massively favour the incumbent Labor Party. There are also differences in the relative credibility of Opposition leaders Hewson and Abbott which again undoubtedly favour Labor.
That said, the polls show the Coalition with a solid lead based, it seems, on Gillard’s comment prior to the 2010 election that “there will be no carbon tax under a government I lead”, the vexed issue of asylum seekers and some of the policy compromises that have been an inevitable consequence of the minority government arrangements entered into as a result of the hung Parliament.

It seems a stretch to think that for Abbott and the Coalition parties the 2013 election is “unloseable”.
On the contrary, the hard facts on the economy, rising living standards and a policy agenda of popular and decent reforms make the election a very winnable one for Labor. As 2013 unfolds and the election campaigning focuses electors’ minds on the things that matter for them, it is more than just conceivable that Labor will win.

This point is even more apparent with the Coalition currently holding 14 seats with a margin of 2.5 percent or less. Eight of those seats are in Queensland and Victoria where there are increasingly unpopular State Coalition Governments. All eight seats are at risk. The Labor Party has only nine seats with a margin of 2.5 percent or less and while those seats and others are obviously at risk, in the absence of a uniform swing some Coalition seats could easily move back to Labor and some Labor seats will move to the Coalition making the election outcome impossible to call.

All of which suggest the 2013 election is up for grabs. It is no forgone conclusion. It will be the Labor Party fighting on its economic record and agenda for social reform versus the Coalition fighting it on the perceptions of trust for Gillard and the promise to revoke the carbon and mining taxes. With close to a year to go until polling day, there will be many events that might sway voters one way or the other. This seems obvious, but try pointing that out to the pundits declaring Abbott home and hosed in another unloseable election.

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

 

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11
Dec
2012

Update

 

For a whole lot of reasons, I have been slow to update my blog in recent weeks. Apologies for that.

For regular commentaries that I write for the pathbreaking Business Spectator group, the link to my work is here:

http://www.businessspectator.com.au/Stephen-Koukoulas

In terms of other blog updates, normal service will resume soon.

I will alert my Twitter followers (@thekouk) when I have an update.

 

 

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