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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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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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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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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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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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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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.


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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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.


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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.


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