Friday, April 20, 2012

Wrong, wrong, wrong: Gillard, Hockey, Robb

What a week.

Gillard

Her speech on the "economic" arguments for the surplus is not yet on the web. I'll put a link here when it is.

She says: "Friends, let me make this clear once and for all: a budget surplus is not a political target but a potent economic tool."

And then proceeds to elaborate (emphasis added):

"A budget surplus speaks of confidence in Australia’s creditworthiness and good economic management...

"So the best way we can demonstrate to global investors that we are a sound place to invest is by the strength and resilience of our economic institutions and policies.

No signal is more powerful than a strong and disciplined fiscal framework.

A budget surplus when the economy is growing also speaks powerfully to the Australian community about having a government that manages their money prudently.

Okay, okay - it's about public relations, not economics despite what you say. I never believed otherwise anyway.



Hockey

He seems unaware of just how targeted Australian social spending is. Here, Matt Cowgill enlightens him. This graph tells the story as well as anything else:

Professor Peter Whiteford says “Australia actually has the lowest middle or upper class welfare in the OECD”. And he should know, he used to work in the OECD.

But one of the most targeted social support systems in the world isn't good enough for Mr Hockey, as he explained on LateLine:


TONY JONES: Okay, I'm only going to interrupt you there to allow you to expand on that because you give a very passionate defence in the speech of the system in Hong Kong, for example, where the top rate of personal income tax is 17 per cent, the top corporate rate is 16.5 per cent - the trade off there being that there's no social safety net, so, instead, people take care of their own families.

Would you - do you think that's a model that could be followed in Australia?

JOE HOCKEY: I wouldn't go so far as what Hong Kong is doing, but Hong Kong is our competition, Tony. This is the thing. If we talk about the Asian century in Australia, if the Government talks about the Asian century, then the Asian countries are our competition, our children's competition.

We can no longer compare ourselves with Europe and the United States, which have massive fiscal and structural problems. And I keep alluding to Hong Kong because Hong Kong is our direct competition, as is Singapore, as is Korea in different ways, Vietnam, Indonesia. They're our competition in many ways.

TONY JONES: OK. The logic of what you're saying is that you would quite like to see Australia move part the way in that direction - lower personal income taxes, much lower company taxes as well accompanied by a lowering of entitlements, which is the only way you could afford it really. Is that correct?

JOE HOCKEY: Well, in part. I mean, it's also the case that you've got to drive productivity growth and that's something that we've spent a lot of time talking about.



As I Tweeted during LateLine the following night:

You opposed means testing of the Private Health Insurance Rebate @JoeHockey #LateLine #auspol

You opposed means testing of the baby bonus @JoeHockey #LateLine #auspol

You said families taking in over $150K deserved government support @JoeHockey #LateLine #auspol


It's about as credible as the man who (mis)administered the Access Card coming over as a believer in privacy. Oh, he's done that too.



Robb

What compelled him to go on AM and implicitly back the ANZ's rate rise with trusting garbage such as this?


SAMANTHA HAWLEY: So is the ANZ bank justified?

ANDREW ROBB: Well I'd have to look at their books.

You know, they're not stupid and I don't think they would willy nilly put up their margin like this if they weren't - if they weren't suffering a problem with their margins.

SAMANTHA HAWLEY: But the...

ANDREW ROBB: You know, they're not - They are responsible citizens. Their books in the end will be on the table, their profit margins and all the rest, so...

SAMANTHA HAWLEY: The ANZ bank made a pretty decent profit didn't it, last year?

ANDREW ROBB: No, but it's the return on capital and things. I mean look at banks that are heavily part of superannuation funds - millions of Australians depend on the banks performing.



The ANZ's return on equity is 14.88 per cent. Talk about a culture of entitlement.

But Robb trusts them. Oh, and he wants to be Minister for Finance.

What a week.



Related Posts

. Does a surplus make sense? Colebatch has Wong on the ropes.

. How bad are Australia's unemployment benefits? Bad and getting worse.

. What the Bankers Association means when it says bank profits are "middle of the road"


21 comments:

Anonymous said...

Great Article Peter. As usual, Joe Hockey takes the cake.

Anonymous said...

After reading the full transcript of the Lateline interview, I figured out that:

- cash to poor people = welfare
- cash to business = incentive

Andos said...

Psst, Peter: it's Cowgill.

Peter Martin said...

Ta.

Anonymous said...

re:gillard do your readers a favour make argument not assertion.

Peter Martin said...

The assertion is?

kymbos said...

Nice work.

Anonymous said...

The assertion is that you infer that confidence plays no role in economlcs. Furthermore you use the word " I believe otherwise" Well it so happens that I believe as PM Gillard does that confidence aka"animal spirits" do play a role. Also I refer you to Stephen Koukoulas article http://www.afr.com/p/opinion/fiscal_prudence_is_right_policy_L9OQ4J3FkQUjxM1y5HnaIP My asertion is that you are not being fair minded.

Peter Martin said...

I asserted an inference?

I guess I did, but not the inference you think.

(Believing that confidence plays no role in economics would be a stretch.)

Here's what I am inferring/asserting:

1. Whether the 2012-13 budget is in projected surplus or deficit will make little difference to Australia's credit rating.

2. If the Commonwealth does lose its AAA credit rating and has to get by with the second-best rating on offer (like much of the rest of the world) Australia will still be able attract foreign capital at good prices.

Anonymous said...

thank you for your reply.. but your article clearly states discussion of confidence is an "economic" argument. A little behavioral economics may broaden your conception of economic argument.

Anonymous said...

Hey Anonymous, I think Peter very well understands behavioural economics, the effects of confidence and the economic impacts of the state of the budget. It seems to me that you are missing the point. It is blindingly obvious that there is a strong political motive behind the government's planned budget surplus.

faust said...

Peter, it is not return on equity that is important but net interest income (reported figure) and the risk-adjusted returns on capital (an internal figure that banks compile to determine whether to do ahead with deals). I'm surprised at your lack of awareness for an economics writer.

Peter Martin said...

Faust - believe it or not return on equity is the broad-brush measure used within the official family to judge whether or not banks are profitable - whether they need to maintain or expand their margins. Trust me.

faust said...

Peter,

1) Return on equity is also a measure of leverage (implicit and explicit).

2) I do this for a living, Peter. You should sit on Analyst calls with Bank CEOs around the world when they go through NII numbers because they know the ROE is not the key measure between the cost of funding a bank and the return on assets.

A bank can make a $20bn profit or whatever but you look at the profit as a function of total assets (and banks can have trillion-dollar balance sheets) so a pure return on equity is a worthless measure for the genuine underlying health of a bank.

I do this for a living, Peter, don't try to patronise me. I do not appreciate it particularly given I know what I am talking about.

Peter Martin said...

Faust, don't try to patronise anyone.

No-one appreciates it.

faust said...

Peter,

Will you at least address my substantive point regarding Net Interest Income?

Your mistake is look at RoE and not NII when analysing whether ANZ should be allowed to increase interest rates. Just admit it.

Peter Martin said...

As I see it there are problems with net interest income - obvious ones, some costs are in the form of fees rather than interest and some income is in the form of fees. But I am not an expert.

Why don't you address my point that return on equity is the broad metric used within the official family?

faust said...

1) Who is the "official family" you are referring to?

2) RoE can just as easily be a metric used to determine the leverage rather than how interest rate decisions are made.

For example (really basic example), a bank with a $100m capital structure based on $10m equity and $90m debt with a $2m profit has a RoE of 20% but a return on capital of 2%. By taking a look at a RoE you ignore the key determinant of how interest rate decisions as made. You also miss the bigger picture that in order to achieve their RoE they have a capital structure is that not strong enough to withstand sudden flucatuations in their asset value.

Interestingly, you could look at the ANZ decision and ask whether their 14.88% RoE but with weaker NII means that the ANZ is engaging in riskier practices to enhance profitability. Now that would be an interesting piece of analysis to undertake especially since it will be the taxpayer that implicitly underwrites the Big Four.

Getting back to the key point: you pooh-poohed Andrew Robb's comments implying that RoE is strong which does not the core determining factor when interest rates are set. In short, if you are going to criticise someone you should use a metric that is meaningful.

faust said...

One other thing, Peter: I do not want to be seen as an apologist for the ANZ hiking interest rates. Australian banks do not face the same funding problems that European-based banks are facing. Their asset base is in far better shape than their international competitors. Finally, the wholesale funding market has steadily improved for many financial institutions since the beginning of the year.

I think the ANZ is hiking rates because they are facing some shorter-term funding pressures and they are looking to enhance profitability to meet analyst expectations (some synchronicity with your RoE point). I think it would be very interesting to see how the ANZ asset base is performing relative to their peer group particularly their international expansion.

Peter Martin said...

1. Sometimes I have conversations I am not allowed to report, so I will be vague. The term "official family" normally refers to the Treasury and Reserve Bank.

2. I can see the theoretical problem with RoE.

It is used as a rough and ready guide to bank profitability (even though if the capital structure changes it won't be).

Banks (say they) set their rates to maintain margins.

Robb seems to think they should.

But it is not at all certain they should. Other businesses endure reduced margins.

Of course if reduced margins meant they weren't healthy it would be a problem. That's where broader measures of profitability come in. I mentioned RoE because it is one of the broader measures used.

Magpie said...

RE: Gillard and confidence.

Okay, so she is addressing the animal spirits. So are the Spaniards, Greeks, Portuguese and Irish: they are addressing the investors' confidence.

Last week Spanish Economics minister De Guindos went on a tour to explain the Markets (yes, believe it or not, to explain the market: he never heard of the word anthropomorphism).

And how is the confidence thing working out for them?

RE: Hockey.

What Hockey is looking for is a whipping boy.

Post a Comment

COMMENTS ARE CLOSED