Josh Frydenberg has the opportunity to transform Australia, permanently lowering unemployment

Josh Frydenberg has the opportunity to become a transformational Australian treasurer. He has been bequeathed a set of circumstances that comes along rarely.

He has already shown himself able to shift the debate on important topics in order to achieve the previously unthinkable.

Most recently he did it with Google and Facebook, getting them to pay news providers for content using legislation that led the world in its breadth and force.

It’s actually the second time Frydenberg has taken on big tech. As assistant treasurer in 2015 he championed a “Netflix tax” on overseas-based suppliers of online services. They would be required to collect and pass on goods and services tax, just like Australian retailers.

It was a tax experts told him big tech might never pay.

Frydenberg has shown boldness before

Opportunities like the much bigger one in front of him now don’t come along often because Australia isn’t in recession often. Three decades ago in the early 1990s Australia’s then Reserve Bank governor Bernie Fraser seized its mirror side.

In the wake of an appalling recession that had destroyed both jobs and inflation, Fraser opted to finish the job and drive a stake through the heart of inflation.

A biography of then treasurer Paul Keating quotes Fraser as saying “we’ve got the inflation rate down and we are damn-well going to keep it down”.

At the first hint of a resurgence in inflation as the economy got back on its feet Fraser rammed up interest rates an extraordinary 0.75 percentage points in August 1994, then another 1.00 percentage points in October, and a further dizzying 1.00 percentage points in December.

Job finished, inflation has remained tamed ever since, never again returning to the 8% and 10% common in the 1980s.

Recessions create opportunities

Frydenberg’s opportunity is to drive a stake through the heart of unemployment.

From the end of the second world war right through to the mid 1970s Australia’s unemployment rate averaged just 2%. From then onwards until today it has averaged 6.8%, an embarrassment in a country capable of much, much better.

How much better?

The Reserve Bank’s pre-COVID estimate of Australia’s so-called non-accelerating inflation rate of unemployment (NAIRU) was 4.5%. NAIRU is the rate below which it is thought inflation and wage growth might start to climb.

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Read more: Why the unemployment rate will never get to zero percent – but it could still go a lot lower

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If correct, the estimate means there is no danger whatsoever in pushing Australia’s unemployment rate down from its present 6.4% to 4.5%, or lower. We won’t know how much lower until we try. Pre-COVID, US unemployment got to 3.5%.

Far from danger, there would be a huge payoff in permanently lowering the rate of unemployment Australia regarded as acceptable.

At an unemployment rate of 4.5%, an extra 255,800 Australians would be in work and earning money, providing services and paying tax. The government could save $4 billion per year in JobSeeker payments.

We could go for broke

Frydenberg should actually aim for a much-lower unemployment rate than 4.5%.

Reserve Bank Governor Philip Lowe does not say 4.5% would accelerate inflation, he says he doubts whether anything above 4.5% would accelerate inflation.

And Lowe says this notwithstanding the view of the secretary to the treasury that the recession has pushed up NAIRU to around 4.75% to 5% as people who have lost their jobs have become less employable.

But here’s the thing. NAIRU is the non-accelerating inflation rate of unemployment — the rate that keeps inflation and wage growth constant.

Wage growth, at 1.4% and inflation, at 0.9% are too low. We need them to accelerate. Frydenberg and the Reserve Bank have agreed to target inflation of 2-3%. It’s a target that would normally mean wage growth of 3-4%, where wage growth hasn’t been for the best part of a decade.

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Wage growth below par for years

Wage price index, total hourly rates of pay excluding bonuses, private and public, annual. ABS

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To get inflation and wage growth back up to where we want them we are going to need an unemployment rate well below the oddly-named NAIRU — well below 4.5% — for quite some time.

In his new book Reset, economist Ross Garnaut says we should be aiming for an unemployment rate of 3.5%.

He says on the way down there would be time to adjust the target “up when high and accelerating inflation becomes a matter of concern, or down (further) if we approach 3.5% without inflation accelerating dangerously”.

As in the US, we don’t yet know how low we can safely push unemployment, but it might turn out to be very low indeed.

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Read more: The reset to lift us out of the COVID recession has to be bold: returning to where we were is nowhere near good enough

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To get there Australia’s government will have to keep spending, and learn to live with big budget deficits and big debt.

Garnaut says to not do so would be a false economy, condemning us to “endless increases in our public debt-to-GDP ratio because we wouldn’t be producing the GDP we were capable of”.

The government would fund the crushing of unemployment by selling bonds to the Reserve Bank directly, bypassing financial markets in order to avoid putting further upward pressure on the dollar.

Low risk, long payoff

To the extent that the continuing flood of bonds further eased mortgage interest rates (which it mightn’t much, because the bonds would be long-term) the Prudential Regulation Authority would have to crack down on investor and interest-only loans as it did successfully before the COVID crisis in order to restrain house prices.

Garnaut believes there will also be a need for less-pleasant reforms to restore the prosperity Australia is capable of, but he says they will only gain widespread acceptance if it is known that anyone who wants a job can get a job — whether that’s at an unemployment rate of 3.5%, the 2% Australia once had or the 1% New Zealand had.

The COVID recession and rapid recovery from it have handed Frydenberg an opportunity to relentlessly drive down and crush unemployment — to finish the job.

If he grabs it he will be remembered as the treasurer who changed Australia, perhaps forever.

Reducing unemployment for good with Peter Martin. Democracy Sausage with Mark Kenny, March 4, 2021 107 MB (download)

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Should the government keep running up debt to get us out of the crisis? Overwhelmingly, economists say yes

Overwhelmingly, the 50 leading Australian economists surveyed by the Economic Society of Australia and The Conversation ahead of Thursday’s economic statement want the government to keep spending to support the economy — even if it means a substantial increase in debt.

The question is the third asked in the Economic Society-Conversation monthly poll, which builds on a series of polls conducted by the society since 2015.

The economists polled were selected for their preeminence in the fields of microeconomics, macroeconomics, economic modelling and public policy. Among them are former and current government advisers and a former and current member of the Reserve Bank board.

Each was asked whether they agreed, disagreed, or strongly agreed or strongly disagreed with this proposition:

Governments should provide ongoing fiscal support to boost aggregate demand during the economic crisis and recovery, even if it means a substantial increase in public debt

Only three of the 50 economists polled disagreed with the proposition, none of them “strongly”.

It is one of the starkest results in the survey’s five-year history.

The Conversation, CC BY-ND

Of the 50 economists polled, 44 supported the proposition, 33 of them “strongly”.

Of the remaining six, three were uncertain, and provided well-argued accounts of their reasoning which are published in full along the responses of each of the other participants at the bottom of of this article.

Debt now, concern later

Rachel Ong of Curtin University said the amount of public debt that has accumulated during the COVID-19 crisis was at a historical high and had to be repaid at some point. But she said governments had to be careful about removing support until the economy was clearly on a trajectory of recovery.

Nigel Stapledon of the University of NSW said while some level of on-going support was needed, at some point the cost would be larger than the benefit. Some sectors, including universities, will have to permanently adjust to lower incomes.

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Read more: Bowing out gracefully: how they'll wind down and better target JobKeeper

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The economists who strongly agreed said that if not enough support was provided or if it was withdrawn too early, the resulting recession would itself make the debt that had been run up less sustainable (Fabrizio Carmignani, Griffith Business).

Financial markets are keen to lend

Beth Webster of Swinburne University argued the only real limit to government spending was high and damaging inflation.

If the government was worried about debt, it could finance its spending in other ways, by borrowing from the Reserve Bank (which could itself create money and “monetise” the debt).

Sue Richardson from the University of Adelaide agreed, using a technical term to argue that the was economy was “so far inside its production possibility frontier” (producing so much less than it was capable of) and inflation was so dormant, that there was a case for creating money.

Saul Eslake said that wasn’t necessary. Even with the hundreds of billions committed, financial markets appeared to be comfortable with the debt and keen to lend.

Debt is how we do things

Reserve Bank board member Ian Harper said the Commonwealth could borrow for 30 years at about 1%. “Can we expect the economy to grow faster than 1% per annum in nominal terms over a 30-year horizon?” he asked rhetorically. “I would have thought that’s a shoo-in,” he answered. If so, then the debt would be easily serviced.

Consulting economist Rana Roy pointed out that public debt was “not an anomaly”. It was an enduring and defining feature of the modern economy, providing an enduring and defining asset class, sovereign bonds, which were in high demand.

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Read more: Australia's first service sector recession will be unlike those that have gone before it

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Of the three economists who opposed the proposition, Tony Makin of Griffith supported “supply side” measures such as JobKeeper that would keep firms in business but opposed “demand side” measures to boost consumer spending, saying they would ultimately prove counterproductive.

Escalating public debt would induce capital inflow, drive up the dollar and make Australian businesses less competitive. Although interest rates are at present low, they would increase when the debt had to be refinanced.

Doubts for differing reasons

Paul Fritjers of the London School of Economics said he would normally support running up government debt for the sake of the economy, but could not support it being run up to support an economy the government itself had run down.

The government should wean the population off of its “irrational fears” and letting “normal economic life return”.

Although strongly argued, these views were more weakly held than those of the majority.

The Conversation, CC BY-ND

Participants were asked to rate the confidence with which they held their opinions on a scale of 1 to 10.

When adjusted for these ratings, the proportion prepared to countenance a substantial increase in public debt climbed from 88% to 92.1%.

The proportion opposing it fell from 6% to 4.6%.

Tommorrow’s economic statement will be the last budget and economic update before the budget itself on October 6.

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Individual responses

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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John Fraser. The new treasury boss defends austerity and Ronald Reagan

The new head of Australia's Treasury is a fan of the Ronald Reagan tax cuts in the US, believes austerity has had a bad press and is wary about using government spending to stimulate the economy.

Meet John Fraser, until a few weeks ago the head of UBS Global Asset Management in London. The Abbott government appointed him in December to replace the long-serving public servant Martin Parkinson, who stepped down after being told he didn't have the confidence of the prime minister.

Although he appeared before Senate estimates hearings in an earlier life when he worked for the Treasury in the early 1990s, Wednesday's appearance was Mr Fraser's first as departmental secretary.

And he was free with his opinions.

He was "a great believer" in the business and personal income tax cuts introduced by US president Ronald Reagan in the early 1980s. He was living in the US at the time and saw them up close. Their critics say they pushed the US budget deeper into deficit, but Mr Fraser told the hearing they "helped reinforce the entrepreneurial spirit which is alive in some of the smaller and medium-sized businesses in the US" which was one of the key reasons it did so well. Others were flexible labour and product markets.

Critics of austerity measures - including those in the International Monetary Fund - had failed to grasp their "clear success" in places such as the United Kingdom.

"I was in Great Britain when the IMF chief economist came to look, and he said he had been pleasantly surprised that the UK had been doing so well with the austerity program," he told the hearing.

"I think the clear success in the UK is interesting, and I would there's been clear success also in the United States as well as elsewhere. But we are a sovereign nation, we are a proud sovereign nation, we have to tailor policies to our own conditions."

When it comes to using government spending to stimulate the economy, Mr Fraser is cautious.

"My own view is that I approach fiscal stimulus, in whatever circumstances, with a great deal of care," he told the hearing. "I am old-fashioned. I don't like public debt...

"One of the reasons I don't like it is because public debt leaves you liable to the vicissitudes of the market. So when interest rates go up as they did in the late 1980s we suddenly had public debt interest taking up a massive amount of outlays."

While interest payments on government debt at present take up less than 3 per cent of government income, Mr Fraser said the impost would grow rapidly when interest rates climbed.

"To my mind that's money that could have been spent on better things, and I'll articulate that later in other places."

The Treasury's Intergenerational Report, due next week, would outline the twin problems of Australia's ageing population and government debt, he said.  It would have "very real implications for how we spend our money, and indeed also how we tax".

Asked to endorse the actions of the treasury in running up debt during the global financial crisis in order to avoid recession, Mr Fraser said he wasn't in a position to judge.

"I lived through it the global financial crisis and it was remarkably frightening, managing a very large global asset manager. 

"I am loath, if you weren't there in the heat of battle, to make judgments about the efficacy or otherwise of the reaction by countries around the world.

"It was a very difficult situation, indeed an unprecedented one in the world's history."

In The Age and Sydney Morning Herald


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Pay no attention to the Telegraph. We need more debt, not less

I am worried about debt. I am worried about some of the things News Corporation newspapers are saying about debt. For most of its life News Corporation has been up to its eyeballs in debt. That's how it grew big.

In 1990, a few years after buying Twentieth Century Fox, it was paying more than $1 billion per year in interest. One billion dollars was an awful lot of money back then. News Corporation owed more than it was worth.

It split itself into two in 2013, leaving all of the debt in what it called 21st Century Fox and leaving News Corporation (the Australian arm) debt free. Fox owes 2.8 times its annual earnings, a sum that would make the Australian government blush.

But the Australian arm hasn't given up its attraction to debt. Michael West reports in this newspaper that News Corporation with its partner Telstra has lent the best part of $1 billion to their part-owned subsidiary Foxtel, much of it at a generous rate of 12 per cent. Foxtel has lent money back to News Corporation at an interest rate of zero.

Whatever the ins and outs of the eyebrow raising deal, it's hard to argue that News Corporation is unfamiliar with debt. And yet its newspapers commit howlers.

This month one of its tabloids headlined its front page: Australia's debt crisis is a staggering $1 trillion nightmare".

"Australia's mounting federal government debt will be $1 trillion by 2037 if urgent action is not taken," it said.

It backed it up with an editorial saying $1 trillion was a figure "most people are unable to fully comprehend".

One trillion is indeed a figure most people are unable to fully comprehend, perhaps because the newspaper won't put it in context...

By 2037 the Australian economy will be turnover around $6.5 trillion per year if trends persist, many times more than the $1.6 trillion it turns over today.

By then a debt of $1 trillion will be worth 15.3 per cent of the enlarged turnover, somewhat less than the 16.7 per cent it accounts for today.

That's right. The newspaper was reporting what would most likely be a reduction in Australia's debt to GDP ratio, but it didn't say so.

"I for one reckon Australia will be doing really well in 2037 if net government debt is $1 trillion, because it will probably mean the budget has travelled on a sustainable path for two decades," the economist Stephen Koukoulas noted.

Then the paper came back for more.

"A baby born today will have paid $90,000 worth of interest on servicing government debt by the time they hit 40," it said. The thinking wasn't clear. The story itself said the interest paid on government debt would reach $1000 per person by 2031-32, which is less compared to the size of the economy than it is today.

The government doesn't have a debt problem. It has a deficit problem. Its debt is a fraction of what corporations with growth prospects owe as a proportion of their income.

Its deficit problem is worrying. It is taking in $40.4 billion less per year than it is spending. It'll have to fix it by taking in more and spending less.

But that doesn't mean it should be borrowing less. Borrowing for long term projects has served Australian governments and corporations well. With the interest rate currently on offer at all time low (just a touch above the long-term rate of inflation) it's almost being offered money for nothing.

Former US treasury secretary Larry Summers sees the ultra low rate as a once in a lifetime opportunity.

"If a moment when we can borrow money, in a currency we print ourselves, for ten years at 1.8 per cent, in a moment when male unemployment is at record levels, is not the moment to fix Kennedy Airport, I do not know when that moment will ever come," he told the London School of Economics last month.

Australia is being offered money at 2.55 per cent, a somewhat higher rate than is the US, but almost as cheap as the US when consideration is given our higher inflation rate.

"A time when there is too little investment and therefore more people are out of work - that is the right time to replace all the old coal-fired power plants that are wrecking the planet," Summers went on. "There are plenty of very valuable things to do, we just need to be willing to make those kinds of investments in the future."

Australia's mining workforce has slid 44,000 in the past year. The unemployment queue has climbed 64,600. There are 100,000 more Australians unemployed than there were when Labor left office. Borrowing for big projects for which there are skills available makes complete sense. If the government is worried that the present ultra low rates on offer won't last it could borrow for 30 years instead of 10. The treasurer Joe Hockey suggested it in opposition.

His job isn't easy. But isn't helped by talk of a staggering debt crisis when debt is one of the few things that could help.

In The Age and Sydney Morning Herald


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Low bond rates. Abbott prepares to pass up the deal of the century

Who'd say no the deal of a lifetime? Tony Abbott would, and it's our tragedy.

The ten year bond rate is the rate at which the government can borrow for ten years at a fixed rate of interest. Right now its just 2.55 per cent, an all-time low.

By way of comparison in the 1970s it exceeded 10 per cent, in the 1980s it passed 16 per cent, in the 1990s it passed 10 per cent, in the 2000s 5 per cent, and until now in this decade it has usually been above 3 per cent. It dived below 3 per cent at the end of last year and is now just 2.55 per cent, the lowest in living memory.

If Australia was to borrow, big time, for important projects that took the best part of a decade to complete, it would have no risk of ever having to fork out more than 2.55 per cent per year in interest. The record low rate would be locked in, for the entire ten years.

Australia's inflation rate is currently 2.3 per cent. Although it will almost certainly fall in the wake of the collapse in oil prices when it is updated next week, the Reserve Bank has a mandate to keep the rate centred at around 2.5 per cent. That means that right now our government is being offered billions for next to nothing, billions for scarcely more than the expected rate of inflation.

If Abbott was the chief executive of a company with good prospects he'd grab the money and borrow as many billions as he could without impairing his credit rating.

In Australia's case that's probably an extra $100 billion. That's enough to build the long-awaited Brisbane to Sydney to Melbourne high speed rail line, or to build Labor's original national broadband network, or to build Sydney's $11 billion WestConnex road project plus Melbourne's $11 billion metro rail project plus Melbourne's $16 billion East West Link plus something big in each of the other states.

And it would cost next to nothing. All each of these projects would need is a positive real rate of return (which several of those listed above lack) and we would get ahead.

All we would need is confidence in the worth of our ideas.

It's rare to be offered money for nothing...

It's happening because interest rates in the rest of the world have dropped to near zero. Japan's ten year bond rate is 0.24 per cent, Germany's is 0.40 per cent, Britain's 1.54 per cent. Even in the United States where the economy is improving, the ten year bond rate is just 1.81 per cent. Without the ability to earn decent returns in the nations to our north investors are flocking to here and buying our government bonds. In order to get them they are prepared to bid down the rates we have to pay them to all time lows.

It mightn't last. In October Reserve Bank assistant governor Guy Debelle warned of a "relatively violent" correction in bond markets. He said as soon as it looks as if interest rates will climb, the purchasers of bonds will demand much higher rates in order to cover themselves for what's likely over the next ten years. The opportunity will vanish.

If we are prepared to grasp it, there's no shortage of projects that would set us up for decades to come. In education, in health, in the delivery to railway lines into suburbs that are at present barely accessible - in all of these areas there are projects whose benefits would exceed their costs and exceed them by more than enough to pay the minimal rate of interest being demanded.

Some are visionary. Bank of America Merrill Lynch economist Saul Eslake says if Australia was to get serious about reducing its dependence on coal it would consider paying coal producers to close, and speeding up the commercialisation of battery technologies that would allow Australians with the next wave of solar panels to live off the grid.

The risk is that bad projects would be chosen over good ones and the money wasted. Abbott himself provides reason for concern. Despite promising during the election to "require all Commonwealth-funded projects worth more than $100 million to undergo a cost-benefit analysis by Infrastructure Australia" his first budget funded scores of road projects without such approval. Some of the cost-benefit studies weren't even published, in others the figures were massaged to make them look better than they were.

The Grattan Institute's John Daley suggests setting up an independent statutory authority along the lines of the Reserve Bank to vet proposals for spending big money. Its members would be appointed by the Governor-General for terms of five to seven years, it would report directly to parliament and it would publish of all of its findings compete with the assumptions behind them. He says even cheap money should be spent well.

Could the Coalition grab the opportunity before it vanishes? There are some good signs. With help from the Greens it axed Labor's debt ceiling. Since taking office it has run up an extra $78 billion in debt. But it is unorganised, behind in the polls and a prisoner of some of the silly things it said about debt while in opposition.

We have a once in a lifetime opportunity. It'll slip through our fingers.

In The Age and Sydney Morning Herald


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Budget explainer: It's the debt, not the spending. Why the budget is bleeding

“Australia has a serious spending problem.” Keep repeating it until you believe it. Joe Hockey has.

The Treasurer was at it again on Friday in the third and final of his scene-setting speeches before the budget.

“The problem at the heart of Labor's legacy was excessive spending,” he told the Australia-Israel Chamber of Commerce .

It’s a good line, but it isn’t true.

Spending is running somewhat higher than it was when the Coalition was last in office, that’s all. On the other hand, government revenue – most of it tax – is far lower.

Australia has a big budget problem – certainly a big revenue problem - but it doesn’t yet have a spending problem.

The figures for the most recent financial year tell the story. Two years beforehand in 2010-11, Treasury forecast revenue equal to 24.1 per cent of gross domestic product by 2012-13. It was a low forecast by the standards of the previous Howard government. But what the Gillard government got was 23.1 per cent of GDP, billions of dollars less.

By a staggering coincidence, government spending that year amounted to exactly 24.1 per cent of GDP, precisely the same figure as the revenue it had expected to get.

If revenue had rolled in as expected, the past financial year’s budget wouldn’t be in deficit in all. Wayne Swan would be crowing about his success in eliminating the deficit on time, as promised.

No one is too sure where the revenue has gone. It’s a murder mystery with multiple suspects.

One is a new style of tax minimisation. Cloud-based corporations such as Google, Apple, Microsoft and Amazon pay far less tax here than their bricks and mortar predecessors used to. Whether it’s Ireland, Singapore, Holland or a more exotic tax haven, they can decide where big chunks of their incomes are meant to reside and shuffle their locations at will. So far we’ve been powerless to stop them.

Another is mining companies. Although big taxpayers because of the size of their operations, they have been paying a much lower proportion of their operating profits as tax than the rest of the corporate sector, about 5 to 10 percentage points less according to Treasury Secretary Martin Parkinson.

“Just to be clear, this is not a judgment about what the effective tax rate paid by mining companies should be,” he told business economists last May. “It is simply a statement of fact.”

Miners have been ramping up their investment spending and writing it off against their incomes quickly for tax purposes.

Another suspect is John Howard. Trapped in a moment of what columnist Annabel Crabb calls “electoral existential panic” over petrol prices in 2001, he froze the fuel excise, abandoning indexation. It hasn’t moved since. It’s still 39.14¢/litre, even though the price of petrol has climbed 60 per cent. The quick fix didn’t cost his budget much at the time but now costs $5 billion per year...

Howard gets fingered again for what economist Saul Eslake describes as “one of the worst taxation decisions made in the past 20 years”. In his last months in office, Howard exempted entirely from tax all superannuation benefits paid to almost all Australians aged 60 and over. Even the interest earned within their funds became tax free. The parting gift cost his budget nothing but crimps revenue more and more as more and more Australians age.

Another suspect is us. At times during the Howard era, households saved nothing. Income was spent as it came in. Now households as a whole save a staggering 10 per cent of their income. Much of it isn’t put in the bank, it’s used to pay down mortgages. We haven’t saved as much since 1986. It’s money largely withdrawn from the economy, money that would have once been spent on businesses that would themselves be taxed and would employ staff who would also be taxed.

And we are changing the way we are spending. More of it is overseas where it escapes the goods and services tax and more is on education and health, also untouched by the GST. The GST is allocated to the states rather than the Commonwealth so the shortfall doesn't have an impact on the Commonwealth directly, but it does put it under pressure to give the states more of its diminished income.

Australia goes into the budget with a projected deficit of $47 billion (a figure inflated by the government’s decision to pay $8 billion to top up the Reserve Bank’s reserve fund).

Each extra year the budget remains in deficit means many more billions the government has to borrow. Net debt is now expected to peak at 16 per cent of GDP, about $280 billion. Two years ago, the forecast was for a peak of just 6 per cent of GDP, about $100 billion.

Although very low by the standards of other developed countries, the forecast is an awful lot bigger than it was.

By itself, the level of debt doesn’t matter much. Government debt is not like household debt. When you or I have a debt it is usually owed to a single institution, the one that provides our mortgage. We have no choice but to pay it off, either by making the payment in full or by dying and having it taken out of our estate.

But governments aren’t like people. They are more like corporations with a multitude borrowings, each paid off when it falls due and each overlapping. There is no such thing as “the” government debt. Instead it is like the water in a bath being kept warm as old water escapes and new water flows in. The volume of water in the bath may not change, but the composition changes all the time. Lenders lend and get repaid continuously. And, unlike people, governments never die. There is never an end point at which “the government debt” has to be extinguished.

And extinguishing it would be a bad idea. In 2002-03, when the Howard government no longer needed government debt, it commissioned a review into whether it should bother continuing to issue government bonds. The review concluded that financial markets need government bonds in order to price private sector loans. Without them, interest rates would be higher. And financial institutions are required by regulators to hold some of their capital in extremely safe assets. Without government bonds they would be struggling. So the Howard government undertook to ensure it always borrowed at least $25 billion whether it needed it or not. It invested what it borrowed in shares and the like, allowing it to boast that it had no net debt while maintaining a gross debt

It’s just as well it did. When the financial crisis hit, the Rudd government decided to borrow big time. Had the Australian government not kept its debt market open it would have found that difficult in the circumstances of the time. Few would now argue the government should be entirely debt free.

A subsequent review found it would be wisest for gross debt to never fall below 12 to 14 per cent of GDP, around $200 billion in today’s dollars. (Today’s gross debt is around $400 billion.)

Although by itself the level of debt doesn’t matter much, it matters for what it does to the annual budget deficit. Once negligible, net interest payments are now about $9 billion. That’s an extra expense the budget didn’t used to have. It is set to climb to $13 billion in two years’ time as more deficits mean more borrowing, which means even bigger interest payments in future budgets.

The scale of the interest bill can be seen by comparing it to other government expenses. At 2.2 per cent of spending, $9 billion is the same as the sum the government spends on non-government schools, on residential aged care and on Newstart. Truly massive in the context of government spending, it’s about one half the size of Medicare and one third  the size of the biggest program of all – the age pension.

Unless something happens to drive that interest bill down, the government will be increasingly constrained in what it can do.

The only way to drive it down (short of a cut in interest rates) is to start running budget surpluses.

That’s why it’s talking about temporary taxes and slowing increases in the pension. It’s why the budget will be unpleasant.

It’s true the problem would disappear if revenue simply snapped back to where it used to be as a proportion of the economy. But this government can no more whistle up Howard-era revenue than could the last one.

Something has changed in the way the economy works and government has to change too.

In The Age and Sydney Morning Herald


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Probably. The next Treasurer will have to lift it.

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Austerity. Why it is suddenly no longer fashionable

It’s been an appalling fortnight for peddlers of austerity. Bit by bit the weight of Australian and international opinion has shifted away from surplus towards deficit, away from repayment towards debt and away from containing inflation to rekindling it.

Australia contribution was startling. As recently as December opposition leader Tony Abbott was promising surpluses “in each year of the first term of a Coalition government,” although he qualified the promise by saying it was “based on the published figures”.

Last week he declared “all bets are off”.

"We were confident that we could deliver a surplus based on what the government was telling us until just before Christmas," he said. "But all bets are off given that the Government won't tell us what the deficit will be."

His treasury spokesman Joe Hockey fleshed things out. Enforced austerity at a time when the economy was fragile could send things pear-shaped.

“It is important to be prudent,” he told an investment conference. “We are not going to go down the path of austerity simply to bring the budget back to surplus, because it would end up being a temporary surplus depending on how deep the deficit is that we inherit.”

“The challenge will be how to get the settings right to bring the budget back to surplus, to start to pay down some of the government debt - whilst at the same time not constraining what I think will be a sense of optimism and hope if there is a change of government,” he said in further remarks not previously reported.

“I think companies will unleash their balance sheets, and I think consumers will as well if there is a change of government, and I am very mindful that we don’t want to be the ones that close down that optimism.”

The Coalition’s new caution about a swift return to surplus, coming months after the government’s embrace of caution, means there is now no mainstream political party promising to quickly end the deficits, or to quickly pay down the government debt they will pile up.

In January Hockey was committed to a surplus “to the core of my bones”. Events since have chilled those bones.

The Reserve Bank is worried there simply isn’t enough happening in the economy to take the place of mining investment as it turns down. The December quarter national accounts released in March showed machinery and equipment investment down 2.5 per cent. Hours worked slipped 0.1 per cent. Household spending climbed just 0.2 per cent.

The consumer price figures released Wednesday put March quarter seasonally-adjusted inflation at just 0.1 per cent. Businesses are having to discount to get Australians to spend. (Woolworths cut average prices 2.5 per cent in the quarter). The discounting is squeezing their profits and providing little reason to invest, at exactly the time the economy needs non-mining investment.

To further cut government spending at such a time could risk recession. Overseas the idea that government debt itself causes recession got hammered at about the same time as the Coalition’s rethink in Australia...

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Internationally renowned economists Carmen Reinhart and Kenneth Rogoff became disciples of the austerity movement in 2010 when they published a provocative paper entitled “Growth in the Time of Debt”. They claimed to have discovered a tipping point. Government debt didn’t seem to do much harm until it reached 90 per cent of gross domestic product. But from that point economic growth crumbled.

“Even advanced economies hit a ceiling,” they wrote. “Current debt trajectories are a risk to long-term growth.”

Mitt Romney’s vice presidential running mate deployed their finding in campaigns. In Britain an advisor to David Cameron used it to back spending cuts which as it happened pushed the UK into recession. In mainland Europe it prodded already weak economies to cut spending further.

At the University of Massachusetts a graduate student had been having trouble with his homework. Thomas Herndon had been trying to replicate Reinhart and Rogoff’s findings. Eventually they gave him their spreadsheet and showed him how to use it. When he did he found glaring - almost inconceivable - errors.

In attempting to average 20 cells on their Excel spreadsheet they had only highlighted 15, leaving out the first five in the alphabet - Australia, Austria, Belgium, Canada and Denmark. And there was more. When he and his teachers recalculated the spreadsheet the tipping point disappeared. All that remained was a mild negative correlation between government debt and growth, one more likely to be the result of weak growth pushing up the debt ratio than other way around.

A laughing stock on US television all week and mocked more seriously by US economist Paul Krugman as the “coding error that destroyed the economies of the Western world,” the findings had carried weight in Australia. Just this week the Grattan Institute cited them in support of the proposition that high debt could slow economic growth “for a long time”.

Austerity for austerity’s sake is suddenly unfashionable. The Grattan Institute’s talk of a decade of deficits has become more of a forecast rather than a warning.

The Reserve Bank meets in ten days time, a week before the budget. It is increasingly concerned about the economy and it’s in no mood for austerity.

In today's Sydney Morning Herald



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Swanny's budget just got $1 billion worse

Shane Wright has the details:

Treasurer Wayne Swan’s troubles bringing the Budget back into the black are getting worse as he faces a blowout in interest costs on the Government’s mounting debt.

The interest bill on the nation’s $267 billion gross debt, to be revealed when the Budget is handed down on May 14, is expected to be at least $1 billion worse and could be pushed out even further.

The Government’s interest bill this year was forecast to reach $12 billion in the mid-year update.

It was predicated on near-record interest rates and a Budget surplus that would drag down the Government’s overall debt.

The mid-year update was done when the interest on long term Government debt was at 3.1 per cent.

Since then interest on Government debt has increased in line with the improving outlook for both the global and Australian economies.

It now stands around 3.6 per cent

Over the forward estimates that 0.4 percentage point difference on a larger than expected debt that will peak close to $270 billion will cost Mr Swan’s Budget bottom line...

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Falling interest rates on Government debt have saved Mr Swan billions of dollars over recent Budgets.

In the 2011-12 Budget the Government forecast it would be paying $12.9 billion on its outstanding debt for the 2013-14 financial year.

That forecast was sliced to $11.7 billion in the most recent mid-year update. Billions more have been sliced from the forward estimates because of those lower interest rates.

The lift in global interest rates has been driven by the improvement in the economies of the United States and China. It was the faltering state of the global economy that originally brought down those rates.

The higher interest rate will not only hit the May Budget bottom line but ripple through future budgets.


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"Get your economies moving". What Swan actually told the G20

Group of Twenty finance ministers concluded their two day summit in Moscow Sunday with a pledge to avoid a global currency war, but Australia's Treasurer Wayne Swan thinks they’ve missed the point.

In a forceful intervention near the end of the conference Mr Swan said much of the talk about “so-called currency wars” was “completely misguided”. It “unhelpfully reduced the focus on the G20’s critical agenda to boost growth and create jobs”.

What other finance ministers thought of as intervention to devalue currencies was more often the byproduct of completely appropriate moves to try and kick-start economies.

“Global growth with a ‘3’ in front of it simply won’t cut the mustard if we want to reduce the unacceptably high levels of unemployment,” Mr Swan told the summit.

“We all agree that countries shouldn’t be targeting exchange rates for competitive purposes, but what we should support is domestically-focussed policies in the major advanced economies aimed at boosting growth and jobs.”

“There is a big difference between indirect effects on market exchange rates from accommodative monetary policy and actually engaging in competitive devaluation.”

“Quite frankly, I think we’re seeing central bankers in the world’s biggest economies take unconventional measures to support growth and jobs because interest rates are already near-zero and fiscal policy is not providing enough support to growth".

“We need to see governments in many advanced economies get rid of the handbrake on growth that’s coming from damaging fiscal austerity.”

“You don’t need to slash and burn now to put your budget on a sustainable path over the medium term – in fact, cutting too hard now will rip the guts out of growth and leave you with higher debt later on.”

The summit ended with a communiqué committing members to “refrain from competitive devaluation”.

‘‘Politically-motivated devaluations can’t sustainably improve competitiveness, they don’t solve structural problems and they set off reactions,’’ said Bundesbank President Jens Weidmann. ‘‘The clear language in the communique underlines this unity and will allow the debate in the future to take place with a less excited tone.’’

The new commitment is probably aimed at telling the Japanese that while they can stimulate their economy, they shouldn’t target the yen, said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London. ‘‘It makes it harder for the Japanese to talk down the yen, but they will let their policies do the talking,’’ he said.

Japanese officials in Moscow insisted the fall in the yen was a byproduct - not a target -of their effort to revive the world’s third-largest economy, a view supported by Mr Swan.

Earlier he had told Bloomberg television the yen’s devaluation was ‘‘a matter for the market. The Japanese approach was “to stimulate their domestic economy. That is also good for the global economy.’’

Bank of Japan Governor Masaaki Shirakawa said the G20 communique was ‘‘absolutely in the same spirit as our monetary policy.”

‘‘The Bank of Japan’s measures have been and will remain targeted at achieving a robust economy through stable prices,’’ he said.

The ministers also pledged to crack down on tax avoidance by multinational companies.
The communique said members were determined to to stop firms shifting profits to pay less tax.

In today's Age


HOCKEY'S TAKE

The Hon Joe HOCKEY MP

SHADOW TREASURER
Monday, 18 February 2013

MORE DEBT IS NOT THE ANSWER

Wayne Swan is yet again in Wayne’s world. Wayne Swan’s call for developed countries at the G20 to take on more debt is ludicrous.

The Treasurer must recognise that if debt is the problem then more debt is surely not the answer. All countries must learn to live within their means and Australia is no exception.

Wayne Swan’s call is code and cover for Labor to keep on borrowing, and is the clearest sign yet that he is trying to justify the fact he has lost control of our nation's finances.

Julia Gillard and Wayne Swan have driven up Australia’s credit card to over a quarter of a trillion dollars.

Labor does not live within their means; it is just not in their DNA. They never have and they never will.

[ENDS]







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What about the sovereign risk? Er....

Play with the slider:

Months after the mining tax, the carbon tax and Labor’s fourth successive budget deficit Australia has been rewarded with an upgrade by the world’s biggest fund manager.

Blackrock is one of the world’s most important buyers of governments bonds, investing $US3.7 trillion worldwide. It says Australia’s carbon tax and the mining tax have had at most a “marginal” impact on perceptions of country risk. More important has been the government’s success in shrinking its budget deficit.

Its new sovereign risk update ranks Australian government bonds as the world’s seventh least risky, up from the tenth least risky three months ago. No other nation has jumped three places in the latest survey.

The finding is at odds with a claim by the Coalition's Treasury spokesman Joe Hockey in August that Labor was “adversely impacting Australia’s sovereign risk profile”.

BlackRock’s Australian head of fixed income Steve Miller said Australia’s position was “exceedingly strong” and strengthening.

“The plain fact is, compared to the rest of the world - and this is what we are doing - Australia's public debt position is very, very strong. Whether you are looking at budget balance or public debt to gross domestic product, whichever way we look at it Australia comes out exceedingly strong.”

The new Blackrock survey rates the governments of Norway, Singapore, Switzerland, Sweden, Finland, Canada, Australia, Taiwan, Germany and Chile as the ten safest to lend to.

The United States is in the next ten along with New Zealand and China, which have each moved up two places.

At the bottom in positions 40 to 48 are Spain, Argentina, Ireland, Italy, Venezuela, Egypt, Portugal and Greece. Japan and South Africa have each slid two places to 35 and 36.

“All other things being equal this and the things that brought it about will put further downward pressure on bond yields,” said Mr Miller referring to interest rate Australia needs to pay to borrow money. Mr Miller said it would also make it easier for Australian state governments to borrow money...

The Blackrock calculation accords with those of the world’s top three credit ratings agencies which have given Australia their highest AAA rating. But it is a more recent calculation and the improvement reflects recent developments.

“The impact of the mining tax and the carbon tax would be marginal,” said Mr Miller. “We look at ability to pay and willingness to pay. Australia’s budget position has improved. It has never defaulted. It has low debt by international standards.”

The Blackrock calculations were finalised before Treasurer Wayne Swan disowned his promise of budget surplus on December 20. Mr Miller said the new position made little difference.

“I don't think bond markets would be that rankled by the difference between a surplus of 0.1 pc of GDP or a deficit of 0.1 per cent,” he said. “I don't it would have a material impact on Australia's ranking.”

Acting Treasurer Penny Wong welcomed the report as an “endorsement of Australia’s strong public finances in the face of global headwinds”.

A spokesperson of Mr Hockey said the reality remained that business leaders had “expressed serious concern about the chopping and changing of government policy, the uncertainty of the taxation environment and the toxic relationship Canberra has with many members of the business community”.

“Unquestionably, eight changes to the carbon tax, five versions of the mining tax, unexpected changes to business taxation, and the four largest deficits in Australia’s history impacts on Australia’s attractiveness as an investment destination,” the spokesman said.

In today's Sydney Morning Herald and Age

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You'll no longer be able to rely on government bonds - Robb

The Coalition will ask investors to prepare for a world with far fewer government bonds in an address in Melbourne Wednesday, saying as it acts on its promise to cut net government debt to zero there will be a “commensurate reduction in the issuance of government bonds”.

In their place it will commit itself to develop a retail market in corporate bonds to rival the share market, saying it makes “no sense” for investors to have easy access to equity yet almost none to lower-risk corporate bonds.

“In March 2009 Tabcorp issued a 5 year retail senior bond - the first vanilla retail bond since Telecom Bonds in the 1980s and 1990s,” finance spokesman Andrew Robb will tell the Melbourne University economics faculty.

“Since then there have been less than five large, quality issues. At this rate a deep and liquid market will never be developed.”

Mr Robb will quote NAB wholesale banking executive Rick Sawers as saying: “If I arrived from outer space this morning I could probably buy shares online by 5pm today, but it is much more difficult to buy a bond.”

“The Coalition understands that until there is a comparable market, government has not fulfilled its role and once there is, government should allow the market to function,” Mr Robb will say.

“In dollar terms, Commonwealth government securities were our second biggest export in 2011-12 at $58 billion."

“Our determination to start paying off Commonwealth net debt will of course see a commensurate reduction in the issuance of government bonds"...

Australia’s banks should be particularly keen to buy corporate bonds as the supply of government bonds winds down and they are forced to comply with Basel III liquidity regulations. Overseas bonds are expensive.

In today's Sydney Morning Herald and Age


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Hockey wants to hold down the debt ceiling

What could possibly go wrong?

The Coalition has raised the prospect of a United States style move to block government attempts to lift the debt ceiling, raising the prospect of turmoil on financial markets.

While not saying outright the Coalition would block the increase to $300 billion proposed in the budget, shadow treasurer Joe Hockey told the press club yesterday enough was enough.

“Labor has now sought increases in the debt limit of the Commonwealth from $75 billion to $200 billion, to $250 billion and now $300 billion. On each occasion they promise not to exceed the limit. Well, enough is enough - we are going to keep them to their promises,” Mr Hockey said.

Australian Office of Financial Management chief Rob Nichol has asked for an increase in the limit to cover seasonal peaks in need for finance. While the government will be gin the financial year with less than $250 of debt on issue and the end the year with less than $250 it projects a peak during the year in May 2013 of $260 billion. Without an increase of the $250 ceiling and without some headroom for contingencies the Commonwealth runs the risk of being unable to meet its obligations.

Mr Hockey said yesterday the Coalition would move an amendment to the appropriations bills to excise the debt ceiling measure in order to bring on a separate debate.

Financial markets consultant Stephen Koukoulas, a former advisor to Prime Minister Gillard, warned things could get “ugly” if the debt ceiling was held down.

“Think back to what happened mid last year. Congress was going to block a required increase in the US debt ceiling. The US government was going to miss its bills. I don’t want to overstate it, but things got pretty ugly... Around 80 per cent of our bond market is held by foreigners. We can’t afford to alienate these people by playing silly buggers with the ceiling.”

Pleading the with the Coalition to leave the issue alone he said there were “a million and one things the opposition can argue about, and should argue about, but the debt ceiling is one of the few things in my views that should be depoliticised. The opposition can politicise anything else it wants.”

Mr Hockey also promised to inject outsiders into the top echelon of the Tax Office, adding four so-called Second Commissioners to the existing three. The would be part time and have “deep experience in the private sector”. All would be based outside Canberra and ideally some would be from regional Australia and small business.

Monash University professor Rick Krever, a former visiting academic at the Tax Office said he doubted the outsiders would make much difference. “They will discover as I did that most of the problems are with the tax laws, not the way they are administered. The tax laws are the responsibility of Treasury.”

In today's Sydney Morning Herald and Age


Stephen Koukoulas on this morning's RN Breakfast:

11 minutes, play or CLICK THEN CLICK AGAIN to download mp3





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MYEFO - Repaint the debt truck!

Here's me in the National Times:

Treasurer Wayne Swan had held a sit-down press conference in Canberra complete with Power Points.

His shadow Joe Hockey held a stand-up "doorstop interview" at the back of NSW Parliament House. And the Opposition's Debt Truck was no-where to be seen.

Perhaps it was in for a paint job.

When last taken out for a spin it had "Labor's Debt bombshell - $315 billion" written on the side.

Always a piece of sophistry - the $315 billion was the meaningless gross figure rather than the more useful net figure - it's now not even in the ballpark.

The Mid-Year Budget update has net government debt peaking at $153 billion rather than the $203 billion expected at budget time.

Divide that by each man woman and child in the country and you get... well not the kind of burden you would have, because annual GDP is also set to be some $50 billion higher than it was going to be.

Yes.

Much of the expected debt simply won't be run up, and it will be easier to repay.

That's what happens when swift action to stop the economy stalling has what the Treasurer calls a "greater than expected impact".

Continued at National Times

The economy will grow this financial year rather than sliding as expected at budget time. Unemployment will peak at a not-too-bad 6.75 per cent mid next year instead of the expected 8.5 per cent. Future budget deficits are set to be up to half what was expected.

Too good to be true? Well it is true the Treasurer didn't expect it. His measures have worked better than he thought they would (and so did China's, just as importantly).

But it isn't true that he and the Treasury were deliberately pessimistic in May in order bring us better news now. Just about everyone was pessimistic in May, scared even. Most commentators believed the Treasury was underplaying how bad things were going to get, as Wayne Swan enthusiastically pointed out today, metaphorically waving at a pile of Budget newspaper clippings.

We're on our way out of the woods, but it'll be bumpy. Every one of the stimulus measures had an end date, and as they end we will feel the bumps.

The bumps will be made harder by the Treasurer's pledge to bank future unexpected increases in revenue. Taken literally the pledge means that next year's government election promises will be fully funded.

It'll repeat that. Taken literally the pledge means an austere election campaign, and an austere five or so years. As we should be in the aftermath of the cash splash.

The Coalition is promising austerity too. At the back of the NSW parliament Joe Hockey pointed to $4 billion of cost overruns identified in the Mid-year update, and implied they wouldn't happen if he was Treasurer.

Lets hope not.

Hockey himself had trouble managing taxpayers' money as Human Services Minister in the last government, spending millions promoting the so-called Access Card and actually calling for tenders before the Senate approved legislation it subsequently let lapse.

But if he and Wayne Swan are in favour of austerity now, that's good. We'll need it as the recovery takes hold.

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The Coalition Debt Truck: Running on empty

The Coalition's campaign against government debt has been unfortunate on many levels. Now its figures are wrong:




Australia's government debt is set to top out at just $108 billion rather than $200 billion and more used the Coalition to justify its claim that the Rudd government plans to "lump every Australian with $9500 in debt".

The updated estimate from Westpac - a near halving - reflects a much stronger than expected economy and comes as an official Reserve Bank survey finds that Australian banks ramped up their interest earnings 22 per cent during the global crisis and that Australian businesses succeeded in raising more money from the share market than at any time since the 1980s.

The Reserve Bank's Financial Stability Review finds conditions have "improved significantly" and that its time for banks to wean themselves off $142 billion in government borrowing guarantees.

Westpac finds that this year's underlying cash budget deficit is likely to be $49 billion rather than the $58 billion forecast at budget time and that next year's should be $35 billion, far less than the budget forecast of $57 billion...

As well the government is likely to have banked an extra $5 billion at the end of the last financial year as a result of higher than expected tax receipts and also lower than expected grant payments. Grant payments alone have been running $6.5 billion below forecasts, causing Westpac to caution that its estimates may prove pessimistic.

"The effect on government debt will be cumulative," said Westpac senior economist Andrew Hanlan. "We're forecasting a peak of $108 billion in 2012/13 rather than the $188 billion forecast in the budget. The $80 billion improvement is simply the sum of the improved budget positions over those years."

The Coalition used a bigger figure of $200 billion in its advertising in May and in July boosted it to $315 billion on its so-called debt truck, a figure Opposition Leader Malcolm Turnbull said was "over 13,000 of debt for every man, every woman and every child in Australia".

The government will officially update the budget forecasts in December. Mr Hanlan said Westpac's projections were prepared on the basis of "no policy changes" over the next three years, meaning that any new spending promised during the next election would add to the debt estimate.

The revised Westpac forecast takes some of the heat out of Monday's Senate hearing set up to quiz Reserve Bank Governor Glenn Stevens and Treasury Secretary Ken Henry on the "efficacy and anticipated costs and benefits" of their stimulus measures.

Other figures released yesterday point to an avalanche of new home sales in August ahead of the phasing out of the $21,000 First Home Owners Boost for new buyers buying newly built homes. National new home sales jumped 11 per cent in August as did NSW sales - the biggest jump in three years - with Victorian sales up a staggering 22 per cent, believed to be the biggest jump on record.

In an indication of the potency of the boost the Reserve Bank report found that first home buyers have been paying more for their homes than other buyers; "an unusual outcome by historical standards".



The Bank found that private banks managed to widen their interest margins during the financial crisis, driving up their net interest income 22 per cnet over the year. Businesses raised double the usual amount of equity in the first half of this year and households enjoyed a 4 per cent lift in disposable income despite working fewer hours, as a result of tax cuts and stimulus payments.

Published in today's Age

UPDATE: The Coalition has told me where its $200 billion, later replaced with $315 billion debt figure came from.

They were both mentioned by Swan in Hansard on 25 May, the first for net debt, the second for Gross debt. The Coalition used the $200 billion net figure in its advertising at first, and then switched to using the $315 billion gross figure. Mmmm...

Westpac Budget Update

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