Now its a global trade war. Soon. Modelling.

A global trade war is likely and a recession in the industrialised world certain unless the United States takes drastic action to unwind its budget deficit - action it is most unlikely to take, the Australian conference of economists has been told.

Unveiling economic modelling prepared for the World Bank, outgoing Reserve Bank board member Warwick McKibbin and trade economist Andy Stoeckel told the Canberra conference the biggest risk to the golbal economy lay in European nations cutting debt while the United States - one of the biggest debtors - did not.

“There is no incentive for the US to wind back debt unless they run into a financial crisis,” Professor McKibbin said. “The optimal policy is to inflate like crazy because that way they can solve their debt problem by getting rid of interest servicing costs. Because all the US debt is US dollars it is the easy way out. If they can’t raise taxes and they can’t cut spending, they can inflate.”

McKibbin and Stoeckel’s modelling shows that if all indebted countries but the US wind back their debts, the freed-up capital will go into financing the US deficit pushing up the US dollar and sucking in imports.

“The massive US trade deficits would get bigger. Looking at the scale of these things you could argue the policy response in the US Congress would be to slap on trade protection, bringing on a global trade war.”

In order to stabilise its debt by 2030 the US would need to shrink its budget position 12 per cent in the next decade. “It would need to turn a budget deficit of 10 per cent of GDP into a surplus of 2 per cent. It’s a massive challenge,” Professor McKibbin said.

“On the other hand Greece is not sustainable at all... It is not only fiscally bankrupt, but 30 to 40 per cent non-competitive. Even if it paid off all its debt tomorrow it would still need to depreciate by 30 to 40 per cent in real terms. It can’t do it within the Euro. It is already gone. I think the Euro won’t exist in its current form within 12 months.”

While a recession in the industrial world and a trade war centred around the US would be unsettle the globe, it would not bring on a worldwide recession. “Developing countries and Australia will continue to do well,” Professor McKibbin said.

“Debt levels in much of the developed world are unsustainable. Credible plans to unwind them would help. Plans that aren’t credible will cause much more pain.”

Published in today's SMH and Age

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Abbott. Economists vote.

Wednesday column

Tony Abbott’s already low opinion of economists is about to sink. Asked a week ago why he thought it was that most economists supported a carbon tax or an emissions trading scheme rather than his own “direct action” plan to tackle climate change he replied: “maybe that's a comment on the quality of our economists rather than on the merits of argument”.

The nervous laughter (he was speaking to a tent full of policy economists in an especially constructed marquee at the Melbourne Institute’s annual outlook conference) reflected both an appreciation of his cleverness in managing to deflect the question with humour, and also concern that someone who wants to be Australia’s next chief executive thinks so little of the people who would be his chief advisers.

Among those at the conference were Gary Banks, David Gruen, Greg Smith, Ross Garnaut, and the current head of Treasury Martin Parkinson - world class economists who have spent decades of their lives advising governments of all persuasions on the best ways to navigate economic challenges and boost prosperity. They have achieved great success. We would be poorer had they failed. They regard their mission as anything but funny.

Today in Canberra several hundred of Australia’s leading academic economists will deliver their verdicts.

At the start of their three-day annual conference the delegates were given voting slips and asked to put a tick next to either the “direct action” plan put forward by Tony Abbott or the carbon tax transitioning to a trading scheme proposed by Julia Gillard.

Abbott will get slaughtered. In some ways it’s an unfair contest... Many of the economists voting don’t know how Abbott’s policy would work. Most of the Australian public don’t know how it would work.

In his address to the nation Sunday night Abbott said it would mean “more trees, better soil and smarter technology” - which is nice, but to economists not a policy.

Gillard’s policy can be understood. It takes on board the two key lessons learned in economics over the past two centuries - that relative prices matter, and if you change them you change behaviour. Want more babies? Offer a baby bonus. Want more people to work? Raise the tax-free threshold, and so on.

My inbox get a drip feed of emails telling me at various times that higher taxes on cigarettes don’t cut smoking, that higher prices for wine wont cut drunkenness, and the like. None of these claims are true. When Gillard says higher prices for pollution will discourage pollution, economists are inclined to believe her.

They like too that her plan eschews the creation of a massive new bureaucracy to hand out grants for worthy programs to cut emissions. Although economists such as Banks, Garnaut and Parkinson work for the government, they are rightly contemptuous of its ability to pick winners. The market can do it for free.

And there’s something else. Gillard’s scheme offers certainty - not just for the next nine years as does Abbott’s scheme, which spells out a plan to achieve emissions reductions until 2020 and then stops - but to 2050 and beyond.

Whether firms like the prices imposed by the Gillard scheme or not, it lets them do the sort of planning they need to do when they are considering installing long-lived equipment such as new power plants or bidding for firms such as Queensland’s Macarthur Coal. The scheme doesn’t necessarily make the outlook for Macarthur Coal better - it may make the outlook worse, allowing Peabody Energy and ArcelorMittal to pick up their $4.7 billion target more cheaply - but it does make the outlook more knowable.

The Coalition's direct action plan is a mystery beyond 2020. The policy document presents this as a selling point. “Unlike Labor’s emissions trading scheme, the Emissions Reduction Fund will give Australia maxium possible flexibility to adapt to changes in global developments,” it says.

Bending over backwards to explain the virtues of his party’s policy in May Malcom Turnbull explained that: “If the theory of climate change was proved to be nonsense, then obviously there would be no point in cutting emissions at all. If the rest of the world ultimately resolved to do nothing then we would very likely be be better off spending the resources available on adaptation – moving to higher ground and so on.”

If ,as is more likely, there remains a need to cut emissions beyond 2020, businesses will need another round of government handouts, another round of non-self-funding public bribes to get them to continue their worthy programs and begin even more. And then a further round.

Those in the profession that do understand what Abbott’s policy might create are horrified. Some have devoted their working lives to pulling business off public welfare.

Dependent on a bureaucracy as Abbott’s scheme would be, it would be less effective than the market in allocating resources.

An Audit Office study of grants made under existing state and federal schemes found they were slow to cut emissions. Some took 2 years longer than promised. None of those studied had managed to spend more than 40 per cent of its budget in the time allocated. A separate Grattan Institute study found that in the past decade only 3 per cent of environmental grants had produced operational projects in the first five years, and only 18 per cent in the first ten years.

No wonder economists prefer the market. It may not be not perfect, but its quick.

And cheap. The NSW government’s Greenhouse Gas Abatement Program is widely acclaimed as the most successful of the grant programs. It has achieved reductions at a cost of $40 per tonne. Gillard’s scheme will do it for $23 per tonne.

Some at the conference Monday disparaged the whole idea of a vote. They think the answer’s obvious.

Published in today's SMH and Age


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Who's ahead? Who's behind? The numbers the government didn't publish:

There isn’t a household in Australia that won’t be (at least slightly) better off under the tax changes announced by the prime minister, but when the carbon price is set against the tax cuts around one-third will be worse off.

From mid next year no-one earning up to $18,200 need pay tax. By mid 2012 the cutoff will be $19,400. Treasurer Wayne Swan says the change will free more than 1 million Australians from having to file a return.

In order to counteract the extreme generosity of the measure (the present tax-free threshold is just $6000, and $16,000 for workers using the low income offset) the government will actually increase the marginal tax rate facing the bulk of Australians earning between $37,000 and $80,000 - lifting it from 30 per cent to 32.5 per cent next year and lifting it again to 33 per cent in 2015.

The net effect of the carefully designed changes will be to ensure that everyone gets a tax cut, even if it’s an imperceptible $3 a year for Australians earning more than $85,000.

For more modest earners the benefits are large - $626 a year for a single earner on $20,000, $1226 for a dual-income couple with two children on $75,000. They are more than big enough to pay for the higher bills that will result from the carbon tax, leaving the dual-income couple $687 a year ahead.

But for an individual the net effect is negative from $50,000 per year, for some families with children negative from $80,000 per year...

Families on $200,000 will find they are well into negative territory, paying an extra $900 per year in bills with scarcely any compensation. Individual on $200,000 will be $950 per year worse off.

Prime Minister Gillard defended the limited compensation saying there was “no money tree”.

“The budget has got to add up. We have made choices and we will stand by those choices. I understand many Australians right up the income scale feel cost of living pressures, but we have directed assistance to those families and Australians we believe need it the most.”

Pensioners, students and Australians on unemployment benefits will will receive a payment equal to 1.7 per cent of the maxium benefit, nine months of which will be paid upfront in May of June 2012 ahead of the introduction of the carbon tax in July. Worth up to $250 for a pensioner the payment will have to las t until March 2013 when future increases will be delivered through the regular payments system.

Seniors card holders will receive a supplement of $338 for singles and $255 for each member of a couple, the same sum delivered to pensioners. Payments to aged care recipients will be split 50:50 between the recipient and the care provider.

Treasury says the changes will push prices 0.7 per cent from mid 2012 and by a further 0.2 per cent from 2015 when the carbon tax gives way to an emissions trading system.

From mid next year the price of electricity will rise a further 10 per cent as a result of the carbon tax, and the price of gas a further 9 per cent. The price of food is expected to scarcely move, advancing less than one half of one per cent as a result of the tax.

Pensioners will be more affected than other Australians by the price rises, suffering average increases of 1 per cent.

Treasury says to the extent pensioners and others “reduce their consumption of goods whose relative prices have risen” the impact on the prices they pay will be smaller.

www.cleanenergyfuture.gov.au


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When Treasury modelled a minor tax change...

An abundance of black coal will make NSW one of the hardest hit states by the climate change plan, with the state production forecast by Treasury to be 3 per cent lower than it otherwise would have been by 2050.

The calculations show the lightly-mined states of South Australia and Tasmania little affected, losing less than 1 per cent of state output and Victoria only mildly hit, losing 2.5 per cent. Even iron ore and gas rich Western Australia escapes more lightly than NSW, losing 2.75 per cent of state output.

Although large by 2050, the differences between the states are tiny year by year. Officials who worked on the Treasury modelling say the annual impact every state will be close to 0.1 per cent, which is the national impact.

Treasury has made what appears to be a heroic assumption that there will soon be a global carbon price. But it has done no more than assume world leaders will keep to the “less ambitious end” of the pledges they have already made. That assumption itself depresses, the ‘starting point’ for the Treasury’s analysis, but not by much. Treasury says it will take the world 16 months longer to reach the combined income it would had by 2050.

Compared to this slightly depressed world outlook Australia’s outlook will be every-so-slightly more depressed, but not so you would notice on a graph... The Treasury has drawn two lines, with and without carbon pricing, that touch.

“The changes to the Australian economy from pricing carbon are small by historical standards and small compared to the changes we are already seeing in our economy as it adjusts to accommodate the pressures of Mining Boom Mark II,” the document says.

“Gross national income has risen more than 30 per cent over the past seven years. In contrast, pricing carbon will only slightly slow growth in Australian income per person so it is about half a percentage point below where it would have otherwise been in 2020.”

Consumer prices will jump 0.7 per cent in 2012-13, much less than the 2.5 per cent increase that followed the goods and services tax. Treasurer Swan said the Treasury modellers were the most professional in the business, the same people who had correctly forecast the effect of the Coalition’s GST.

Prices will jump again by a further further 0.2 per cent on the transition to a emissions trading system in 2015-16. Combined, the impact on average household spending will amount to $13.40 per week, much of it from a $4.20 increase in the price of electricity. The average food bill will climb $1.10 per week.

Employment will grow by around 1.6 million people by 2020 and a further 4.4 million by 2050 with or without a carbon tax. Although some industries will grow faster than they would have and others slower the changes will be “small compared to the usual churning of employment between firms and industries every year”.

The Treasury forecasts assume a carbon price of $20 per tonne, somewhat lower than the $23 price the government adopted. A separate set of forecasts based on a $30 per tonne price produces similar results.

The forecasts take no account of the economic benefits of reducing global emissions and so can best be thought of as an estimate of the costs.

The net cost to the budget is relatively small - $3.8 billion over four years. Adjustments to the timing of payments ensures the cost to the budget will be just $475 million in 2012-13, the year the government plans to return the budget to surplus.

Published in today's SMH and Age


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What'll the carbon tax do to prices?

Not as much as the GST:

From the Treasury economic modelling.

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C-Day. It's best done as a carbon tax - Abbott

He said it. Presumably he meant it.

Sky News sit-down interview, July 2009:

"I also think that if you want to put a price on carbon, why not just do it with a simple tax? Why not ask motorists to pay more, why not ask electricity consumers to pay more, and then at the end of the year you can a rebate of the carbon taxes you've paid. It would be burdensome, all taxes are burdensome, but it would certainly change the price of carbon, raise the price of carbon, without increasing in any way the overall tax burden."

The context? Well the context is important.

Here's the whole thing. The interview was unedited and ran for 13 minutes. Abbott made the case for a carbon tax unprompted. He wasn't led into it.

Yes, in the interview he also with declared his support for Malcolm Turnbull, said the Coalition should agree to the emissions trading scheme, and spoke of the need to return to elements of WorkChoices -- all positions he has since repudiated.

Yes, the carbon tax he proposed would be ineffective.

But it is worth listening to the context. The carbon stuff begins 7.00 minutes in:

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If this graph doesn't awe you... Meet Google's Hal Varian

Ask Google’s chief economist a question about the future and he goes quiet. “Who knows,” he says when asked whether the share price of high tech companies can keep rising.

But ask Hal Varian about the present and he’ll tell you the possibilities are endless. He’ll be in Australia Monday delivering the keynote address to the annual conference of economists entitled Forecasting the Present.

On the phone from California where he is preparing the board the flight he directs me to a website that allows me to track Australian searches for terms related to flu in close to real time. I can see that so far this year inquiries have been mild, except in South Australia. By contrast in 2007 inquiries about the flu went through the roof.

Exceedingly closely correlated with actual cases of the flu, the web search data comes weeks or months sooner than the official statistics.

In countries where they don’t have as good statistics it is saving lives. Bolivia and Brazil are using Google’s dengue fever data to help direct resources to areas in need as outbreaks strike.

In the United States some economists no longer wait for the official unemployment figures...
“Terms such as - how do I apply for unemployment benefits, how long do they last - it turns out these are highly correlated with actual claims for benefits. We can spot turning points sooner,” says Varian.

In Australia the key word is Centrelink. Searches using that word surged in late 2008 and 2009 during the global financial crisis and - disturbingly - are peaking now, especially in NSW and Queensland.

In Canberra Professor Varian will meet with officials from the Australian Bureau of Statistics to tell them he doesn’t want to replace what they do, merely bring it forward into the present.

“Those agencies have a wealth of well-classified historical data. We can use that to establish correlations and then produce real-time guesses about what’s happening now. Agencies such as yours calculate the rate of inflation collecting prices by hand. We are doing it using barcode and merchant fee data.”

The Google Price Index, one of Varian’s pet projects, is said to closely match the US personal consumer expenditure index excluding food and energy.

“We haven’t seen any divergence yet,” says Varian. But he is fine tuning it before taking it public.

Until recently Varian was a professor of economics at the University of California Berkley specialising in public goods - the sort of things that are produced for the good of society rather than money. For a few years during the 1980s he worked at Melbourne’s Monash University.

When the barely profitable Google asked him to help out in May 2002 he was thrown an embryonic scheme called Ad Auction and told “look at this, it might make us some money”.

Applying the insights of game theorists including John Nash, made famous in the movie the A Beautiful Mind he realised Google had stumbled upon something with the ability to make money for both advertisers and itself. Its key was charging the winning bidder only the price of the bid that came second, allowing bidders to more freely reveal what they thought the ad was worth. He set up a continually moving exchange rate that converts views to clicks and then helped ensure the ads that won were quality ads, because otherwise web users wouldn’t continue to click.

Google now takes in $30 billion a year, the biggest chunk from Ad Auction. “It’s too much to say I’m the man who made Google make money,’ he says. “I just helped.”

His passion is data, and what it can do. A fan of the Issac Asimov Foundation novels in his youth he was taken with the idea of psychohistory, the fictional science of predicting the future based on applying maths to group behaviour. Economists were once frightened of data he says. They need to embrace it along with biologists who look for correlations between DNA and illness, psychologists who look for correlations between brain scans and behaviour.

“We live in a data-rich world,” he says. “The key is distinguishing the data that means something from the data that is noise.”

Asked to chance his arm with a forecast about the future he says the best way to take part is to “become a statistician, it’s the sexy job of the next decade”.

“If you find that hard to believe, think about computer engineers. Who would have guessed a decade ago they would have sexy jobs,” he says.

Published in today's SMH


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I think it's going to be a long, long time... space shuttle edition

When the last space shuttle launches after midnight our time it'll be over.

No more people into space, from the US anyway.

Russia won. Who would have thought?

(My colleague points out they still have fuel)

The knowledge that we could step into space shaped my life, and shaped my children's lives.

So here's the soundtrack.

Enjoy it, before its a mere memory:

Back to Elton and Bernie.

"I miss the earth so much, I miss my wife..."

That song does so much more than it should, like all the good ones.

Here's an extract from an uplifting Chicago public radio documentary, Everyone speaks Elton John.

A group of musicians were assembled from ads in the paper and asked to play:

Everyone Speaks Elton John by 1petermartin

I think it's going to be a long, long time.

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It's a two-speed economy aright. Hello Sydney..

Gaining jobs

Victoria + 25,300
Queensland + 4900
Western Australia +17,100
South Australia +11,100

Losing jobs

NSW - 22,100
Tasmania -1200

ABS 6202.0 Six months to June, trend

Clear enough?

Sydney has joined the upper ranks of the world’s most expensive cities as its economy turns sour. New figures show NSW shedding jobs at the fastest rate in the nation, losing 22,100 workers during six months in which every other state bar Tasmania built up employment.

The Bureau of Statistics figures show Victoria gained 25,300 jobs in the six months to June, Western Australia 17,100; South Australia 11,100 and Queensland 4900.

The losses in NSW turned what would have been a respectable national jobs performance into a mediocre one and helped redefine economic geography.

Victoria is emerging as a winner from what Treasurer Wayne Swan calls the “patchwork economy” along with the mining states of Western Australia, Queensland and - these days - South Australia.

The losing states - whose economies are lagging on a measures including wages, consumer spending, jobs and population - are NSW, the ACT and Tasmania.

The decline is new... During the second half of 2010 NSW outperformed the rest of the nation by a wide margin.

“A mirky election would explain some of it,” said Westpac economist Justin Smirk. “We knew what the result would be but didn’t know what the new government would be like. Consumers normally hide out during election campaigns.”

Sydney’s outsized finance sector might have something to do with it too. “Finance firms were hording labour last year in anticipation of good times. Now they are slimming down by not replacing staff,” said Mr Smirk.

The worldwide cost of living survey released yesterday by the Economist Intelligence Unit moves Sydney up two notches to become the sixth most expensive city in which to live.

Sydney’s prices eclipse those in London, Vienna, Rome, and New York. Only Toyko, Oslo, Osaka, Paris and Zurich remain more expensive. The survey includes rents, electricity, public transport, private schools and the price of domestic help.

The intelligence unit priced a one-day business trip to Sydney at $US627. The cost included one night's accommodation, a two-course meal, a simple meal, two taxi journeys, a drink in a hotel bar and an international newspaper.

The managing director of the Sydney-based funds management firm Rismark International Christopher Joye said much of the apparent increase would have measured the 20 to 30 per cent surge in the Australian dollar.

“Australians earn Aussie dollars, so a lot of that increase has had no impact on us. In fact the higher dollar has lifted our purchasing power. We can buy overseas goods more cheaply.”

“On the other hand we are now a more expensive destination for immigrants and visitors who pay in their own currencies. Our cost of living is increasing faster than other developed countries and this will get worse as the investment boom squeezes out our remaining spare capacity.”

Australia’s national unemployment rate remained steady at 4.9 per cent in June as jobs growth did little more than keep pace with population growth. The NSW unemployment rate climbed to 5.2 per cent. Victoria's slipped to 4.6 per cent and Western Australia’s to 4.2 per cent.

Treasurer Wayne Swan welcomed what he said was evidence of one of the strongest economies
in the developed world. “When the global financial crisis hit, our unemployment rate was the same as the United States. Now it is half that,” he told parliament.

Published in today's SMH

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6202.0

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Carbon tax. You want GST on top of that?

We'll know Sunday. Three more sleeps.

My colleague Shane Wright in the West Australian:

The States and Territories stand to share a near-$500 million windfall as the Federal Government's carbon tax pushes up prices and GST revenue.

In a blow to taxpayers, they face having to foot the bill of the carbon tax and the GST from the middle of next year.

But it will mean up to an extra $45 million for the WA Government.

The office of Treasurer Wayne Swan would not comment on the issue or whether the Government would release new forecasts for the economy under a carbon tax.

A carbon price of about $20 a tonne would drive up overall prices about one per cent, led by an increase of 15 per cent for electricity.

That one per cent would be magnified by the 10 per cent GST.

Tax experts questioned by The West Australian yesterday all agreed that because the carbon tax would push up prices, there would be some impact on the amount of GST collected.

This financial year more than $48 billion is forecast to be raised by the tax, with that rationed out to the States and Territories.

WA is fighting to get a fairer share of the tax while a review headed by former NSW premier Nick Greiner is looking at the complex system used to allocate GST revenue across the Commonwealth.

Treasury officials have previously confirmed that because of the way a carbon price interacts with prices, GST revenue would have to rise.

WA Government officials also expect the carbon tax to flow through to the amount of money that will ultimately end up with the State.

Apart from lifting overall prices, a carbon tax should have a small impact on overall economic growth, which could flow through to employment.

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Get worried, it'll be more than Greece - Swan

The Greek financial crisis could spread Europe-wide and then to the United States creating global turmoil, Treasurer Wayne Swan has warned parliament.

Delivering a ministerial statement Mr Swan said in recent weeks the risks to global recovery had become more pronounced and the recovery itself had weakened.

“We have seen a hit to the Japanese economy as well as disruption to international supply chains. In the United States, a depressed labour market, unprecedented weakness in the housing market and high oil prices are all holding back recovery,” he said.

“Most significantly, we have seen debt problems confronting a number of European economies – especially Greece. I welcome efforts to avert what would have been an immediate default. But we should not underestimate the challenges ahead.”

“The potential for contagion is significant, particularly in the event of a disorderly default or an unravelling of assistance. With banks in Europe and the US holding significant amounts of European government debt, such contagion could generate renewed financial market turmoil globally".....

The challenges were highlighted by a decision of the Moody’s credit rating agency Tuesday night to slash Portugal’s rating by four notches to below investment grade. Moody’s warned of an “increasing probability Portugal will not be able to borrow at sustainable rates”.

Mr Swan said it was “essential” other European nations took decisive action to assist Portugal, Greece and Ireland.

It was “not just Europe” that faced challenges of fiscal sustainability.

“The United States and Japan are faced with balancing the need to avoid undermining their economic recoveries in the short term, while setting in place credible medium-term plans to address high and rising public debt,” Mr Swan told Parliament.

The Treasurer’s statement is the strongest yet about the risk of a new global financial crisis and echos concern in the Reserve Bank governor’s statement released after Tuesday’s board meeting.

Ahead of that meeting outgoing board member Warwick McKibbin told a conference in Melbourne the global economy was facing a "slow motion train wreck" that could make the previous financial crisis look like a “blip”.

Shadow treasurer Joe Hockey accused Mr Swan of trying to distract attention from weakness in the domestic economy.

“Perhaps he wants us to believe the loss of confidence is linked to concerns on the international front,” he told parliament.

Published in today's SMH


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Hockey. Woolly on tax and costings

Here's the shadow treasurer at a press conference Monday for which he did not issue the usual transcript.

"If you look at payments as a percentage of GDP then the goal you would like to have is to get back to the last year of the Howard government, and the same with revenue."

As a goal this would mean cutting government payments as proportion of GDP from 24.5% to 23.2% and increasing government revenue as a proportion of GDP from 23.2% to 25%.

Here's the table, from Budget Paper 1:

Bookmark it for reference.

Another point he made at Monday's press conference was close to meaningless:

He said:

"The government is very fond of throwing Treasury's pre-budget analysis at us. The number the Treasury did look at was the amount of money we allocated to direct action [on climate change]. They didn't dispute that, there was no hole in that number."


Tim Colebatch takes up the challenge:


PRIME Minister Julia Gillard says never mind the carbon tax: if you get the Coalition's direct action plan for tackling climate change, you'll end up paying $720 a year per household to finance it.

Rubbish, says shadow treasurer Joe Hockey: Treasury has costed our policy and endorsed its estimates of both the cost and the planned outcome to cut Australia's emissions by 2020 to 5 per cent below 2000 levels.

Who is right? Neither. In fact, the Coalition never submitted its direct action plan for costing by Treasury. It was one of the hundreds of policies it refused to have costed, arguing it could not trust Treasury because it works for the government.

In the immediate aftermath of the campaign, at the request of the three independents, Treasury costed the policies of both sides (the famous costing that estimated the Coalition had overstated its savings by $10 billion over four years). But that costing did not even mention the direct action plan.

There was no need to. It's pretty obvious that a plan to spend $3.2 billion over four years would cost $3.2 billion over four years. Treasury did not endorse the Coalition's claim that this would be enough to cut Australia's per capita emissions in 2020 by a third from their present trajectory which the 5 per cent target implies.

Quite the reverse. An undated Treasury note released in April under freedom of information laws warned that the Coalition plan as proposed presents a "significant budget risk relative to a carbon price". For the Coalition to achieve its target of cutting emissions to 5 per cent below 2000 levels, the note maker wrote, it would need to be "scaled up . . . [and would be] likely to have major fiscal costs".

But how much? When Labor talks of $720 per household, it is making it up. Like the Coalition, it makes assumptions that suit it about how much these projects would cost, how much carbon abatement they would deliver, and how much the Coalition would then have to spend to buy international permits to meet the target.

The reality is that it's impossible to say how much the Coalition's scheme would cost. Few observers believe it will deliver anything like a cut of 33 per cent in per capita emissions by 2020. They say Tony Abbott would then have to choose between spending far more than planned or scrapping the target.

If you think he would choose to honour the target, then you can make your own guess as to what he might make you pay. But I think he would scrap the target.


Okay?


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As opposed to...

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No hikes. The RBA listens to evidence

The Reserve Bank no longer expects to raise interest rates this year. The new position follows an upgraded assessment of the risk of a new global financial crisis and a decision to abandon its Australian economic growth forecasts for 2010-11 and 2011.

For the first time the statement released after yesterday’s board meeting acknowledged the possibility that the global economy might not grow as strongly as expected, saying if did not, Australia’s medium term growth prospects would be in doubt.

The bank revised down its short-term economic growth forecasts. It had forecast growth of 2.5 per cent in the year to June 2011 and 4.25 per cent in the year to December. It now says neither forecast will be met, primarily because of a slower than expected return to production in Queensland’s flood-hit coal mines.

While the slower recovery in coal exports will delay the expected bound in economic growth, the bank believes other developments could subdue it. “Cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect,” says the statement released by governor Glenn Stevens.

Inflation - usually the trigger for higher interest rates - should be tame, or “close to target over the next twelve months”. So-called underlying inflation which is adjusted to remove the effect of events such as the Queensland floods is “in the bottom half of the target range, although a gradual increase is expected over time”...

At 2.25 per cent, the most recent measure of underlying inflation is benign. The Bank’s target is a range between 2 and 3 per cent. Inflation would need to jump sharply and soon for the Bank to feel any pressure to raise interest rates during the remaining months of this year.

The changed position reflects neither a disagreement at the board nor a weakening of the bank’s resolve to keep inflation within the target band, merely changed circumstances that have increased the risk of a global slowdown resulting from problems and Europe and put beyond doubt that Australian consumers are having a slowdown of their own, saving rather than spending to force up prices.

“I still think the Reserve has a tightening bias, it's just a question of timing,” said HSBC Australia economist Paul Bloxham. “This has shifted out the timing of the hike,” said the former Reserve Bank staffer.

“The tone is perhaps more conciliatory than ever,” said Credit Suisse economic consultant Sean Keane. “There is little apparent sign of the pressures that had previously occupied the governor’s mind. Its a fair bet that next month the Bank will revise up its forecast of unemployment and revise down its forecast of economic growth.”

Export figures released as the Reserve Bank board met show income from China growing at a breakneck pace with $58 billion earned in the 11 months to May, up from 41 billion in the same period the previous year.

Whereas three years ago Japan eclipsed China as Australia’s biggest customer, last financial year earnings from China exceed those from Japan by 23 per cent. This financial year earnings form China exceeded those from Japan by 37 per cent.

The figures show a slower than expected recovery in coal exports in April and May offset by strong growth in rural exports which climbed 5.7 per cent in April and 6.4 per cent in May.


WHO’S BUYING?

Our biggest customers

11 months to May

(growth on previous year)

China $58.3 billion (up 42%)
Japan $42.3 billion (up 28%)
Korea $20.4 billion (up 39%)
India $13.9 billion (down 4%)
United States $8.4 billion (down 3%)
Taiwan 8.4 billion (up 40%)

Published in today's SMH and Age


Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.
The global economy is continuing its expansion, but the pace of growth slowed in the June quarter. The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries have both contributed to the slowing. The banking and sovereign debt problems in Europe have also added to uncertainty and volatility in financial markets over recent months.

A key question is whether this more moderate pace of growth will continue. Commodity prices have generally softened of late, though they remain at very high levels. Despite the challenging international environment, the central scenario for the world economy envisaged by most forecasters remains one of growth at, or above, average over the next couple of years. A number of countries have tightened monetary policy but, overall, global financial conditions remain accommodative and underlying rates of inflation have tended to move higher.

Australia's terms of trade are now at very high levels and national income has been growing strongly, though conditions vary significantly across industries. Investment in the resources sector is picking up strongly in response to high levels of commodity prices and the outlook remains very positive. A number of service sectors are also expanding at a solid pace. In other areas, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect. The impetus from earlier Australian Government spending programs is now also abating, as had been intended.

A gradual recovery from the floods and cyclones over the summer is taking place, though the resumption of coal production in flooded mines continues to proceed more slowly than initially expected. The recovery will boost output over the months ahead, and there will also be a mild boost to demand from the broader rebuilding efforts as they get under way, but growth through 2011 is now unlikely to be as strong as earlier forecast. Over the medium term, overall growth is still likely to be at trend or higher, if the world economy grows as expected.

Growth in employment has moderated over recent months and the unemployment rate has been little changed, near 5 per cent. Most leading indicators suggest that this slower pace of employment growth is likely to continue in the near term. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.

Credit growth remains modest. Signs have continued to emerge of some greater willingness to lend and business credit has expanded this year after a period of contraction. Growth in credit to households, on the other hand, has slowed. Most asset prices, including housing prices, have also softened over recent months.

Year-ended CPI inflation is likely to remain elevated in the near term due to the extreme weather events earlier in the year. However, as the temporary price shocks dissipate, CPI inflation is expected to be close to target over the next 12 months. In underlying terms, inflation has been in the bottom half of the target range, though a gradual increase is expected over time.

At today's meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.



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Memo RBA: Spending's shrinking

SNAPPING WALLETS SHUT

Our spending on...

Clothes - least since January 2011
Cafes - least since October 2010
Books - least since September 2010
Furnishings - least since December 2009
Takeaways - least since August 2009
Shoes - least since December 2008

NSW, seasonally adjusted, ABS 8501.0

Sydney consumers are on strike, pushing spending at cafes to its lowest since October 2010, spending on takeaway food to its lowest since August 2009 and spending on shoes to its lowest since December 2008.

The Bureau of Statistics figures show NSW the only state whose spending was trending down in May and show no growth at all in spending in the year to May, at a time when nationwide spending grew 2.1 per cent.

Other figures released yesterday show NSW out of puff on newspaper job advertisements - which have been on a sliding trend for 12 months - and private home building approvals, which have been slipping for two months.

“The data can only be described as surprisingly weak,” said CommSec economist Savanth Sebastian. “Consumers are not spending and building approvals have slipped, sapping the economy’s momentum.”

“The risk of a near-term rate hike is off the agenda until things improve.”

The CommSec assessment came as ANZ dramatically downgraded its forecast of interest rate rises, saying there would now be none this year instead of the two it had previously forecast.

“The non-mining economy is exhibiting much less broad-based strength than in the first phase of the commodities boom,” research chief Ivan Colhoun said in a note to clients.

“Employment growth has slowed considerably in both the mining and non-mining states and is currently growing at a rate consistent with unemployment beginning to rise. Business conditions are lower across the economy and job advertising has broadly levelled off or begun a slight decline. Declining job ads are usually a forewarning of lower rates"...

National Retailers Association chief Margy Osmond blamed the collapse in retail spending on the fear of higher interest rates and concern about the impact of the proposed carbon tax.

“Australians need to know what this carbon price will mean for them as individuals, so they can see the real impact on their household budgets and plan accordingly,’’ she said.

The Reserve Bank last lifted interest rates in November 2010. An entire year without an interest rate move would be unusual. It hasn’t happened since 2004. But continual talk about higher rates and the big banks action in almost doubling the November rate hike have made consumers unusually wary.

The ANZ is still expecting rates to climb, but not until February 2012, or later if inflation remains contained.

The privately-compiled TD Securities inflation gauge released Monday showed zero inflation in the month of June and a rate of 2.9 per cent in the year to June, putting the annual rate within the Reserve Bank’s target band.

“If inflation remains restrained and the non-mining sector remains weak there is a chance of a modest cut in rates in the next 12 to 18 months,” said Mr Coulhoun. “The most recent board minutes hinted the Bank might be changing its view about the overall strength of the non-mining economy.”

Today’s Reserve Bank board meeting will be the last attended by retiring board member Warwick McKibbin who is believed to have been pushing for higher rates to contain inflation.

At a Melbourne Institute conference last week he signaled a change in his view warning the global economy was facing a "slow motion train wreck" with Greece only the first nation to be hit. The fallout from a repudiation of debts in Europe would make the most recent global financial crisis seem like a “blip”.

Published in today's SMH and Age


ANZ Australian Economic Update - Monetary Policy - A Longer, Slower Tightening Cycle



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It's Sunday. Carbon Price D-Day:

From the PM:

This weekend the Gillard Government plans to announce a price on pollution as the central element of a comprehensive policy to tackle climate change, cut pollution and drive the transformation of the Australian economy to a clean energy future.

After hearing a report on the discussions of the Multi-Party Climate Change Committee, Cabinet agreed tonight that sufficient progress had been made to allow an announcement date to be set for Sunday 10 July 2011.

Considerable common ground has been achieved in the MPCCC talks in recent weeks.

This reflects the genuine commitment of members of the MPCCC to tackle climate change to protect Australia’s environment and support the economy.

While there will be additional discussions with the MPCCC this week, followed by further Cabinet consideration, it is expected that the remaining details will be finalised in these discussions ahead of Sunday’s announcement.

The Gillard Government’s priorities in designing the carbon price have been cutting pollution, protecting household budgets, and supporting jobs.

A carbon price is an important reform that will create incentives to lower Australia’s carbon pollution at the lowest cost to the economy.

It will do this by putting a price tag on the pollution of fewer than 1,000 businesses.

More than half the revenue raised will be used for tax cuts and increased payments to households, which will be generous, fair and permanent and will keep pace with cost impacts from the carbon price in the future.

After announcing the policy the Government intends to introduce legislation to Parliament later this year.

This will be an opportunity for all MPs to decide whether they accept the scientific advice that climate change is real and whether they accept the economic advice that a market mechanism is the cheapest and most effective way of reducing pollution.

Arrangements for media will be released this evening. Arrangements for stakeholders will be announced in the coming days.

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You think our Labor leader is bad?

The UK's Labour leader has turned himself into a YouTube joke:

ITV interviewer Damon Green blogs about how it came about here:

"...it isn’t until our shot has been checked by all three press officers – all peering into our viewfinder and offering helpful advice about framing and depth of field (a term they turned out not to understand, as my cameraman Peter Lloyd-Williams triumphantly established) that we turn to the topic: `What questions are you going to ask?’

I hate being asked that. Partly, because it is none of their business. But mostly, if I am honest, because I don’t really know. I don’t have an interview `technique’, and this lack of technique has been honed constantly since my earliest days of not using it at the Bermondsey News. Its absence never troubled me until yesterday. You see, getting a `grab’ for a television report is a simple enough business. You say the first thing that comes into your head. The interviewee responds with the first thing that comes into his head. And you take it from there. Almost like, well, a conversation.

But when your interviewee has only one answer, and repeats it back to you whatever you say, things go downhill very fast...

Read the full thing.

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2011-12 Economic Survey. A year of normal growth?

Click to enlarge

Tim Colebatch:

AUSTRALIA'S private sector economists are less confident about the new financial year than their official counterparts, but nonetheless expect it to be a year of solid growth for Australia and the world.

At the end of a financial year that delivered rather less than they had expected, the panel of 19 economists in The Age half-yearly economic survey, by and large, predict growth to accelerate over the next 12 months, the sharemarket to rebound, commodity prices to peak and edge down, unemployment to fall, and interest rates to rise.

Given the risks hanging over the global economy partisan conflict in the US Congress making the nation ungovernable, government debts in Europe threatening to unravel the euro zone, China struggling to control its economy for a soft landing that would make 2011-12 a very good year for business, workers and investors in Australia.

Our panel of forecasters expects 2011-12 to be a normal year for the Australian economy. If it's right, Reserve Bank governor Glenn Stevens and Treasurer Wayne Swan will go down on their knees to give thanks...

On average, the panel predicts Australia's GDP to record year-average growth of 3.2 per cent in this new financial year. That's in line with its long-term average growth, but significantly below the 4.5 per cent growth forecast by the Reserve Bank, or the 4 per cent forecast by Treasury.

The gap between the panel and the official line is partly due to the presence of Monash University's resident pessimist, Jakob Madsen, who, for the third year in a row, is forecasting Australia and the US to sink into recession. One day he'll be right, but hopefully not this time.

The other members of the panel on average forecast growth to be 3.5 per cent. That is probably more like the way Reserve hopes the year will turn out, since that would not require it to show the same activism on interest rates.

No panel members believe that growth will reach the 4.5 per cent predicted by the Reserve in May. Only six thought Treasury's budget forecast of 4 per cent growth would be met.

Commonwealth Bank chief economist Michael Blythe is at the head of the bull pack. He sees Australia growing by 4.3 per cent over 2011-12, thanks to continuing strong growth in China and the global economy. Unemployment would fall to 4.5 per cent by next June but well before then, the Reserve would have stepped in twice to raise interest rates.

Professor Madsen is alone at the other end of the forecast range, predicting Australia will follow the US into recession in coming months, cutting annual GDP by 1.4 per cent in this financial year.

But four other forecasters predict growth in this new financial year will be less than 3 per cent. They include Katie Dean at the ANZ (2.5 per cent), Paul Brennan of Citigroup (2.9 per cent), Saul Eslake of the Grattan Institute (2.8 per cent). Worryingly, Neville Norman of Melbourne University predicts growth to be just 2.1 per cent.

That is worrying because for the second year in a row, Professor Norman has won the Palme d'Or as the most accurate forecaster in our survey. Two years ago he was one of few optimists to see a solid recovery coming. But last year, as now, he was the wary one, predicting below-average growth as higher interest rates held activity back.

Professor Norman sees China booming in the year ahead but the US floundering. That would slow global growth, bringing the Australian dollar back below parity, and sending unemployment back up, albeit only to 5.3 per cent by mid-2012.

The panel as a whole expects global growth to edge down slightly to 4.1 per cent in 2011, held back by slower growth in the US (2.6 per cent), Europe and Japan. There are differing opinions about China, where growth forecasts for 2011 range from 10.6 per cent (Professor Norman) to 8 per cent (Greg Evans of the Australian Chamber of Commerce and Industry).

For the most part, the panel expects unemployment to edge down over the next 12 months, to 4.7 per cent by mid-2012. No one sees a dramatic change ahead: the range of forecasts is between 4.2 and 5.5 per cent.

The panel as a whole expects the budget deficit to be halved to about $22 billion, a tad under Treasury's own forecast. But a few, including government insider Heather Ridout of the Australian Industry Group, predict it will end up a lot better than officially forecast, while a couple, including the outsiders at ACCI, predict it will end up a lot worse.

All the panel, apart from Professor Madsen, expect the Reserve to raise interest rates at least once by Christmas. An interesting detail: five of the 10 panel members from financial institutions, including ANZ, Commonwealth Bank and NAB, predict two rate rises by then but no one outside the financial sector shares that view.

The panel also divided over the future of the dollar. Four forecasters predict it to rise to $US1.10 by New Year's Eve; four think it will stay more or less where it is; five think it will edge back closer to parity; while six expect it to drop back below parity. John Rothfield of Merrill Lynch is the currency bear, tipping it to close the year at US93?.

Most of the panel expect a gradual rise in share prices over the new financial year. Of the 14 forecasters who chanced their hand at tipping the market, 11 see it heading up, on average predicting the S&P/ASX200 index to be nudging 5000 by New Year, and above 5300 by mid-2012.

But Professor Madsen expects it to sink to 4000, while our two Evans - Bill Evans of Westpac and Greg Evans of ACCI see global jitters nudging the index down over the six months, and, in Greg's view, next year too.

On one of the big issues for the Australian economy, the panel shares a broad consensus that commodity prices are now nearing their peak and will be falling in the first six months of 2012.

On average, the panel predicts Australia's terms of trade (the ratio of export prices to import prices) to rise about 6 per cent between now and the end of the year then lose nearly all of that by next June to end the financial year where they started.

Some disagree. Katie Dean of ANZ sees the terms of trade continuing their rise into 2012, but at slower pace. But Master Builders economist Peter Jones joins Greg Evans in predicting that they've peaked already, with the terms of trade to sink 5 per cent in the rest of the year and 10 per cent in early 2012.

The official family probably wouldn't mind that at all, as it would reverse our path towards a two-speed economy. But they're not expecting it.

Published in today's Age


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About that bigger surplus. Perhaps not - Hockey

Shadow Treasurer, Joe Hockey, has broken with the Coalition's commitment for bigger surpluses, telling Melbourne Institute conference he would be prepared to accept a smaller surplus if it meant giving people tax cuts.

In his first public qualification of his commitment to deliver a bigger budget surplus than Labor, Mr Hockey said he would be prepared to hurt the budget bottom line if it meant cutting taxes.

"The truth about tax reform is that you have to leave money on the table for people, even if it means you are reducing the size of the surplus," he said.

"If you are taking people on a journey where they are going to restructure their affairs, it costs them money. Many Australians are actually prepared to embrace tax reform, but they have to believe that for the pain they go through they are going to be better off."

The Coalition had pledged to return the budget to surplus sooner than Labor, which it is planning to do in the next financial year. It had also pledged a bigger surplus than the $3.5 billion promised by Labor.

Mr Hockey also backed tax increases... telling the conference he opposed capping local government rates because "the people who are accountable for spending the money should also be accountable for the way they raise the revenue".

"A fundamental principle I want to see developed over the next few years is that the governments that raise the money spend the money, the governments that spend the money raise the money," he said.

The Treasury secretary, Martin Parkinson, was pessimistic about the likelihood of future tax reform, telling the conference Australians had become complacent.

Around half the workforce had never experienced anything other than sustained economic growth, he said. Even mild reforms such as trimming access to family payments were "easily undermined by the populist media campaigns that we saw after the budget", he said.

The Treasurer, Wayne Swan, told the conference before the May budget there were "wide-ranging calls for cuts to family payments to so-called middle class families".

After the budget, he faced cries of anguish "from the very same voices in the media that had previously called for even tougher cuts".

Dr Parkinson said the changed environment meant governments had to be careful not to try to do too much.

"If you think you can do 10 different reforms all at the same time with limited political capital, you run the risk you may not be able to implement any of them effectively," he said.

The defeat of the originally-proposed mining super profits tax was particularly unfortunate. "Australia is selling non-renewable assets. Yes, we have large supplies, but once sold those assets cannot yield any further return," he said.

"This means that it is critical that society receives an appropriate return on the assets, rather than the value being captured solely by the Australian and foreign shareholders. Arguably, this is not presently the case."

Mr Swan said he would release a "framing paper" this month to encourage debate in the lead-up to the October tax summit.

Published in today's SMH


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Gee, how are our mining companies doing?

"The largest contributors to the rise in June were increases in the estimated export prices of coking and thermal coal, reflecting the ongoing movement to higher contract prices. In Australian dollar terms, the index rose by 2.2 per cent in June."

Just out.


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Crude, distorted, dangerous - Garnaut on News Limited

Custom normally dictates you're not rude to your host. But the federal government's climate change adviser, Professor Ross Garnaut, is sufficiently hot under the collar about media coverage that he abandoned that principle yesterday.

Speaking at a conference sponsored by The Australian, the broadsheet owned by Rupert Murdoch's News Limited, the professor hit out at ''crude'' and ''distorted'' reporting of plans for a carbon tax.

And the worst culprit, according to Professor Garnaut? The very same News Limited.
He constrasted coverage of the carbon debate with ''the positive role played by a highly professional, conscientious, committed Australian media'' during earlier reforms.

''Reflect on the media treatment - I don't want to be too pointed but I would say especially the News Limited group - reflect on the media treatment of this complex issue of immense importance for long-term Australian prosperity, and I don't think many people would say we have had a media presentation of the issues as thorough, as reliable, as informed, as we had as a basis for the reform era of Australia in the last century,'' he said.

"I know from my close friends among the senior journalists at The Australian that there is disquiet about that.''

He singled out a front-page story he said implied electricity prices would rise 11 per cent as a result of renewable energy schemes, but said they were actually responsible for 11 per cent of a 30 per cent increase - that is, closer to 3 per cent.

''I could give you dozens of examples... Facts are ignored, the rules of logic violated, and it is rare for people professing strong opinions to go back and actually look at the documents on which they have commented.''

Surveying an audience of 200 economists and academics at the Melbourne Institute-Australian conference, he said he knew of only two who had read his climate report in full. One was Malcolm Turnbull.

The former Hawke government economic adviser cited ''great figures'' in the media such as Peter Robinson, Max Walsh, Max Suich who helped build a platform for reform on issues such as tariffs.
''In the '80s and '90s we had a high-quality media. Paul Kelly, Alan Wood, Michelle Grattan and others were able to explain complex ideas that the community never felt really comfortable with, but which would provide a basis for political action.''

The Australian's economics editor Michael Stutchbury said it was wrong to compare the battles over tariff reform and a carbon tax. ''There is a lot more contested ground, even among people such as myself who support putting a market price on carbon,'' he told The Age.

Treasurer Wayne Swan - introduced by Stutchbury - backed up Professor Garnaut, telling the conference ''sometimes it seems like the main criteria our opponents in the Parliament and sections of the media use to evaluate policies is not what's good for Australia but what's bad for the Australian Labor Party''.

Published in today's SMH and Age


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That was a blip, this is a slow motion train wreck - McKibbin

The global economy is facing "a slow motion train wreck" with Greece only the first nation to be hit, Reserve Bank director Warwick McKibbin has told a Melbourne conference.

Referring to the most recent global economic crisis as a mere “blip” he said the coming crisis could undo the mining boom and bring on inflation of the kind not seen since the 1970s.

Professor McKibbin told the Melbourne Institute conference dozens of European countries now had gross government debts on track to exceed 60 per cent of GDP.

“Japan is forecast to be 200 per cent of GDP, the US is forecast to be over 100 per cent of GDP,” he said. “At zero interest rates that can be sustained, but at 5 per cent interest rates countries have to put aside 5 per cent of their GDP every year just to service the debt.”

“That is not sustainable. Already consumers aren’t spending and investors aren’t spending because of the tax increases that are in prospect.”

“Greece, Portugal and Ireland don’t just need to have their debts written off, they need to have a 30 to 40 per cent depreciation of their real exchange rate,” he told the conference.

“There are two ways to do that, either pull out of the euro and depreciate by 40 per cent, or have deflation of 40 per cent over the next 12 months.”

“I do not believe any society can survive having a a 40 per cent deflation.. that’s been imposed by the International Monetary Fund and the European Central Bank.”

As the US created more dollars to inflate away its debt repayment obligations countries linked to the dollar including China, India and parts of Latin America would suffer 1970’s style inflation.

‘In India inflation is 9 per cent, in China it is 6 per cent. that inflation is pushing up resource prices for now, but it will have to be brought under control with much higher interest rates.

Joking that he could not talk about Australian interest rates which were in any event “always appropriate” the Reserve Bank board member warned the inflation would spread worldwide.

Australia needed a sovereign wealth fund to store mining income while it lasted, ideally stored in a separate account for each taxpayer so the government could not raid it.

The $50 billion national broadband network epitomised the sort of waste Australia could not afford.

“I would say to any politician who thinks that spending is worthwhile, take your salary as shares in NBNCo. If you think it’s a good investment, you’ll be ahead,” he said.

Published in today's SMH and Age

McKibbin on the Train Wreck


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