Wrong, wrong, wrong: Gillard, Hockey, Robb

What a week.

Gillard

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

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

And then proceeds to elaborate (emphasis added):

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

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

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

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

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



Hockey

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

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

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


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

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

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

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

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

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


As I Tweeted during LateLine the following night:

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

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

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

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



Robb

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


SAMANTHA HAWLEY: So is the ANZ bank justified?

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

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

SAMANTHA HAWLEY: But the...

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

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

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


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

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

What a week.



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'Too much money was sloshing around' - Turnbull on Howard's economic mistakes

The guy is honest, gutzy, serious. Unlike his frontbench contemporaries

Coalition Communications spokesman Malcolm Turnbull has crashed into the economic debate, saying the Howard government made bad economic decisions in its final years, ones for which he accepts collective responsibility.

“The simple fact is, and we’ve seen it again and again in this city, when governments have money sloshing around they want either to spend it on benefits, invest it in infrastructure or give it back in tax cuts,” he told a Canberra forum organised by the Melbourne Institute.

“There’s nothing wrong with any of those objectives if the spending or the tax cutting for example is sustainable, well targeted, and represents value for money. But regrettably that isn’t always the case.”

Mr Turnbull believes the Coalition should have banked much more of the income from the mining boom, perhaps by putting it in a wealth fund managed by the Future Fund. But he said the idea had become less attractive after “the so-called Keating debt had been paid off.”

“I say this as somebody who has been part of a government and made collective decisions about spending. This is a behavioural economics perspective. From a political point of view my strong belief is that a new sovereign wealth fund would be very much in the spirit of the times, and would become a matter of real national pride.”

Asked which of the Howard government’s decisions were bad he said: “This isn’t the time or the place, nor would I be able to comprehensively chronicle them all, but I think most of us feel that, Peter Costello clearly does.”

“The reality was inevitably the surpluses came in - in those last three years much bigger than forecast - so the government was presented with a lot more money at the eleventh hour, as it were.”

Mr Turnbull’s observations challenge the Coalition’s formal position that it was its economic management that brought about its repeated budget surpluses...

He also took issue with those on both sides of politics who want the Reserve Bank to cut interest rate in order to restrain the Australian dollar. They include Coalition finance spokesman Andrew Robb and Australian Workers Union leader Paul Howes.

“To complain about the current level of the dollar is to implicitly oppose the current size of the resources sector,” he said.

“In a sense by developing an iron ore or a coal industry in the first place while while having a floating currency and free capital flows Australia signed on for the current ride.”

As an instance of what could happen when a government tried to restrain the exchange rate he singled out the McMahon Coalition government of 1971 and 1972.

“Arguably among the most costly policy miscalculations in our history was the Country Party’s repeated veto of the stronger dollar in 1971 and 1972, which stoked the runaway inflation which ultimately averaged 9 per cent annually for the next two decades - it took a long time to get over that.”

The Country Party was the National Party’s predecessor. Mr Turnbull’s analysis differs from that of other Coalition politicians who blame the two decades of high inflation that grew out of the 1970s on the succeeding Whitlam Labor government.

Former Reserve Bank board member Bob Gregory backed Mr Turnbull’s support for a sovereign wealth fund but said in his view interest rates were too high because the Bank had overestimated the strength of the economy. It would soon correct its mistake and cut rates.

In today's Canberra Times, Sydney Morning Herald and Age



Malcolm Turnbull writes:

Peter Martin’s article in the Sydney Morning Herald today rather misrepresents a very sober and fairly academic discussion about the exchange rate, fiscal discipline, the mining boom and sovereign wealth funds at the Melbourne Institute Conference in Canberra yesterday.

Speaking on the same platform as Professors Max Corden and Bob Gregory it wasn’t the occasion for a rip roaring partisan political harangue but rather a more thoughtful and considered analysis of some important political issues. It was certainly received that way.

My only comments on the Howard Government’s spending was to say that with the benefit of hindsight we could have saved more in our last years in office – that is hardly a novel observation, and as The Australian’s David Uren reports, I noted that it was significant that our side of politics, having governed Australia well and responsibly for nearly twelve years, is nonetheless prepared to reflect on how we might have done a good job even better.

What Peter Martin failed to report was that I pointed out that politics is a relative business and that compared to the reckless spending of the Rudd and Gillard Governments the Howard Government’s record was in terms of fiscal matters “stellar” – as indeed the record shows. John Howard not only paid off all of Labor’s debt, left us with a substantial cash at the bank but also established our first sovereign wealth fund, the Future Fund with the proceeds of asset sales and surpluses.

I might add there was no reporting of the strong criticism I made of the Rudd Government’s mishandling of the mining tax issue, both in terms of process and design.

Peter Martin asked me to nominate particular spending decisions I didn’t agree with and having declined to talk about one decision or another or otherwise go into particulars this is what I said:

“..most of us feel we could have saved more, certainly in the last term in particular. The reality was that surpluses came in invariably in the last three years much bigger than had been forecast. The Government was presented with a lot more money at the eleventh hour. Quite a lot was saved. Politics, just like interest rates, is relative. One thing that is commendable is that our side is having an honest reflection on whether – notwithstanding we did a very good job paying off debt, establishing the Future Fund and other funds and adding to national savings and (in this regard) compared to our successors did a stellar job, it is I think a good thing to be reflecting on whether that job could have been done better. I guess what I am saying is that if we had a – if there had been an ongoing sort of program of thrift and saving [referring to the sovereign wealth fund proposal] that would have been a good alternative, more money would have been saved.”

Now, quite how you can turn an answer like that into a headline which says “Coalition economics not on the money: Turnbull” let alone argue that my observations “challenge the Coalition’s formal position that it was its economic management that brought about its repeated budget surpluses.”

Quite the contrary is the case, the repeated budget surpluses were the result of sound economic management – they are the proof positive.

My point is that when surpluses are high Governments are under pressure either to spend them or give them back in tax cuts. As I said in my speech as long as the decisions to spend or cut taxes are sustainable, there should be no hesitation in doing so. But if those decisions taken at the top of the cycle create long term obligations or entitlements or create long term diminutions in the tax base which have the consequence of creating a structural deficit then they are not wise.

Now I do not believe the Howard Government did that, quite the contrary. But the Labor Governments that succeeded us have done just that, by overspending they have created the extraordinary situation where they have been borrowing record amounts and running deficits in the midst of the biggest terms of trade boom in our nation’s history.

So my argument for a new sovereign wealth fund, for creating a stronger culture of thrift and saving is that it will provide another option for governments faced with strong revenues – one of saving for the long term. And that is entirely consistent of course with the philosophy and the the practice of the Liberal Party in Government.



A high exchange rate - should we be concerned and what should be done?

Malcolm Turnbull
Melbourne Institute – Public Economics Forum
Canberra, 19 April 2012

Well thankyou very much. Let me start by saying that I’m very honoured to be in such illustrious company for this discussion.

Max Corden, my fellow speaker, is of course one of our nation’s most distinguished economists and his work on industry protection, trade and exchange rates has not only contributed to economics as a discipline, but has also influenced some of our important public policy debates, especially over the true costs of tariffs. He was one of the loose grouping of public servants, academic economists, corporate economists, financial journalists, backbench MPs and others who took on Australia’s long-established commitment to industry protection in the 1960s, and by doing so began the long process of dismantling the increasingly antiquated post-Federation economic institutions.

In 1982 Max proposed the three-sector model that has been revived a number of times, including in the last article that is being distributed today, that most usefully explains what is usually termed ‘Dutch Disease’ or the ‘Gregory effect’. I think it would have been better if it had been called the Gregory Effect , if I could say that. Because one of the problems with the whole Dutch Disease term is that a phenomenon that for most people is actually a profoundly good thing, is presented as a morbid condition – a counterpoint to the virility that you were talking about Gary. I noticed your hair is perfectly combed, by the way. This is of course the phenomenon where higher income and a stronger exchange rate caused by rapidly growing exports from one traded sector (classically, the resource sector) have a negative impact on other traded sectors.[1] And of course, the argument now is – and Max might touch on this – that the Dutch never suffered from the Dutch disease in the first place. That’s the Treasury’s received view – Martin Parkinson is nodding there.

Bob Gregory of course is here today as well and he’s another of our distinguished economists in the room. He produced the first research about this in 1976, which is why it sometimes known as the ‘Gregory Effect’. He is perhaps known best for his work on the labour market and a former member of the Reserve Bank board. [2]

Now they have published recent papers dealing on this and I will come back to these papers in a little while, particularly Max’s. But I just want to say something about the Gregory paper, which he wrote with Peter Sheehan. It looks at the recent divergence between GDP per capita and income-based measures of living standards as an increasing proportion of our growth in material well being having come from gains in the terms of trade (which are not captured in the former calculation or the former metric). He calculates that gap at $7500 per capita in 2011 dollars, which is a large chunk of what has been accrued over the past decade. It is worth pondering, perhaps we can discuss, how enduring that gain will be. [3]

Given there are so many great economists here I think I should going to focus my talk principally on the political economy of the matter. There is of course a great politician here, Dr Andrew Leigh, one of the Members from the People’s Republic of Canberra. And it’s good to see him, but I’m sorry you have to leave him before the discussion. It will be a pity.

Let me just outline a few propositions that should serve as constraints in the discussion. And I will say frankly in advance, if you accept them all, there isn’t much space left for a genuine attempt to ‘do’ something about the exchange rate.

The first point is that the wave of emerging market demand for commodities is much bigger than we are.

Everyone agrees that it is the sheer size of this resources boom that distinguishes it from previous commodity windfalls such as the late 19th century minerals boom, the Korean War wool price spike, or the buoyant energy and agricultural prices of the early 1970s.

And we have to bear in mind that the commodity boom that we’re talking about here in Australia is in large measure made up of the demand for the components of making steel. That is to say, iron ore and metallurgical coal. I will come back to thermal coal later. That demand is being driven by the rate of urbanization in Asia and in particular, of course, China. Now the steel intensity of economies peak when urbanization peaks and then over time starts to decline. So this is not going to go on forever. Steel intensity is not coextensive with economic prosperity. America uses much less steel now than it did 50 or 60 years ago. And the same will be true of China. A lot of people don’t reflect on this, but it is very important to bear in mind, particularly when people are trying to persuade you that this is a boom that will never end. I know there are a few people in this room who suspect that, or come close to arguing, that this is the case. So I would just make that point about urbanization, that this is a long term trend. It won’t go on forever, but it is a long term trend. This is not a spike.

The only episode that is comparable in terms of its economic impact was Victoria’s gold rush of the 1850s, which trebled the European population of Australia, made Melbourne into one of the great cities of the British Empire, and helped deliver the highest per capital incomes in the world for the next four decades.

Just in summarizing some of the metrics, and I know everyone here’s very familiar with them. The RBA index of commodity prices tripled between 2003 and 2009. In terms of investment committed or flagged for new resources sector projects, the January investment pipeline reported by Deloitte Access was $912 billion, with work going on at projects involving $415 billion. And in terms of duration, the episode has already outlasted all earlier booms save for the 1850s gold rushes. [4]

The bottom line here is, large though our resource industries and endowments are, in the end Australia is a tiny part of the market compared to an increase in demand in China or India. Even without investment in expanding our resources capacity, our exchange rate would still be significantly elevated compared to the period before 2003 given demand has been so strong. To complain about the current level of the dollar is to implicitly oppose not just current expansion of the resources sector, but its ex ante level of production.

In a sense by developing an iron ore or coal industry in the first place while having a floating currency and free capital flows, Australians signed on for the current ride.

The second proposition I want to make is about the dollar. This is the first – and Ric Battellino made this point in a very good speech last year – this is the first big boom, the first boom we’ve had, during which the exchange rate has been floating, and in which, and I’m quoting from his speech, “a significant rise in the nominal exchange rate has been an important part of the economic adjustment. This has added an important degree of flexibility to the economy by allowing the real exchange rate to rise through a means other than inflation.” [5] This is not our forst big boom, but it is our first big boom with a floating exchange rate.

Now my next proposition is that in my view, Australians are not going to reverse the past two decade of depoliticizing the exchange rate and interest rates. We’re not going to go back to governments, Paul Howes notwithstanding, setting the exchange rates or interest rates.

The contrast could not be more stark between the 2000s and earlier booms, as Treasury’s David Gruen described in his recent paper on the boom, when the exchange rate was still manipulated by politicians willing to do anything to avoid enraging farmers and manufacturers (which they would if the exchange rate had revalued). The result back then of income shocks was invariably inflation and industrial disputation as the higher wages in the fast growing sector, in the resources sector, flowed on to what max would call the lagging sectors and of course, created or contributed to very damaging inflation. One of these choices was arguably among the most costly policy miscalculations in our history - the Country Party’s repeated veto of a stronger dollar in 1971-72 which stoked the runaway inflation that ultimately averaged 9 per cent annually for the next two decades. [6] It took a long time to get over that.

Persistently high inflation combined with political meddling on official interest rates and the value of the currency in turn contributed to the macro-economic instability, recessions and low growth of the 1970s and 1980s.

Compare this with the record since our institutional arrangements were changed - first with the float of the dollar in 1983, and then later with the formalization of Reserve Bank autonomy and independence, and specification of an inflation target.

Since the float Australia has experienced only one recession (if we use the rule of thumb of two consecutive quarters of contraction) and that, in 1990-91, was the result of a conscious policy decision by the soon-to-be-independent RBA to finally break the back of inflationary expectations. The 1990-91 recession was a disaster in terms of human costs, but it did achieve its objective although at very high cost.

Against this backdrop, Paul Howes recently suggested the Reserve Bank’s mandate be altered to focus it on two objectives (price stability would be joined by the real exchange rate).

Given the struggles across much of manufacturing, where most of his members work, and Paul’s very enviable youth, it’s not hard to see why he might arrive at this suggestion. After all, it is quite a while, thankfully, since we have seen serious inflation at work in Australia or engaged in public discussion of its insidious effects.

The first thing wrong with Paul’s idea is that the RBA would be left with one instrument to aim at two targets - which implies one of them would have to be partly or entirely sacrificed at some point.

But an even more important criticism is that Howes implicitly downgrades the value of keeping inflation low, perhaps not realizing that if it edges higher, the costs tend to fall on the most vulnerable.

It is telling – very telling in my judgement and a marker of monetary policy success - that to find a quote best to explain this danger we had to go back to 1990, when Ross Gittins expressed the issue very well in an article. And I quote Ross Gittins:

“Inflation would be less of a problem if everyone had an equal ability to protect himself from its ravages. The ability to protect yourself from inflation, however, varies greatly through the community. Generally speaking, it's the better-off who have greatest freedom to protect the real value of their income and their wealth. The more you have, the more you can afford to get the advice and do the tricks that keep you ahead ... inflation hurts our society: it makes it less fair, with the less powerful and the less astute being the ones who lose out.” [7]

And surely the Australian Workers’ Union and its supporters would not want to do that.

Now Max Corden’s recent paper on policy options for a three-speed economy logically and convincingly makes a general argument that in an open economy amid a resources boom, any sector-specific policy we can devise is nothing more than a redistributive measure, either from consumers to producers, or from one group of producers to another. There will be negligible impact on the exchange rate.

He makes the point so compellingly that I think we can dismiss even considering such policies (unfortunately that is not so easy in the real world, where they remain popular). [8]

I might simply note for emphasis that invariably the loudest claims for assistance are from industries and firms whose comparative advantage is least apparent and whose history of Government assistance has been the longest, regardless of the exchange rate.

Add all of this up and the very limited scope to ‘do something’ about the high dollar becomes plain.

Max’s paper does propose one other approach - which is a strongly contractionary fiscal policy (Government spends less) offset by accommodative monetary policy (Reserve Bank cuts rates) with the aim being to leave demand at the same level but lower the effective exchange rate.

Of course such a strategy is very challenging to implement at the present time, where the aftermath of the GFC is layered on top of the resources boom, making it particularly difficult to know what ‘neutral’ settings for monetary and fiscal policy might be in Australia, much less what the current trade-off between them is.

Max notes that this could be a useful role for a sovereign wealth fund, a reform I have advocated. My understanding of his position is that he is agnostic as to whether a sovereign wealth fund invested in foreign currency denominated assets (and by that I mean uncorrelated foreign currency assets - so it would make no sense for us to invest a sovereign wealth fund in the RMB) would actually result in effective exchange rate sterilisation. And I think he’s right to be agnostic about that. I note that the Governor of Norges Bank said in 2010 that it is was still unclear, I think he said the jury is still out, whether Norway's SWF which at $550 billion or thereabouts has been effective in keeping the krone value even lower than it otherwise would be. And bear in mind their sovereign wealth fund, at %550 billion, is around 125% of Norway’s GDP. So a comparable Australian sovereign wealth fund would be a gigantic fund and obviously not something that could be achieved other than after a very long time.

So the exchange rate sterilization argument, in the context of investing in uncorrelated foreign assets I don’t think is a very powerful one. It might have some effect but it’s probably not going to be very material. The better arguments for a sovereign wealth fund relate to financial prudence and remembering that all booms come to an end and ensuring that when that does happen we will have something to show for it.

As to the exchange rate, I agree with Max that in an Australian context an Australian SWF – we already have one of course, the Future Fund. I’m talking about a new one or a second account if you like. This fund would assist in the fiscal consolidation exercise we both endorse and to pick up on something Martin Parkinson said the other day would result in savings being higher than they otherwise would be.

This behavioural aspect of SWFs is rarely discussed. The simple fact is, and we have seen it again and again in this city, that when Governments have money sloshing around they want either to spend it on benefits, invest in infrastructure or give it back in tax cuts. Sticking it in the bank is generally not very attractive, particularly when there is debt to be paid off and we saw this in the last years of the Howard Government when the Keating debt, so-called, had been paid off.

There is nothing wrong with any of those objectives if the spending or the investing or tax cutting for that matter is sustainable, well targeted and represents value for money.

Regrettably that isn’t always the case. Some of you have obviously fainted, shocked, at that proposition. And my argument is that it would be a salutory encouragement to greater thrift if an additional option was built into our thinking about public finances which was to save for our children and grandchildren's futures. And I say this as someone who’s been part of a Government and made collective decisions about spending. I am giving a behavioural economics perspective. You would struggle to quantify this or justify it in a quantitative way.

From a political point of view, my strong belief is that a commitment to a new SWF would be very much in the spirit of the times and would become a matter of real national pride. But it has to be said there isn't a lot of support for such a reform outside of the Business Council of Australia and many of its leading members, leading economists both academic and corporate, David Murray, Arthur Sinodinos, Peter Costello, the IMF and implicitly the Reserve Bank itself. And of course the Greens. But apart from that motley crew, there doesn’t appear to be much support for it.

There are many issues to discuss in relation to a new SWF, which of course may simply be another account managed by the Future Fund. These include the governance, the investment mandate of the fund and its nature. Should it be long term saving fund like the Norwegian fund, something we can live off when the oil runs out, probably not applicable to our resource endowment. Or should it be a stabilization fund like Chile's, which can be drawn down on when the commodity cycle turns down and government revenues decline?

My argument for a SWF as you can see is not driven solely or even largely by a concern about the exchange rate, and we have to always ask ourselves that while we may lament the high exchange rate as we empathise with producers, we should remember that the most important concern of politicians will inevitably be the welfare of consumers.

Of course the consumer benefits of a higher exchange rate are cold comfort if you dont have a job, but if you can combine a rising exchange rate, the sectoral adjustment that causes and yet maintain high levels of employment it is hard to see that the high exchange rate is an unalloyed bad thing as many would have us believe.

Compare the situation in China where you have a number, and Yiping Huang writes a lot about this, a Chinese economist. Or Michael Pettis, at Peking University has written a lot about this so probably a lot of you are familiar with it. But if you think about the Chinese economy, because consumers don’t have the same leverage there that they do in a democracy like ours, there are massive subsidies to producers and to State owned corporations at the expense of consumers. Negative real deposit rates, the transfer of between five and seven per cent of GDP from households to the banks to State owned corporations. That funding not being available to private corporations with a few exceptions that are national champions, like Huawei and others. And at the same time of course the exchange rate benefits exporters at the expense of consumers. So do we really want to do that? Is that the approach we really want to achieve? We have got to think about that, think about the consequences, when we complain about the exchange rate.

Now just consider, when we are told the exchange rate is unreasonably high, it is worth thinking back to the turn of the century when Australians were still being penalized because our economy was not exposed enough to the ‘new economy’ boom, so called.

Because of this and low commodity prices in the year 2000, GDP per capita at market exchange rates was $US35,300 in the US and a mere $US20,800 here.

What a difference the past dozen years and a change in investor perceptions has made.

By 2008 per capita incomes in Australia and the US expressed in market terms were the same, for the first time since 1895 and by 2012, the IMF forecasts GDP per capita of $US49,100 in the US and a startling $US69,000 in Australia. So the reality is that the high exchange rate is a feature in a turn around in economic conditions that has made all Australians wealthier but of course has had serious issues of adjustment. But it is something we should be proud of, that we have been able to achieve that process of adjustment while still maintaining relatively high, historically high levels of employment. And that is something we should be very proud about.

Now I am just going to make one final point because we can talk a lot more in the discussion. But my simple point is this: There is always an attraction to what I used to call many years ago, the ‘Backslash Copy’ school of economic forecasting. Those of you who can remember using Lotus 123, so it’s only the older people in the room who know what I’m talking about. The disruption caused by technology, discover and innovation is not limited to the world of social media.

Just think for a moment of the revolution in natural gas. That is a vast topic for another occasion. It was only a few years ago that the United States was lamenting that it was running out of energy and that it was going to become a massive gas importer. Gas is now cheaper relative to oil, by relative values on a BTU basis, than it has ever been. And of course America will become a major gas exporter. And that is going to have a very material impact on the price of gas in Asia. The price differential in the United States and gas in Asia – because the markets are not presently connected – is gigantic. Now trade will resolve that.

What has made that possible? Horizontal drilling and fracking. Technology has made that possible. The gas has always been there, it has been there for millions of years, no doubt. China is a gigantic coal province, it has more coal reserves than any country in the world. It has, inevitably, equally vast resources of gas – unconventional gas, shale gas, coal seam gas.

Now there are people in Beijing that I have spoken with who believe China will become self sufficient in gas eight years or more from now. And more than that, it could become an exporter of gas. Now we are dealing with high levels of uncertainty here, so I wouldn’t make any financial investments on what I am saying to you, or anything I have said to you. But imagine if China becomes self sufficient in gas. I think that is very realistic. But imagine if China becomes an exporter in gas. America will become an exporter in gas. What does that mean for the value of our gas reserves and the value of our gas exports? What will happen if technologies to make steel without metallurgical coal become available? And there is a lot of work being done, but I think they’re a long way off, but who knows.

We should not assume that rapid disruption is limited to the world of the internet. The world of resources is subject to it just as much. And sometimes those shifts, while perhaps they take a little longer to take effect can be even more momentous. So prudence and thrift are good qualities to bear in mind in these uncertain, but nonetheless very prosperous, times. Thankyou very much.


[1] W. M. Corden & J. P. Neary (1982) ‘Booming Sector & De-Industrialisation in a Small Open Economy,’ Economic Journal 92, pp. 825-848. This and subsequent research modeled an economy experiencing rapid growth in income from one type of export in terms of three stylized sectors: a booming sector (such as resources or energy), a lagging traded sector (such as manufacturing or agriculture), and a non-tradable sector (such as services or government).
[2] R. Gregory (1976) ‘Some Implications of the Growth of the Mineral Sector’, Aust. Journal Agric. Econ. 20, pp. 71-91.

A third important contribution to the early economic literature about resources booms was also published by an Australian economist, Richard Snape (1936-2002) who later became deputy chairman of the Productivity Commission. See R. H. Snape (1977) ‘Effects of Mineral Development on the Economy", Aust. Journal Agric. Econ. 21, pp. 147-156.

[3] R. Gregory and P. Sheehan (2011), "The Resources Boom and Macroeconomic Policy in Australia", available online at: http://www.cfses.com/documents/AER_No_1.pdf, p.11

[4] Wayne Swan & Lindsay Tanner (2010) Budget Paper No. 1, 2010-11, pp.4-4 to 4-5.

[5] Ric Battelino, Deputy Governor, RBA (2010) ‘Mining Booms & the Australian Economy,’ speech to Sydney Institute, 23 Feb 2010, published in RBA Bulletin, Mar Qtr 2010, p.67

[6] Country Party then Whitlam: David Gruen, Australian Treasury (2011) ‘The Macroeconomic and Structural Implications of a Once-in-a-Lifetime Boom in the Terms of Trade,’ speech to ABE, 24 November 2011, pp.6-7.

[7] Ross Gittins, Sydney Morning Herald (1990) ‘Why High Inflation Makes Us Losers,’ 2 May 1990.

[8] W. M. Corden (2012) ‘The Dutch Disease in Australia - Policy Options for a Three Speed Economy, Melbourne Institute of Applied Economic & Social Research, Working Paper No. 5/12, Feb 2012



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Newstart won't even pay the rent

So low has the Newstart unemployment benefit fallen compared to the cost of living it now won’t even pay the rent on a typical Sydney one bedroom unit.

New calculations from the Tenants Union of Victoria show the single Newstart allowance with associated rent assistance now either just meets or fails to meet the median rent in every capital city other than Adelaide and Hobart.

Newstart is $244.85 per week, rent assistance an extra $60.10. In Sydney the $304.95 total falls far short of the $420 median rent on a one bedroom flat. In Melbourne and Perth it barely exceeds the $300 median.

If a jobseeker on Newstart decides to share, paying half the rent on on a two-bedroom flat, his or her rent assistance is cut, bringing down total $284.90 per week, leaving just $60.90 per week to spare after rent payments of $225. The excess needed for food, clothes, fares and utility bills works out at $8.70 per day.

Tenants Union of Victoria liaison officer Toby Archer says single Australians looking for work have to adapt, renting housing below the median, sharing overcrowded houses, couch surfing and using boarding houses and caravan parks.

“But even in boarding houses rent consumes a big part of their income... They spend as little as they possibly can on food, they avoid going to the doctor or the dentist, they don’t buy medication. They find it hard to present themselves for jobs.”

“By the time we see them they are behind on their rent, they’ve already eaten into savings, sold their cars and pawned things of value.”

Once comparable to the pension, Newstart has failed to keep pace since the two were indexed separately in 1997. The unemployment benefit is now just two-thirds of the single pension and is slipping with each half-yearly adjustment. In March the pension was lifted $3.35 per week, Newstart $1.45 per week.

Greens leader Christine Milne this week committed herself to winding back some of the $132.90 per week gap, saying some of the planned cut in company tax should be diverted to lifting Newstart $50 per week.

Treasurer Wayne Swan has acknowledged the problem telling the Press Club in the lead up to the budget there is “a case about the gap that has opened up,” but adding, “how we can deal with that in the longer term is a difficult one given that the fiscal pressures and so on the government is facing”.

Greens Senator Rachel Siewert is this week attempting to live on $17 per day, her calculation of what Newstart jobseekers would be left with if they handed over only half their income in rent.

In today's Sydney Morning Herald and Age


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Budget 2011-12. The curious case of the income still rolling in

It’s a pre-budget paradox. As regular as warnings from the Treasurer about tight finances are official figures sneaked out quietly showing the budget in good shape.

The latest, put up on the Finance Department’s website late Friday, details taxation income and spending to the end of February - two thirds the way through the financial year.

It shows that at the two-thirds mark the government has banked almost exactly two-thirds of the expected full year’s income tax revenue. It has banked a somewhat weaker 64 per cent of the expected full-year company tax revenue, and an over-the-odds 69 per cent of the expected full-year GST revenue.

In other words - two thirds the way in - the budget ain’t looking sick, not compared to the official mid-year budget update in November.

Yet finance minister Penny Wong was on the TV Sunday talking of hard decisions. Wayne Swan says this year’s budget will be in some ways his most difficult. Things ought to be tough. The November update predicted economic growth of 3.25 per cent. So far we’ve had 2.3 per cent. It predicted more than 100,000 new jobs. So far we’ve had 45,000.

The real mystery is not whether Swan and Wong are having us on about revenue falling short - it ought to be, it is why it has fallen short so little (just $2 billion or 1 per cent so far) when the everything we are told about the economy says it should be seriously slipping.

It would be great if the economic figures were wrong - if there were more jobs being created than the figures show. Income tax collections suggest this may be the case. It would be great too if that meant the government didn’t need to cut as hard as it says it will have to in order to achieve a 2012-13 surplus.

But the second hope would be misplaced. Three weeks out from the budget those familiar with it say the cuts are unpleasant. The government needs to forecast a 2012-13 surplus big enough to withstand any downgrades to its economic forecasts as the year progresses. It will be a budget to remember (for many Australians not in a good way) however well revenue is holding up right now.

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

Meet the Press, Sunday:

RIMINTON: Welcome back, this is Meet the Press. Our guest is the Finance Minister, Senator Penny Wong and welcome now to our panel, Sabra Lane from the ABC and Tim Colebatch from The Age. Good morning to both of you.

COLEBATCH: Good morning. Minister, we thought we were going to be growing at 4% or 5% at this time when the budget surplus was going to be happening and it made a lot of sense. We are, in fact, growing at about 2.5%. Our state here in Victoria has just lost 30,000 jobs in six months. Is this a good time to take $40 billion out of the economy?

WONG: We think it’s the right thing to do to bring the budget back to surplus and there are a number of reasons for that. One of them is that fiscal policy should look to the long-term. As a Finance Minister, you would expect me to say, we should set ourselves up for the long-term, but also, as you know, it's important for Government at a time where the economy is on track to return to trend growth.

COLEBATCH: “Trend growth” – what is trend growth? Can you explain that?

WONG: To ensure that the RBA has the flexibility to move when it comes to interest rates, should it choose to do so. Tim, I’ve read a couple of your columns, I understand the position you have on this. I would make the point that the forecasts that the Government made and the Treasury made in the mid-year review do take into account the fiscal consolidation that the Government is proposing.

COLEBATCH: Ok, which is 2.5% of GDP and you’re saying that if you take that out, you’ll still get trend growth which is 3 or 3.5%? Seriously.

WONG: What I'm saying is that the mid-year review, which forecast, as you recall, 3.5%, assumed the fiscal policy that the Government's got in place. And you mentioned your home state of Victoria - we are very conscious of the very different experience of the economy that we have at the moment.

I mean, things are very different if you are a manufacturing firm in South Australia, my home state, or here in Victoria, to a mining company in Western Australia. But let's also remember what sort of jobs growth we had – I think it was 44,000 last month. That's a very substantial increase in employment. The unemployment rate still has a five in front of it, putting us really in a very good place compared to most other comparable economies.

LANE: On Tim's point, an analyst this week from Société General warned that markets were watching Australia and were very concerned that you would pull out too much money, possibly triggering a recession. He said international credit rating agencies would have no problem in his words, “stabbing Wayne Swan in the back” – the implication being that they would downgrade Australia’s credit rating.

WONG: Let's remember, first – this is the Government that in the GFC acted to support jobs. Of course, we are a Labor Government. We acted to support jobs. In our view also, that it is the right thing to do, to bring the budget back to surplus, given where the economy is going.

One of the things we seem to forget is what's happening on the investment side. In the three-year period of which we’re in the middle of at the moment, mining investment goes $47, $95, $120 billion over three years. $120 billion is slated for next year. Now, I accept that there is a different experience in different sectors in the economy. But we shouldn't forget what that investment boom means and what that investment pipeline means.

When you're talking about the different experience of people in the economy, that's why you should do things such as the Government is doing – investing in skills, innovation, participation and the mining tax – which is about taking money out of profitable mining companies and spreading it across the economy through things like tax cuts for small businesses...

COLEBATCH: Let’s come to something the Coalition’s saying which makes a little more sense – that’s your Shadow counterpart, Andrew Robb. He gave a speech where he spelt out eight different measures where the Government has shifted more than $6 billion of spending out of 2012-2013. I’ll just quote one example – the Energy Security Fund gets $1 billion this year, $1 million next year, $1 billion the year after and $1 billion the year after that. Now, that’s surely a budget fiddle. How can you – if those are the ways you get a budget surplus, people are going to say, this is phoney, aren’t they?

WONG: But you know the sorts of numbers you’re talking about are… in the scheme of the budget, you can’t simply achieve a surplus by pretending – you’ve actually got to make hard decisions. And if Andrew Robb is so concerned about budget integrity, why is it he keeps getting his costings wrong? –

COLEBATCH: But I was asking about yours –

WONG: But Tim, the criticism from the Coalition – and people should start saying to them, well, but why don’t you put up or shut up?

RIMINTON: What Tim’s just said though, is tricky accounting. And that’s the argument that the Coalition –

WONG: The ‘tricky accounting’ is the Coalition who has never actually put forward costings which add up.

COLEBATCH: But the tricky accounting in this case, is also the Government, surely.

WONG: What I’m saying to you is that we have laid out our path to return to surplus and as you know, we will lay that out again in the Budget which will be handed down. No doubt, people like yourself will scrutinise it closely. But it is true, there were some up-front payments for example, in relation to the carbon price. And we explained why that was the case. But again, what I’d say is you don’t come back to surplus simply through accounting. You come back to surplus because you make hard decisions and hard decisions which so far, Andrew Robb has talked about but never delivered. In fact, he’s been overruled.

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Employment graphs. The zigs are getting bigger.

So maybe things are turning up. Maybe.

Here's the graph for the year to February:

It seemed ultra-flat, right?

Now, here's the graph for the year to March:

It looks better.

As Tim Colebatch puts it:

It was the fourth month in a row that the figures followed a zigzag pattern, falling and rebounding. But the rebounds have been bigger than the falls

To mangle a phrase from the 1980s, the zigs are getting bigger.

But not that much, not consistently, yet.

This chart from Leith van Onselen at macrobusiness shows that in the broad sweep of history employment grew rapidly up until late 2010 and has scarcely grown since:

This wasn't clear when the May 2011 budget was prepared, which is why the budget forecast an astounding (and now unreachable) half a million new jobs in two years.

It's the same for hours worked. We're scarcely doing any more, as this chart from Bill Mitchell makes clear:

Of course all this time the population has been growing, making the hours worked to population ratio look really, really sick, as this graph from the ACTU's Matt Cowgill indicates:

Here Matt Cowgill shows full-time employment growth has been seriously failing to keep pace with population growth. Not pretty, eh?

So, has the jobs market really sprung back to life? It's too early to say. And it is also too early to say that the reported gain of 44,000 in March even took place, given the nature of the ABS sample survey.

I doubt it myself. I would love it to be true. It would be tragic if if it turned out true and the May budget knocked the stuffing out of it.

Finally, when will we ever see the end of silly analysis like this (on Twitter):

"Great job Job figures. Only big surge in participation stopped jobless rate falling below 5.2%"

The big surge in the participation rate was not a surprise, independent of the of the extra jobs - it was caused by them. (Employment drives almost all of the participation rate, unemployment very little).

You can't accept one without accepting the other. The unemployment rate is 5.2%. Live with it.

Here's the long-suffering Chris Caton:

Bear in mind that monthly movements in the participation rate are simply an arithmetic reflection of movements in the estimates of employment and unemployment. The monthly movement in participation is otherwise devoid of informational content. Pay no attention to any analysis that suggests otherwise! If you don’t believe me, ask Peter Martin.



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New destinations. We are choosing the future

CHANGING PLACES

Where we’re travelling now

The new top ten

2002                            2012

1. New Zealand           New Zealand
2. United Kingdom        Indonesia
3. United States          United States
4. Indonesia               Thailand
5. Singapore               United Kingdom
6. Thailand                 China
7. Hong Kong              Fiji
8. China                     Singapore
9. Fiji                        Hong Kong
10. Malaysia               India

As recently as ten years ago travelling abroad meant flying to the UK (after the obligatory trip to New Zealand).

A radical reshaping of Australian tourist and business travel has the UK relegated to fifth place with China snapping at heels at position number six.

India, a decade ago not even near the top ten, has become our tenth most visited destination with 17,400 visits per month, up from 4000 ten years ago.

The Bureau of Statistics figures show that in February when the UK was at its coldest, more Australians visited China and more visited India than did the UK.

India, Thailand and China are by far our fastest growing destinations with double digit annual growth rates of of 15, 14 and 13 per cent, eclipsing the US and UK where visitor numbers are growing 7 and 4 per cent.

China and Hong Kong combined now take in more Australian visitors per month than the United States.

Curiosity is growing in both directions...

Australia is receiving 47,000 visitors per month from China (and a further 15,000 from Hong Kong), well in excess of the 40,000 that come from the US and within spitting distance of the 49,000 who come from the United Kingdom.

China is on track to replace the UK as the biggest source of visitors to Australia after New Zealand.

Tourism minister Martin Ferguson welcomed the new order saying China had the potential to add $9 billion to Australia’s tourism industry by 2020.

“New aviation agreements mean there are now 900,000 seats per year between China and Australia and we are funding businesses to become China ready through the Welcoming Chinese Visitors Project. We are also focusing marketing on China.”

Tourism & Transport Forum chief executive John Lee said he was pleased Australia was no longer as reliant on one source of visitors but warned against over-reliance on Australia's biggest trading partner.

“We have to promote Australia in a variety of markets. Any ramping up of activities in China must be paid for by extra funding, not by shifting resources from other areas,” he said.

Chinese visitor numbers dipped in February as a result of the timing of this year’s lunar new year. The future of UK numbers is uncertain after the introduction of the UK airport passenger duty on April 1.

“It now costs a British family of four coming to Australia $A 560 in airport passenger duty alone, which will not only reduce demand, but will reduce the spending capacity of those visitors when they arrive,” Mr Lee said.

“Some will avoid long-haul destinations such as Australia.”

Australians took 657,300 trips abroad in February, way in excess of the 498,900 visits to Australia from abroad.

In today's Sydney Morning Herald and Age


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HT: Mark Colvin

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Coal and iron ore, they're less than they were

Coal and iron ore are losing their place as drivers of Australia’s economic growth.

Unexpectedly bad trade figures for February show income from resource exports down for the second consecutive month.

Over the quarter income from coal exports slid 19 per cent, income from metal ores and minerals exports slid 10 per cent.

“The commodity price cycle peaked in the third quarter of last year,” said HSBC chief economist Paul Bloxham. “Indeed, with global growth expected to be below trend and more commodity supply likely to come on stream over the next year or two, it appears likely Australia's terms of trade peaked in the third quarter as well.”

Australia recorded its second trade deficit in a row in February, $480 million after a downwards revised $971 million in January.

The balance had been in the black for all but one of the previous 21 months, the exception being flood-affected February 2011.

“It’s just as well that we don’t worry about current account deficits these days,” quipped BT Financial Group chief economist Chris Caton. “The currency may fall, but that wouldn’t be a bad thing. Oh hang on, the currency has fallen.”

The Australian dollar slid from 103 US cents to 102.7 in an unusual reaction to a trade report propelled by the belief it might herald a further slowdown in economic growth.

At issue is how much of downturn was due to the timing to the Chinese New Year and bad weather choking coal supplies...

JP Morgan economist Ben Jarman said the weakness in coal exports seemed “indiscriminate by destination”.

‘‘That’s consistent with the idea that the problem is at our end in terms of getting the supply out.’’

The high Australian dollar has also suppressed the Australian dollar value of export receipts.

An Australian Bureau of Statistics analysis of quantity shows the volume of hard coking coal exported fell 27 per cent in February while the volume of iron ore rebounded 16 per cent. The price per unit of hard coal slipped 1 per cent, the price per unit of semi-sort coal slipped 13 per cent and the price per unit of iron ore slipped 2 per cent.

“There is no need to hit the panic buttons just yet. Having said all that, the second consecutive trade deficit is is unlikely to ease investor concerns about the extent of the slowdown in China,” said Commonwealth Securities economist Savanth Sebastian. “Even more concerning is that rural exports have fallen for the fourth consecutive month. It adds to the array of reasons why the Reserve Bank should be cutting rates.”

In today's Sydney Morning Herald and Age


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Announce it, hope for the best. The NBN-style weakness at the heart of Labor decision making

It might be popular now, but Labor’s $36 billion National Broadband Network is shaping up to be a financial disaster that will set back Labor’s image decades rebranding it the party of waste and extravagance.

That’s the view of Percy Allan, president of the Australian Institute of Public Administration and a former head of the NSW Treasury under premiers Wran, Greiner and Fahey.

Releasing a report card on “Public Policy Drift” he told the Herald that while Kevin Rudd came to office in 2007 promising “evidence-based” decision-making, he never spelled out what the term meant.

“True evidence-based decision making requires consultation. Kevin’s style was to lock himself in a cave and put in all the evidence and then emerge as Moses from the mountain with the tablets to tell the people what they would get.”

The NBN is a case in point.

“It would have been quite possible to say ahead of the election ‘we are going to ensure everybody can have an opportunity to be hooked up to the internet at good speeds, and when we get into power we are going to put out a green paper on the options for doing that and we are going to get feedback and make a choice.”

“That choice might be to spend $36 billion ripping out copper wire and disconnection Foxtel cables and starting afresh, which is the proposition we are facing... But had they examined the need, examined options and consulted they might have discovered cheaper ways to fill the need.”

“If a lower than expected proportion of people end up subscribing to it because they don’t want to pay Rolls Royce prices for a Rolls Royce service this thing is going to be a financial disaster - watch public opinion then.”

From opposition Labor would be tarred as a party of waste.

“It already has an image problem from the Whitlam years. If this thing goes under, the Liberal National party will be able to say here’s just another example of waste and extravagance by Labor, the Labor brand.”

“It may not take that long to backfire. When ten per cent of it is rolled out we will have a good idea of the take-up rate.”

The Institute asked management consultants Howard Partners to examine 18 high-profile Commonwealth projects for the quality of decision making making that brought them about. If finds 10 deficient - the alcopops tax, Building the Education Revolution, the NBN, the Darwin to Alice Springs railway, FuelWatch, the green car innovation fund, the green loans program, the home insulation scheme, Grocery Watch and the set top boxes for pensioners program.

Passing the test were the national disability insurance scheme, the minerals resource rent tax, and the emissions trading scheme.

The Institute wants all projects worth more than $100 million be subject to a ten-step process for establishing a business case.

Instead Mr Allan says politicians like to “decide things things in secrecy, call a dramatic press conference, get the front page splash and have people say - boy they’re smart, they got that right.”

“We find out later they haven’t got it right,” he adds.

In today's Canberra Times, Sydney Morning Herald and Age


Ten Criteria for a Public Policy Business Case

1. Establish Need: Identify a demonstrable need for the policy, based on hard
evidence and consultation with all the stakeholders involved, particularly
interest groups who will be affected. (‘Hard evidence’ in this context means
both quantifying tangible and intangible knowledge, for instance the actual
condition of a road as well as people’s view of that condition so as to identify
any perception gaps).

2. Set Objectives: Outline the public interest parameters of the proposed policy
and clearly establish its objectives. For example interpreting public interest as
‘the greatest good for the greatest number’ or ‘helping those who can’t help
themselves’.

3. Identify Options: Identify alternative approaches to the design of the policy,
preferably with international comparisons where feasible. Engage in realistic
costings of key alternative approaches.

4. Consider Mechanisms: Consider implementation choices along a full spectrum
from incentives to coercion.

5. Brainstorm Alternatives: Consider the pros and cons of each option and
mechanism. Subject all key alternatives to a rigorous cost-benefit analysis. For
major policy initiatives (over $100 million), require a Productivity Commission
analysis.

6. Design Pathway: Develop a complete policy design framework including
principles, goals, delivery mechanisms, program or project management
structure, the implementation process and phases, performance measures,
ongoing evaluation mechanisms and reporting requirements, oversight and
audit arrangements, and a review process ideally with a sunset clause.

7. Consult Further: Undertake further consultation with key affected stakeholders
of the policy initiative.

8. Publish Proposals: Produce a Green and then a White paper for public
feedback and final consultation purposes and to explain complex issues and
processes.

9. Introduce Legislation: Develop legislation and allow for comprehensive
parliamentary debate especially in committee, and also intergovernmental
discussion where necessary.

10. Communicate Decision: Design and implement a clear, simple, and
inexpensive communication strategy


Fail

• Building the Education Revolution
• NBN - National Broadband Network
• Darwin to Alice Springs Railway
• FuelWatch
• Green Car Innovation Fund
• Green Loans Program
• Home Insulation
• Grocery Watch
• Set Top Boxes for pensioners

Pass

• Higher Education – Transforming Australia’s Higher Education System
• Innovation – Powering Ideas: An Innovation Agenda for the 21st Century
• Environment – Caring for our Country
• Taxation – The Resources Super Profits Tax
• Water – The Murray Darling Basin Plan
• Energy – Emissions Trading and Carbon Tax
• Disability – National Disability Strategy 2010-2020
• Regional Development – Regional Development Australia



IPAA Policy Paper - Public Policy



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Two Australias. One isn't spending

Me on ABC Adelaide 891, April 4

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




A NATION DIVIDED

Six months of retail spending

NEXT TO NO GROWTH

Tasmania - 0.02%
NSW +0.06%
Victoria 0.30%
South Australia 0.50%

WAY STRONG GROWTH

Northern Territory 1.2%
Queensland 1.6%
Australian Capital Territory 2.0%
Western Australia 4.1%

Trend growth, August to February



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At last, the RBA gets off its hands. Why it's May 1

Baring surprises, the Reserve Bank board will cut official interest rates at its next meeting on May 1.

The move will deliver Treasurer Wayne Swan an apparent endorsement of his strategy one week before the May budget and open the way for a further cut at the Reserve Bank board’s June meeting four weeks later.

The Bank’s cash rate has stood steady at 4.25 per cent since December. A cut to 4 per cent would cut the cost of repaying a $300,000 mortgage $49 a month if fully passed on.

Reserve Bank governor Glenn Stevens signalled the switch in a statement released after Tuesday’s board meeting. Economic growth, previously thought of as “close to trend” had turned out to be “somewhat lower than earlier estimated”.

Instead of growing at the 3.5 per cent forecast by the Bank, the economy grew just 2.3 per cent in the year to December. Importantly, the news was mixed with nearly all of the growth in the coal and iron ore rich states of Western Australia, Queensland and New South Wales. Victoria, South Australia and Tasmania went backwards. Governor Stevens acknowledged the disparity, referring to “differences in performance between sectors”.

The only thing standing in the way of a rate cut next month is a bad inflation result due on Anzac Day eve.

Mr Stevens said the board thought it “prudent to see forthcoming key data on prices to reassess its outlook for inflation before considering a further step to ease monetary policy”.

The explicit acknowledgment that the Bank is preparing to consider easing rates policy is known in the markets as an “easing bias”. Futures traders are now pricing in an 80 per cent probability of a rate cut on May 1...

Treasurer Wayne Swan welcomed the Reserve Bank statement saying it reflected “patchwork pressures in our economy with some sectors booming and others facing challenges”.

Linking the easing bias to the forthcoming budget Mr Swan said returning the budget to surplus would help “ensure the Reserve Bank has the flexibility to cut rates further - after two rate cuts last year - if it thinks that’s necessary”.

Shadow treasurer Joe Hockey said the governor’s statement confirmed weakness in the economy and suggested it was not the time imposing a carbon tax that would drive up the price of everything.

Retail figures released as the Reserve Bank board met show a nation divided with next to no spending growth in the southern states of NSW, Victoria South Australia and Tasmania offset by strong growth in Western Australia, Queensland, the Northern Territory and the ACT.

In the past year spending in NSW and Victoria has grown a mere fraction of 1 per cent. Spending in Western Australia surged 9.25 per cent.

Retail prices climbed 1.6 per cent throughout 2011 suggesting the quantity of goods and serviced bought in Victoria and NSW has gone backwards.

Retail supplier Metcash yesterday announced plans to gut the Campbells Cash & Carry chain and slash head-office jobs, losing 500 staff. It will close 15 Campbells stores and close or sell 15 of the Franklins supermarkets it bought last year.

The Bureau of Statistics says in trend terms spending on food has been flat for three months. Spending on household goods has been sliding for four months. Spending in clothes and shoes stores and in department stores is climbing.

In today's Sydney Morning Herald and Age


A NATION DIVIDED

Six months of retail spending

NEXT TO NO GROWTH

Tasmania - 0.02%
NSW +0.06%
Victoria 0.30%
South Australia 0.50%

WAY-BIG GROWTH

Northern Territory 1.2%
Queensland 1.6%
Australian Capital Territory 2.0%
Western Australia 4.1%

Trend growth, August to February


RECOMMENDED READING

. RBA Statement In Blue and Red - Stephen Koukoulas


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What to look for in Budget 2012. Pain, deception...

Tuesday column

If @SwannyDPM pulls this off, he really will deserve to be called the world’s greatest Treasurer.

Few Treasurers anywhere in the world (and certainly none in Australia) have ever managed to turn a $40 billion deficit into a $3 billion surplus in the space of a year -- not without a massive surge in tax revenue, which we certainly don’t have. If you were running a company with a budget as big as Swan’s you could do it by sacking 1 in every 10 of your workers and hoping your income held up. To do it while the economy held up would be an extraordinary achievement since the cuts not only amount to 10 per cent of Commonwealth government spending, but around 2.6 per cent of Australia’s entire national spending.

Unless you used creative accounting. And for Swan, just as for any chief financial officer given a near-impossible task, the incentive is there.

As well as the handbook. Last week the International Monetary Fund released “Accounting Devices and Fiscal Illusions” - a sort of how-to guide for Treasurers “tempted to replace genuine spending cuts or tax increases with accounting devices that give the illusion of change without its substance”.

It lists five tricks - all of them familiar in Australia, and some being tried out on us by Wayne Swan and finance minister Penny Wong right now.

Deferred Spending. The Australian variant is brought-forward spending. In mid-May the two million or so families on Family Tax Benefits A and B will get a lump-sum gift - a prepayment of one year’s worth of carbon tax compensation payments brought forward to just before the financial year in which the carbon tax will actually start. At the end of May pensioners will get three quarters of their first year’s compensation payments paid upfront. In mid June Australians on Newstart and Austudy will get their own one year’s worth of prepayment, notwithstanding Newstart’s intended role as a temporary payment until someone gets a job.

It’s happening in order to move spending out of the financial year in which Swan is gunning for a surplus into the preceding year in which he is not. It’s mostly harmless, certainly a lot less harmful to the economy than would be actually cutting spending, for which we may turn out to be grateful.

International examples proffered by the IMF include postponing a military payday by a single day, which the US government did in the 1980s... and leasing instead of buying equipment rather than buying equipment, even when the eventual payments are more expensive.

Disappearing government. It’s what our own government doing with the National Broadband Network. Swan’s wholly owned NBNCo will spend $36 billion over ten years pushing cables into offices and houses. But most of it won’t show up in Swan’s budget. NBNCo is borrowing to do the building (at much higher interest rates than Swan himself could get) and so the spending won’t be in Swan’s books. Its a neat (and expensive) trick, but it least it won’t damage the economy in the same way as withdrawing the spending actually would.

The IMF says Greece tried a similar trick, treating government-owned bus and railway companies as if they did not belong to the government when in fact they did.

Disinvestment. The Hawke and Keating Labor governments sold off chunks of Qantas and the Commonwealth Bank and then booked the proceeds as revenue, the same sort they might have made from collecting tax, conveniently ignoring the decades of future dividends Qantas and the Commonwealth would no longer give them. These days Australian budget standards don’t permit that sort of trickery, but that did stop the Coalition in the 2010 election from (probably inadvertently) counting as revenue the proceeds of its planned sale of Medibank Private without counting as lost revenue the dividends it would no longer receive.

The IMF says Greece tried it selling future lottery proceeds and air-traffic control fees, Belgium sold future tax revenues.

Hidden borrowing. A loophole in Australia’s budget standards allows the sale of buildings (but not companies) as a way of gaining revenue without having to take account of the ongoing costs of paying rent. In the late 1990s the Howard government booked billions from selling government buildings including the purpose-built Foreign Affairs HQ, despite a warning from consultants Access Economics it would get “done”. Spurned, Access advised the Motor Traders Association to buy the building and its been pushing up the rent ever since.

Forgone investment. NSW premier Bob Carr and his successors simply didn’t invest in anything much once the Olympics was out of the way. Hospitals ran down and roads were left to decay unless they were “private” which meant the construction costs were off the government’s books, even if unpublicised side deals meant future governments would have to out handsomely if the toll-paying commuters stayed away. The IMF gives Australia’s toll roads a special mention.

Swan’s anguish is that these sort of tricks have already been tried. He’ll need billions more in real cuts. My money is on defence. In the incoming minister's brief presented to Senator Wong after the election her department listed options. The first was to “re-assess the strategic posture and funding of defence”.

In today's Sydney Morning Herald and Age


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