I originally produced this research at my old website in 2012.
Given the kerfuffle over asset sales and Treasurer Joe Hockey's flailing with the budget and former Treasurer Peter Costello's suggesting that the government redo the budget, I thought it useful to up the debate on debt, asset sales and the fiscal follies of the Howard government.
There are a few updates from when this was initially published.
Australia's net Government debt was $96 billion in June 1996. By June 2007, Australia had net financial assets (negative debt) of $29 billion. The Howard Government and the current Liberal Party point to this turn in the finances of the Government with pride and say it is a sign of good economic management.
To be sure, this is a significant turnaround but there are some interesting facts behind the issue of Government debt in the past 30 or so years
The first point to note is that the $96 billion of debt inherited by the Howard Government from the Labor Party in 1996 comprised around $39.9 billion of debt accumulated by the Fraser Government under the Treasury-ship of Mr Howard and left to the Hawke Government in 1983! See Table 3 of Budget Paper 10 for more details.
As I discussed a while back, https://alturl.com/4o973 , when the Coalition talks of the $96 billion of Labor debt that it inherited, recall that just under half of it was in fact Liberal Party debt that was a hangover from the Fraser era that ended in 1983.
That slightly embarrassing issue aside, let's look at how else the Howard Government "got rid" of that debt.
Asset sales loom large in that discussion. The list of government assets sold by the Howard government is here: https://alturl.com/bjhqk . This table shows the asset, the time of sale and the price.
To get an accurate indication of the true dollar impact on debt of those asset sales, I have converted them into June 2007 dollar terms. Take the sale of DASFLEET, for example, which was sold for $408 million in July 1997. In June 2007 terms, this was worth $536.8 million. Or perhaps the first tranche of Telstra is interesting. Sold for $17.2 billion in November 1997, that converts to $22.6 billion in June 2007 terms.
The value of all asset sales under the Howard Government totalled a very hefty $71.8 billion in June 2007 dollar terms. This means that around three-quarters of the pay-down of the $96 billion of government debt was simply from selling assets to the private sector. Nothing more, nothing less.
To summarise the above facts:
The $96 billion "Labor debt" inherited by the Howard Government in 1996 comprised $39.9 billion of Fraser Government debt that carried through the Hawke/Keating period meaning that the true level of Labor debt in 1996 was $56 billion. To pay that $56 billion off, the Howard Government sold almost $72 billion of Government assets meaning the move to negative net debt was not really due to any miraculous and bold fiscal settings, but owed everything to a series of asset sales.
This article originally appeared on the Business Spectator website in October 2013: Here https://www.businessspectator.com.au/article/2013/10/31/australian-news/budget-complaints-bark-wrong-tree
Budget complaints bark up the wrong tree
With this being my second to last article for Business Spectator, I want to deal with the concept of good economic management.
Don't let this put you off, but the issue of what is a 'good economic manager' has been clouded by the hysteria of recent years and what has generally been an unquestioning dogma on what economic policy is all about.
Let's start at the end.
At a macroeconomic level, if policy makers in Australia can deliver annual GDP growth at 3 per cent, inflation between 2 and 3 per cent, an unemployment rate at 4 or 5 point something, and preside over rising living standards, this is almost perfect. It is as good as it gets.
For all credible economists, this is the unquestioned, universally agreed end game for policy makers.
The budget surplus or deficit, level of debt, interest rates and value of the Australian dollar are the tools used to achieve those objectives and are not the target in themselves.
Since the Abbott government came to power in September 2013 on a platform of "reducing debt" and "paying down debt" with the end point of "eliminating debt", it has borrowed, in gross terms, over $93 billion. That is about $2 billion a week.
The borrowings are in the form of government bonds and T-Notes and the debt is issued to cover the usual running costs of government when revenue is not sufficient to cover the cost of things like defence, aged pensions, other social security, health, giving money to the RBA and roads and the like.
The gross borrowings include a lot of short term debt (3 to 6 month T-Notes) and debt issued in years gone by that has matured over that time has had to be covered by new borrowing. The issue of financial management of government finances has been this way for many, many decades and it is entirely appropriate.
This means that the $93 billion or so of borrowing has not all added to the overall level of gross government debt which, according to the Australian Office of Financial Management, has increased to $333.5 billion as of today, which is some $53.2 billion above the level of gross debt at the September 2013 election.
The government has, to date, done nothing to suggest this $2 billion a week gross debt binge is going to end as it promised when in opposition. Losing the revenue from the abolition of the carbon and mining taxes, the cut to company tax, the $8.8 billion spending on the RBA reserves in addition to the paid parental leave scheme, roads, defence and the medical research future fund are all big ticket items that have to be covered.
With evidence building that the economy is stuck in a growth rate at or even a little below trend, the revenue from other sources will not see the budget deficit narrow much over the next few years.
Get set for a lot more borrowing from the Abbott government in the years ahead.
Dreadful news on the jobs front.
The low light is a 6.4 per cent unemployment rate – a 12 year high for that measure. Add to that a 9 year low for the employment to population ratio and almost no net increase in employment for the last four months and you have a picture where the jobs market is telling the world (including the RBA), that the rate of economic growth remains below trend.
Curiously, at its meeting just two days ago, the RBA Board noted "There has been some improvement in indicators for the labour market this year" and to be sure, there was. But with this update on the jobs market, it seems that 'improvement' was short lived.
This article first appeared in the July edition of The Melbourne Review:
The Australian economy is entering its 24th year without a recession, as we move into the second half of 2014.
This is a feat of extraordinary economic management and terrific good luck. Most economies experience a recession every seven to 10 years or so, as Australia did prior to the 1991 slump.
The reasons why Australia has managed to avoid a period of falling GDP and sharply rising unemployment over recent decades fills one with optimism that the next recession is still some way off. Policy makers have been, and still should be, shrewd and pragmatic, pulling the policy levers without fear or favour as growth and jobs dominate their objectives.
Hugely important for Australia's recent success has been the conduct of monetary policy, including the free-floating Australian dollar.
The monetary policy deliberations of the RBA remain torn. At one level, there is a need for higher interest rates as the house price pick up continues, as the hard data on inflation is ticking higher and as evidence mounts that the pause in activity associated with the budget may have been temporary.
At another level, that pause in activity may still be the start of a move back towards sub-trend growth – time will tell, the Australian dollar is still very high – certainly relative to the terms of trade, the unemployment rate is elevated and while the global economy is looking only mediocre, commodity prices are trending lower which will no doubt act as a drag on national income.
So there you have it. Up, down; down, up. While such divergences and uncertainties persist, the best course of action is to leave interest rates steady and that is exactly what the RBA has done for the past year.
Some mixed news on the economy today – it suggest that the strong start to 2014 may have edged off a little, but that a resurgence in credit growth and on-going house price inflation are issues that will test the RBA in the months ahead. For now, with the economy rolling along with uneven pressures, the RBA is set to keep interest rates on hold next week and probably for some months beyond.
Credit growth was upbeat, with a monthly rise of 0.7 per cent in June, which was the largest monthly rise since March 2008. Borrowers are back in town! This means that annual credit growth leapt to a 5 year high of 5.1 per cent. This is probably the most important indicator for the RBA today – borrowers are ramping up their credit at the same time lenders are willing to extend that credit. Another few months of these sorts of increases and the RBA will not only be moving to a tightening bias but it will be delivering rate hikes to cool the credit lift off.
One consequence of the Abbott government's proposed work for the dole scheme might be to increase the number of people unemployed, as measured by the Australian Bureau of Statistics.
From July 2014, the ABS is changing the definition of "active" job search. This change is to bring the ABS into better alignment with international standards. The ABS includes an 'active' job search criteria to define the unemployed population. That seems sensible.
But what is 'active' job search?
According to international standards and those being adopted by the ABS, "active' job search steps are those which put a person in contact with prospective employers for work, either directly or through intermediaries (such as employment services, agencies or recruiting firms), or represent steps towards 'self-employment".
It seems the markets and a gaggle of commentators are getting a little excited about the June quarter CPI which showed headline inflation at 3.0 per cent annual terms and the underlying inflation measure at 2.8 per cent. At face vale, both are near or at the top of the RBA 2 to 3 per cent target band and without any further analysis would suggest there is something of an inflation issue in the economy.
But when one bothers to dig into the numbers, it is clear that inflation is probably slowing and one-offs have been pushing those annual figures higher.
In six monthly annualised terms, the path for underlying inflation over the past two years has been:
H1 2014: 2.5%
H2 2013: 3.1%
H1 2013: 2.1%
H2 2012: 2.7%
There was a bit of a lift in the second half of 2013, which now appears to be a quirk, perhaps influenced by the AUD dipping through much of 2013 and adding to some import prices. Obviously that mini-spike will drop out over the next two quarters which suggests a gentle pull-back in the annual inflation rate is likely by year end.
Everybody knows, although not everybody admits it, that consumption of tobacco in Australia has fallen in the aftermath of the plain packaging laws which came into being in December 2012.
The Fairfax media group is reporting this morning findings from the National Drugs Strategy Household Survey that show smoking levels are in decline. Not at all surprisingly, the numbers from the NDSHS dovetail with the hard data on the volume of tobacco consumed from the Australian Bureau of Statistics. Those data show that the volume of tobacco consumed is 5.3 per cent lower in the March quarter 2014 compared with the December quarter 2012.
What is interesting is the fact that the NDSHS survey was conducted between July and December 2013, before the 12.5 per cent rise in tobacco excise took effect. The authors of the report noted: "We know that that tax has a lot of influence over consumption so it's really important that the data was collected before that".
"The only thing that happened in the 12 months before that was the introduction of plain packaging laws."
The key findings were:
- The daily smoking rate plunged from 15.1 per cent to 12.8 per cent between 2010 and 2013.
- Most people are now 16 before they smoke their first full cigarette, up from 14 in 2010, and 95 per cent of 12 to 17-year-olds have never smoked.
The Fairfax report can be found here.