This article first appeared on 17 May 2013, at my old blog. In the lead into the budget, I thought it worth circulating again.
The Howard government went to capital markets on no fewer than 400 occasions to borrow money.
Between March 1996 and November 2007, there were 135 lines of bonds that were taken to market in various bond tenders which were issued with a face value of $51 billion, while there were over 280 T-Note tenders with a face value of over $220 billion.
Indeed, in the three months before the November 2007 election, the Howard government went to the bond market on 8 separate occasions to borrow money with a series of bond tenders. Even during the election campaign, just 11 days from polling day, it borrowed an additional $300 million in bond tender number 236. In the final term of the Howard government, from October 2004 to November 2007, there were 43 bond tenders or times the government borrowed money.
If Treasurer Joe Hockey was smart, he would be starting to link the fiscal tightening that seems to be in store in the budget to the current low interest rate environment and he would suggest the fiscal austerity about to be unleashed is a deliberate policy effort to try to drive the Australian dollar lower.
There is no doubt that there is a trade off between fiscal and monetary policy. Whenever fiscal settings are tightened, interest rates can be held lower than they would otherwise be and vice versa. The current low level of interest rates owes something to the tightening in budget policy over the last couple of years.
This article first appeared in Business Spectator on 29 October 2013:
The topsy turvy approach to climate change
The crux of Tony Abbott's Direct Action policy on climate change is having the government pay the worst polluters a fee as an inducement for them to reduce or stop their carbon emissions.
It is an odd policy, to be sure, and without any precedent – which means it is risky in terms of cost and effectiveness.
As Fairfax Media revealed yesterday, only 5.5 per cent of the 35 economists surveyed were in favour of the Direct Action approach to reducing carbon emissions versus 86 per cent in favour of a carbon price or emissions trading system. The only surprise in these findings was that 5.5 per cent (two respondents) were in favour of government payments to polluters.
There is a story doing the rounds this morning that "families could be hit with a debt tax to help pay off the budget deficit".
All that such a debt tax imposed by the government to reduce governement debt and deficit would do is transfer household savings from the private sector (where savings fall and / or debt increases) to the government sector (where debt falls). $10 billion of revenue from the tax, for example, would reduce household savings by that amount whilst simultaneously reducing governemnt debt by that amount, less the red tape and administration costs of course.
The net effect on national savings, which is the thing that matters to all sensible macroeconomists, is a big fat zero.
It would be a wild exaggeration to say that Australia has an inflation problem, but the March quarter CPI highlighted the fact that the strength of the domestic economy is spilling over into a somewhat uncomfortable acceleration in the inflation rate.
While the March quarter inflation rates came in under market expectations (which says more about those expectations than it does about the actual hard data), inflation is moving higher.
Whether it is the annual headline inflation rate – which has risen from a low of 1.2 per cent in the June quarter 2012 to 2.9 per cent now – or the underlying inflation rate – which has risen from a low of 1.9 per cent to 2.7 per cent now – the RBA can no longer sit on a record low cash rate of 2.5 per cent and be confident that a further acceleration in the inflation rate wont happen.
This article first appeared in the April edition of the Melbourne Review. See melbournereview.com.au
Australia is in the midst of a quite startling export boom. What is exciting and positive for Australia's longer run growth prospects is that the transition of the economy towards exports has much further to run.
The surge in exports and the prospects for yet further growth is largely the result of the once in 100 years mining investment frenzy over the past decade. Capacity in the mining sector has risen massively as the mining companies built the infrastructure needed to extract and transport the raw materials to the export markets, mainly in China and elsewhere in Asia.
Much has been written and discussed the fall away in mining investment. That is perhaps one of the most obvious aspects of the change in the structure of the economy over the next few years and nothing can or should be done to arrest that inevitable fall.
This article first appeared on The Drum on 16 April 2014. I wrote it for Per Capita, at per capita.org.au
One yawning gap in the economic debate in Australia is the lack of a target for the unemployment rate.
Just last week, with the release of a better than expected unemployment result, the commentary was focused on the favourable labour market news sparking speculation that the Reserve Bank of Australia would soon need to increase interest rates as future growth drove the unemployment rate lower.
The business cycles over the past few decades suggest that politicians and policymakers are happy to claim "full employment" whenever the unemployment rate is about 5 per cent. Anything less and there are skills shortages and wage pressures building and it is left to the RBA to hike interest rates to cool demand for workers.
Today the RPData series showed house prices rising 0.4 per cent in the first half of April after a record monthly rise of 2.3 per cent in March. Double-digit annual house price gains are now the norm and there are growing risks that any further inflation in house prices will threaten the stability of markets and with that, the economy.
Today also, the RBA published the minutes from the April Board meeting and made just one reference to house prices. It was a corn-ball factual comment that "Housing market conditions remained strong, with housing prices rising in March to be 10½ per cent higher over the year on a nationwide basis".
There was no discussion of whether this growth in house prices was a concern, or normal or whether, in the RBA's view, it posed a threat to financial stability.
It is trite to say that not all markets move in straight lines up or down, but in the case of the Australian dollar, the rally from below 0.9000 a few months ago to around 0.9400 at present has been quite powerful...and profitable.
In February, the call was for the AUD to move to parity over a medium term time frame and it is important to highlight that this bullish structural view still holds. By late 2014 and into 2015, the AUD is likely to be at parity or higher. https://thekouk.com/blog/aud-parity-beckons.html#.U0tlLca27wI
But what is somewhat disconcerting for that bullish view is a turn in market and economist sentiment. There are an increasing number of people who have shifting from calling the AUD lower from when it was below 0.9000 and are now bullish. It is unlikely their clients who shorted the AUD below 0.9000 are all that thrilled having been hit hard with the 5 per cent appreciation in the AUD.
The MYEFO fudges imposed on a weak and shell-shocked Treasury by Treasurer Joe Hockey and his office back in December are being shown up in the run of recent data.
This time, it is employment.
The MYEFO forecasts from Mr Hockey were for employment to rise by 0.75 per cent over the year to the June quarter 2014. This was 0.25 per cent lower than the employment growth forecast that was published in the independently prepared PEFO in August. That 0.25 per cent, as will be clear, is about 30,000 jobs and in budget terms, a lot of money.
The ABS released the March labour force data yesterday and those numbers confirmed what most sober analysis was suggesting and that is a solid pick up in employment growth in recent months is well underway as the overall rate of economic growth accelerates.
The most recent labour force data mean that for the MYEFO employment forecast to be correct, monthly employment over April, May and June has to average growth of a puny 5,000. This may be correct, but it's very unlikely. An average of 29,000 jobs were added over the last three months.
Given the momentum in economic growth, the rise in job advertisements and other labour market forward indicators, it is not unreasonable to expect average monthly employment increases of, conservatively, 15,000 a month over the next three months. If this is what happens, then the PEFO forecast of 1 per cent employment growth will prevail and the whole scam of cooking the books in MYEFO will be further exposed.
If the job creation of the March quarter is repeated in the June quarter, then annual employment growth will be nearer 1.25 per cent.
The end point is that the MYEFO numbers were the result of the new Treasurer, Mr Hockey, trying to make a lousy political point that had little to do with the true position of the economy.
The economy is doing well, really well in fact and we all should be delighted that jobs growth is picking up and the unemployment rate is ticking down. This is what, in my view, economic policy is all about. It is a pity that Mr Hockey prefers to play the petty debt and deficit political game.