Ahead of tomorrow's RBA meeting, a flow of local data locks in generally good news on the economy and a still troublesome rate of inflation.
According to the TD-MI monthly inflation gauge, prices rose 0.4 per cent in April, after increasing 0.2 per cent in March. The annual increase rose to 2.8 per cent and remains dangerously close to the top end of the RBA's 2 to 3 per cent target band, especially with monetary policy so loose and the wealth effect from rising house and share prices still very powerful.
The number of building approval was a touch weaker, falling 3.5 per cent in March, after a 5.4 per cent fall in February, but were still 20 per cent higher than a year earlier. While slightly softer, it appears that the housing construction boom remains in place with 2014 likely to see a record number of new dwellings constructed. This vital aspect of the rebalancing of economic growth away from mining investment towards construction appears to be locked in.
In a vital sign for the health of the jobs market, the number of job advertisements, as measured by the ANZ series, rose 2.2 per cent in April and in trend terms, has been rising for six straight months, This bodes well for strong job creation in the months ahead and indicates that the unemployment rate should continue to fall over the near term at least.
In light of the humbug of the 'budget never returning to surplus unless we cut the tripe out of spending', I though it interesting to revisit the sensitivity of budget forecasting to small changes to the economic parameters.
The Commission of Audit finding that Australia will be dogged by perpetual deficits is based on a range of economic projections which assume the economy maintains an output gap over the next decade (real GDP growth never above 3%), nominal GDP growth averaging 4% for the next three years and then only rising to 5.5% thereafter, the unemployment rate remaining at 6% for the next decade and a falling particpation rate.
These forecasts may be right, they may not.
My simple budget forecasting spreadsheet shows that if we change slightly some of those projections and in two of the next three years, real GDP growth hits 3.5% as the output gap closes, if nominal GDP is 0.75% higher in those two years, and the unemployment rate ticks down to 5.5% within a year and then drops to 5% by 2016-17, there are surpluses within three years and that surpluses remain and get larger out to 2023-24.
One of the lame brain fact free and unchallenged assertions doing the rounds recently and one which forms the basis of the Commission of Audit report, is that the spending cuts and other policy changes needed are because the government is getting too big.
While it is open to debate on how best to measure the 'size of government', one way is to look at the sum of Commonwealth revenue and spending as a share of GDP. This means that the more the government raises in tax and then recycles into the economy via spending, the bigger the footprint of government on the economy, and vice versa.
The last few days have seen some low impact, but nonetheless enlightening, data hit the screens.
Credit growth remains solid, with a 0.4 per cent gain in March which meant the annual growth rate was 4.4 per cent. Not weak, not strong but the annual increase was the fastest since March 2009. Housing credit drove the lift in growth with a 5.9 per cent annual increase while business credit was also on the mend with an annual rise of 2.6 per cent. It seems borrowers and lenders are stepping up to take advantage of the current low level of interest rates and stronger growth more broadly.
The terms of trade (export prices divided by import prices) were broadly stable in the March quarter (up 0.4 per cent) with export prices rising to their highest level since December 2011. The curious thing – at least for the terms of trade doomsayers – is that since the end of 2012, the terms of trade have actually risen by 1.4 per cent, aided by a stronger world economy.
The budget is fast approaching and the Abbott government is flagging a deficit reduction levy (tax) and / or an increase in personal income taxes as it works furiously to return the budget to surplus.
This got me thinking about high taxes and which side of politics resorts to tax revenue in its budgetary planning.
Here, in order, are the highest tax to GDP ratios that have been recorded. Here are the Top 10.
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.