This article, written on behalf of Per Capita, first appeared on The Drum website:
Australia is in a fine budget position and the deficit isn't nearly as big an issue as some politicians would have you believe. Just ask the credit rating agencies, writes Stephen Koukoulas.
The budget debate in Australia is so pathetically inane that the fiscal blame game has reached a point where neither side of politics wants to take responsibility for Australia's triple-A rated fiscal settings.
This perverse situation shows up with the notion that debt and deficit are political poison rather than the medicine that, when used wisely, has delivered spectacular wealth-creating returns for the economy.
The latest $700 million bond issue by the Abbott government brings the cumulative total of gross borrowing since the election to $64.15 billion. What is extraordinary about this is not the borrowing itself, but the fact that after 7 months in office, the government has not implemented any meaningful policies to stem the rise in debt accumulation.
The AOFM has indicated it will be borrowing a further $1.4 billion next week.
Indeed, as the Mid-Year Economic and Fiscal Outlook showed, policy decision taken by the new government added $13 billion to the budget deficit.
The run of data in the few days since Tuesday's meeting of the RBA Board has continued the trend of strength, confirming a substantial lift in the non-mining investment parts of the economy.
The RBA appears to be too gloomy with its views on growth and sanguine on inflation as it happily leaves interest rates at record lows, inflating house prices along the way and allowing the rest of the economy to pick up momentum at an increasingly worrying pace.
As I sit back and contemplate what is, I often wonder which is more damaging to the Australian economy: rapidly inflating house prices which are starting to look and smell a bit bubble-ish, or on the other hand, a strong Australian dollar which sort of, maybe, kind of, perhaps is a bit overvalued?
The lever pullers at the RBA clearly think it's the Aussie dollar rising that is the biggest threat with its decision today to let the house price surge continue unchecked with interest rates being held at record lows.
I don't agree with the RBA. One reason is that I am not sure the Australian dollar is all that over valued, while I am also unsure whether interest rate hikes would see its value rise for any sustained period. After all, if interest rate differentials were the main driver of currencies, the Japanese yen would be worth next to nothing and the Turkish Lira would be a world beater.
My old sparing partner and AFR scribe, Christopher Joye, thinks "when [house] prices do start sliding, it is not inconceivable that we could see unprecedented 10 to 20 per cent losses across the board".
While I am clearly worried about the current run up in house prices and can see a period where house prices will falter as the RBA moves to a monetary policy tightening cycle, Chris' view of such large falls seems to be askew.
As a result, I am offering Chris a simple two-tiered offer based on his forecast.
The RPData five city house price index rose a thumping 2.3 per cent in March which is a stunning rate of increase at a time when house prices are already elevated.
For the first three months of 2014, the RPData series shows house prices up 3.5 per cent, or an annualised pace of close to 15 per cent. This is a rate of increase that must be causing the RBA some concerns as it continues to sit on official interest rates at a record low 2.5 per cent.
While the RBA does not target house prices with its monetary policy settings, it is well aware of the macroeconomic policy risks that come with house price booms... and busts. House price booms generally lead to a pick up in speculative borrowing and a ratcheting down of lending standards by financial institutions as every one wants to get on board the price surge.
It is refreshing to see the RBA catching up to my view about the strength of the domestic economy. In recent days and weeks, RBA officials have finally acknowledged some of the general risks to inflation associated with a clear strengthening in the non-mining parts of the economy and from what is an increasingly worrying lift in house prices.
The RBA Board meeting next Tuesday, 1 April, is likely to throw a few more hints that the current 2.5 per cent cash rate is not appropriate for the current fundamentals. The foreign exchange market understanding this as the AUD powers to 0.93 US, even though it is taking an eternity for the many strategists to roll over to the new information.
Booming double digit growth in house prices, a record high level of new housing construction, rising commodity prices, exports surging in both volume and value terms and consumer demand expanding at a solid clip are threatening to put a rocket under inflation, which has already been marching higher since the middle of last year.
The Federal election is still probably 125 or 130 weeks away, but many of the online bookmakers are already offering odds on various aspects of what might happen in politics between now and polling day and of course, who might win.
The Coalition government are warm to hot favourites to win the 2016 election, at $1.45 versus $2.70 for Labor, despite some of the polls that currently have Labor well ahead on a two-party preferred basis. It just goes to show what punters, and the bookies, think of the predictive power of polls two and a half years away from election day.
I am not sure which part of the graph below that Treasurer Joe Hockey does not understand.
Mr Hockey's crusade against the former government and its Treasurer Wayne Swan on the issues of economic management, debt and deficit shows a disturbing lack of self-awareness. Mr Hockey doesn't realise people are laughing at him like a down-and-out soothsayer procliaming "the end is nigh" each time he raises those issues. Indeed, it is a little embarrassing to see Mr Hockey discuss economic management without even the slightest understanding of the issues that make this one of the most extraordinary charts doing the rounds. The information in this chart is likely to fuel a library of Ph D theses as the smart economists around the world work out what went right in Australia and what went wrong in the other advanced economies.
This article first appeared in the March edition of The Melbourne Review:
ANOTHER YEAR OF EXPANSION
The economy has started 2014 on a strong footing, although there remain quite divergent trends within the changing composition of that growth.
Mining investment is falling away very sharply and perhaps one of the easiest things to forecast for the next few years is for further sharp declines. Many of the huge mining projects of the last decade have been completed or are close to completion. The work is finished. Given the huge capacity in mining built up over that time, there are very few new mining projects on the horizon.