Blog

Mon, 21 May 2018  |  

This article first appeared on the FIIG website at this link: https://thewire.fiig.com.au/article/2018/05/14/.Wv932WJ7Bn8.linkedin 

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An investor’s perspective of the budget

As some of the dust settles from Treasurer Scott Morrison’s budget, the clean air reveals the biggest issues boil down to significant cuts in income tax; an earlier return to surplus; and a path to lower government debt.

The government announced this seemingly incongruous policy mix – lower taxes and yet lower government debt – because revenue has been flowing into the Treasury coffers at a pace significantly above the level assumed in the mid year Economic and Fiscal Outlook update in December last year.

Lower tax and lower government debt are, at face value, good news. Most individuals would prefer paying less tax, while economic prudence and sound policy should see government debt levels reduced when the economy is growing at a decent pace.

But the good news on tax and debt is based on a number of premises that are open to debate.

The surplus forecast needs the economy to remain strong

Important to the analysis of the budget are the following assumptions from Treasury:

• The economy picks up steam and grows consistently by 3 per cent
• The unemployment edges down to 5 per cent
• Annual wages growth accelerates from 3.25 to 3.5 per cent

These favourable economic conditions are essential for the revenue inflow to remain strong enough to fund the tax cuts, see the budget return to surplus in 2019-20 and debt levels decline.

Tue, 15 May 2018  |  

This article first appeared n the Yahoo7 Finance web page at this link: https://au.finance.yahoo.com/news/cant-get-job-want-2-055935412.html 

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The Turnbull government is kidding itself when it claims the labour market is strong.


The latest data show the unemployment rate at 5.5 per cent, which is little changed from when it took office in September 2013. And while employment was impressively strong during 2017, it has weakened in the last two months to register no net increase since January.

Indeed, in the March quarter of 2018, employment rose by just 36,000, the second weakest March quarter increase in employment since 2009 which was when the economy was dealing with the global recession.
What’s more, the bulk of the rise in employment over the prior 18 months or so merely reflects population growth, mainly from net immigration, and little more.

More evidence of the problems in the labour market is evident in the near record high level of underemployment – that is, the number of people who have a job but would prefer to work more hours. In February 2018, the underemployment rate was 8.3 per cent, little changed from the level of recent years. The 1.1 million people who are underemployed reflect a weak labour market from the perspective of their employers being unable to offer them more hours because their business (the economy) is simply not strong enough.

When looking at economic facts, context is important.

The underemployment rate has been above 8 per cent since August 2014. At the depths of the global financial crisis in 2008 to 2010, the underemployment rate peaked at 7.8 per cent, lower where it is today, and never before in history has the underemployment rate been above that level.

Fri, 11 May 2018  |  

This article first appeared on The Guardian web site at this link: https://www.theguardian.com/australia-news/2018/may/09/australia-budget-2018-whats-the-point-of-scott-morrisons-policy-speed-limit 

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What’s the point of Scott Morrison’s ‘policy speed limit’?

The budget confirmed a deluge of tax revenue for the government that will see the tax-to-GDP ratio rise over the next few years to a peak of 23.9% in 2021-22.

The treasurer, Scott Morrison, has decided to use that peak as a self-imposed “policy speed limit”: in other words, he will put a cap on the tax-to-GDP ratio at this arbitrary level to 2028-29. This cap is effectively how the income tax cuts have been funded, as excess tax revenue is recycled back into lower tax rates.

It is an odd speed limit for a treasurer to embrace and it means there is either an economic timebomb in the budget for a future government or Morrison has no intention of sticking to the cap.

It is important to note, in this context, that the budget is framed on a series of realistic and reasonably conservative economic forecasts for economic growth, wages and company profits, while it makes the usual technical assumption of broadly flat or even lower commodity prices than recently seen.

Wed, 09 May 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/governments-budget-surplus-just-pure-luck-003443629.html 

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Is the Government's Budget surplus just pure luck?

 The Treasurer Scott Morrison was all smiles on budget night, when he announced a budget surplus in 2019-20, a year earlier than previously forecast.

As it stands, it will be the first budget surplus since 2007-08 and if it is delivered, it will mark the start of the long process of reducing gross government debt which is still on track to hit a record high around $600 billion in 2020-21 before it starts to fall. According to the budget documents, net debt is on track to decline from next year and if all goes well in the economy, it will keep falling through to at least 2028-29.

In looking at how this about turn on the budget and government debt occurred, it is important to understand that it had nothing to the policy finesse of the government.

Indeed, the return to surplus is wholly the result of Treasury forecasting errors which as recently as December last year, were projecting a deficit of $2.6 billion for 2019-20, and that was before the extra spending and tax give-aways that Mr Morrison was also delighted to announce. Amid the thousands of pages of budget documents, there is a table in Budget Paper 1, Statement 3 which shows how the budget deficit 0f 2019-20 morphed into a surplus in five short months.

Tue, 01 May 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/revealed-chinas-role-upcoming-federal-budget-023756522.html 

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Revealed: China's role in the upcoming Federal Budget

Next week’s budget will deliver income tax cuts, reiterate cuts to company tax, it will confirm the abandonment of the previously proposed hike in the Medicare levy and will still have a forecast for the budget returning to surplus in 2020-21. How can there be such a cargo cult give-way of goodies, yet not change in the path of returning the budget to surplus?

The answer, it appears, is in a mix of China, upbeat economic forecasts and a pay back from the pea and thimble budget trickery that former Treasurer Joe Hockey engineered shortly after the 2013 election when he sneakily and quite unnecessarily gave a stunning $8.8 billion to the Reserve Bank of Australia, ostensibly to firm up its financial position.

Each of those issues has fuelled a lift in revenue relative to forecast, that the government seems keen to give away as is strives to woo the electorate ahead of the upcoming Federal election.

Chinese demand for Australian goods and services has underscored a lift in export earnings through a combination of greater export volumes and higher commodity prices.

Mon, 30 Apr 2018  |  

The following is an extract from my opening remarks to the Senate Committee on the Audit Commission in February 2014.

The full document is at this link: https://thekouk.com/blog/the-kouk-s-opening-remarks-to-the-senate-committee-on-the-audit-commission.html 

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It is somewhat alarming to see the increasingly popular view that budget deficits are bad and surpluses are good. Alarming because it may encourage policy makers to take the wrong decisions when managing fiscal settings without paying attention to the business cycle. There was a risk of this with the previous government with its commitment to return to budget surplus in 2012-13. It was a worthy objective but thankfully it did not stick to that strategy when it became apparent that the decline in the terms of trade and high value for the Australian dollar had impacted negatively on national income growth and therefore government revenue.

Had it cut spending to meet its surplus goal, the economy would have weakened appreciably and the unemployment rate would inevitably be higher than it is now.

The government and the economics profession needs to work hard to change the misconception that surpluses are always good and deficits always bad.

There should be no value judgement that suggests budget deficits are good or bad without context being placed around the economic and fiscal position.

I have used the analogy elsewhere, but I think it makes the point – is a warm and sunny day good or bad?

Most obviously, it depends.

For a holiday maker at the beach, a warm sunny day is clearly good. But for a farmer on marginal land in the midst of a drought, another warm and sunny day is clearly bad.

A similar judgment should be applied to budget deficits and surpluses.

It would be an economic policy failure, in the extreme, for any government to be aiming to run a budget surplus if the economy was in recession and the unemployment rate was rising. Here a budget surplus is unquestionably bad, while a deficit would be good, even if it was merely the result of the government allowing the automatic stabilisers on revenue and expenditure to kick in.

Similarly, if the economy was in a well established period of above trend growth, with very low unemployment and inflation pressures evident, a budget surplus would be good and a deficit bad.

When I look at the business cycle in Australia over the last four decades, I see quite clearly that this approach has been in place, more or less, from both sides of politics. I note the Howard government running a budget deficit in 2001-02 as the economy slowed markedly, if only temporarily, in the wake of the ‘tech wreck’ in the US and aftermath of the terrorist attacks on the US in September 2001.

This was appropriate.

Tue, 24 Apr 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/will-banking-royal-commission-undermine-economy-054126660.html 

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Will the Banking Royal Commission undermine the economy?

 For those of us worried about the health of the economy, economic growth and the objective of full-employment, the findings of the banking Royal Commission are extremely worrying.

There is a real risk that the revelations about the misconduct and devious practises of the banks will have the dual effect of undermining already fragile sentiment and will force the banks to tighten up on their credit policies. If ether of both of these happen, there would be a downgrading of investment and spending plans in an economy that is already growing below its long run trend. Sound, financially secure and well-run banks are the bedrock of a modern and successful economy.

Banks and other financial institutions allow consumers to borrow money for their house, to fund some of their personal expenditure while at the same time, often manage their superannuation savings. They also help business, big and small, expand and invest.

Mon, 23 Apr 2018  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/tax-pushed-spotlight-012812764.html 

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Why your tax is about to be pushed into the spotlight

The budget is just a few weeks away. The Federal election is likely within a year.

Over this time, you will be hearing a lot more about tax. Some will claim the tax-take of the government in Australia is high and that cuts in company and personal income taxes are a necessary policy aim. Others will claim a decent amount of tax revenue is needed to fund the services the people demand from government, namely health care, education, roads, defence, pensions and the like. Closing loopholes and getting rid of unfair tax breaks, collecting more tax in other words, will allow billions of dollars to be directed from the wealthiest so that these services can be funded.

All this assumes, quite plainly, that responsible economic policy delivers budget surpluses when the economy is strong and allows for deficits when the economy is soft or downright weak.

But let’s have a look at a few of these claims on tax against some hard and fast facts.

Wed, 11 Apr 2018  |  

The RBA Governor, Phillip Lowe, suggested that when interest rates do increase, it “will come as a shock to some people”.

On this, Lowe is spot on.

It has been 7 and a half years since the last interest rate rise from the RBA which means that those who have taken on debt since November 2010 have only see their interest rate stay the same or move lower.

There are a few fun facts with this development.

Wed, 11 Apr 2018  |  

This article first appeared on The Guardian website at this link: https://www.theguardian.com/commentisfree/2018/apr/11/first-home-owner-grants-and-the-peoples-bank-plan-push-house-prices-higher?CMP=soc_3156 

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First home owner grants and the people's bank plan push house prices higher

The Reserve Bank of Australia must be dismayed at the policies from several state governments that have increased cash payments to first home buyers and propose a people’s bank that, among other things, will make it easier for potential owner-occupiers to access credit and bid for a house.

The last thing potential property buyers need is easier access to credit and cash handouts to boost demand. Indeed, the RBA and other regulators are still working the other way, keeping policy tight so that credit growth continues to slow and with that, there will be some rebalancing of household balance sheets away from ever increasing debt.

The first home owners grant increases in NSW and Victoria have underpinned prices, with the number of first home buyers rising around 35% over the past year. In addition to adding to demand for housing, these policies have also been costly to the state budget position.

Without this surge in first home buyer activity, house prices would have no doubt been weaker still and that may have allowed the RBA to be more proactive in setting monetary policy with an eye to boosting demand and lowering unemployment which would impact positively on wages growth and in time see inflation return to the target.

One of the important economic issues that will likely have a significant impact on the economy and policy, is the fall in house prices that is steadily unfolding.

Outside Darwin and Perth, where prices have slumped by over 20% and 10% respectively from their peaks, the falls are not yet substantial, but they could be signalling the early stages of a fall in household wealth which, if sustained, would have consequences for the economy.

In the two mega-cities, Sydney and Melbourne, prices are down 4% and 1%, respectively, from the late 2017 peaks and according to the Corelogic price data, there is no evidence that the falls in prices are abating.

THE LATEST FROM THE KOUK

Get ready for a February budget

Wed, 15 Aug 2018

This article first appeared on the Yahoo 7 Finance web site at this link: https://au.finance.yahoo.com/news/heres-need-get-ready-early-2019-budget-010743625.html 

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Get ready for a February budget

 An early budget is the likely scenario given the Federal election is set to be held in May 2019. The budget, which in modern times is usually delivered by the government on the second Tuesday in May, cannot be handed down during the election campaign which will be running hot if Prime Minister Turnbull sticks to his word and holds the election in May.

To allow the government to deliver its budget before the election is called, the most likely time for it will be in the period from mid-February through to early March.

With the constraint of the election timing, this timeframe for the budget would allow the government to ramp up its economic rhetoric and no doubt engage in a bit of a voter friendly strategy in an effort to gain some political momentum into the election campaign. This timing also means that soon after voters return to work and the real world after the summer holidays, they will be bombarded with budget news which, if the government is smart, will be portrayed as ‘good news’ and ‘vote for us’ as it struggles to remain competitive with the Labor Party.

How the way you pay for stuff is fixing the budget

Mon, 06 Aug 2018

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/way-pay-stuff-fixing-budget-024912997.html 

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How the way you pay for stuff is fixing the budget

 Over the past few weeks, I have tried a little experiment with a few on my favourite small business retailers who, for what will be obvious reasons, will remain nameless.

For a range of smallish transactions of say $10 to $20, I deliberately made a bit of a fuss about paying with cash, rather than tapping with my card. Almost without exception, the proprietor, with a wink and nod, appreciated the use of cash, and passed a quick comment to the effect that “unfortunately, cash is rare these days”. I also noticed on a number of occasions the transaction was not rung up on the cash register, with the notes tucked into the cash drawer with no one other than me and the shop keeper aware of the transaction.

This got me thinking about an issue which has had me a little puzzled – the sharp improvement in the government’s budget position on the back of unexpectedly strong tax receipts. This extra tax revenue for the government appears to be an odd development given the sluggishness in the economy and consumer spending, and the ongoing weakness in inflation and wages, which over many decades have proven to be the driver of tax collections.

Rather than an unexpected pick-up in economic activity driving the revenue surge, it appears that technology, the decline in the use of cash and the greater use of cards accounts for the extra tax take.