Blog

Fri, 23 Mar 2018  |  

This article first appeared on the Yahoo7 website at this link: https://au.finance.yahoo.com/news/heres-political-debate-tax-getting-hot-213307700.html 

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Here's why the political debate over tax is getting hot

Just about all economists agree with the general principal of budget management that the Federal budget should be in balance over the course of the business cycle and that the level of net government debt should be low enough to ensure the maintenance of Australia’s triple-A credit rating.

These big picture fiscal themes even have bipartisan support with both the Coalition and Labor arguing that they will both deliver a sound budget position when in government. But like someone planning to travel from Dublin to Cork, there are different routes that can be taken to get there. What is the best policy mix that will meet the end point of budget management of balanced budgets and low government debt?

In broad terms, there are two paths that the government can take to balance the budget and contain government debt.

One is to spend less money by cutting government funded services on education, health, roads, pensions and the like while keeping the tax base lower than it would otherwise be. Such a strategy can comfortably balance the budget as fiscal austerity trims the spending side.

The other way is to have tax laws to ensure there is enough revenue in the government coffers so that services can be provided to a large number of people at a high quality. If the tax system is progressive, the much of the revenue raise will be through fair means.

Tue, 13 Mar 2018  |  

This article first appeared on the Yahoo7 Finance website at this link:  https://au.finance.yahoo.com/news/house-prices-fall-across-australia-worried-004714571.html 

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As house prices fall across Australia, should we be worried for our economy?

Are you a home owner?

If you are in Sydney, Perth and Darwin, you are losing money at a rapid rate.

In Melbourne and Canberra, prices are topping out and there is a growing risk that prices will fall through the course of this year. If your dwelling is in Brisbane or Adelaide, you are experiencing only gentle price increases, whilst the only city of strength is Hobart, where house prices are up over 13 per cent in the past year.

The house price data, which are compiled by Corelogic, are flashing something of a warning light on the health of the housing market and therefore the overall economy. For the moment, the drop in house prices has not been sufficient to unsettle the economy, even though consumer spending has been moderate over the past year.

The importance of house prices on the health of the economy is shown in the broad trend where the cities that have the weakest housing markets tend to have the slowest growth in consumer spending and are the worst performance for employment and the unemployment rate. The cities with the strongest house prices have strong labour markets and more robust consumer spending.

Wed, 07 Mar 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/trump-cause-next-global-recession-heres-233953884.html 

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Trump could cause the next global recession: here's how

The Trump trade wars threaten the global economy. This is not an exaggeration or headline grabbing claim, but an economic slump based on a US inspired global trade war is a distinct and growing possibility as it would dislocate global trade flows, production chains and bottom line economic growth.

Up until a few weeks ago, there was a strong enthusiasm for the economic policies of US President Donald Trump. Tax cuts and planned infrastructure spending were seen to be good for the US and world economies. US stocks and many around the rest of the world rose strongly, to a series of record highs. At the same time, bond yields (market interest rates) surged as the market priced in interest rate hikes and inflation risks from the ‘pro-growth’ policies. It was seen to be good news.

Very few, it seems, were worried about the consequences for US government debt and the budget deficit from this cash splash, especially when the US Federal Reserve was already on a well publicised path to hiking interest rates.

About a month or two ago, a few of the more enlightened and inquisitive analysts started to focus on the fact that the annual budget deficit under Trump was poised to explode above US$1 trillion with US government set to exceed 100 per cent of annual GDP.

A debt binge fuelled by tax cuts was a threat to the economy after the temporary sugar hit.

Wed, 28 Feb 2018  |  

This article first appeared on the FIIG website at this link: https://thewire.fiig.com.au/article/commentary/opinion/2018/02/25/26-years-and-no-recession-what-might-go-wrong 

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26 years and no recession – what might go wrong

 Australians should be justifiably proud of the fact that the last recession in Australia ended in the June quarter 1991, over 26 years ago. This means around half the current workforce has never had to deal with the pain and suffering – both financial and emotional – that a recession delivers.

While the economy is hardly on fire at the moment, it is pretty safe to say there is no material threat of a recession. Indeed, there are few identifiable issues that can be seen as genuine triggers for what some are suggesting is a long overdue recession.

As 2018 kicks off, business investment is rapidly recovering from the mining sector imposed slump and public sector spending is strong. These items alone will provide a foundation for the economy for the next year or two, also supported by the export sector, which should perform well following steady growth in the global economy. Despite moderate growth in household spending due to weak wages growth and high levels of household debt, it is still expanding and adding to bottom line GDP. In other words, it is not falling and offsetting the positive news in business investment and public spending.

For a recession to emerge as a material threat, household consumption has to fall, or business investment and public infrastructure spending has to reverse sharply, neither of which are currently on the radar.

Forecasting a recession is easy

Forecasting recessions is easy and many people seem to make a living out of it.

Tue, 27 Feb 2018  |  

This article first appeared on the Yahoo 7 Finance website at this link https://au.finance.yahoo.com/news/heres-expect-2018-federal-budget-004452841.html 

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Here's what we could expect for the 2018 Federal Budget

Treasurer Scott Morrison is about to do cartwheels down the corridors of Parliament House, such is the unexpected improvement in the budget position over the past year.

A surprise surge in company tax collections, a lift in goods and services tax receipts and an undershoot in planned government spending has seen the forecast for the budget deficit for the first seven months of 2017-18 come in more than $6 billion lower than was assumed when the Mid-Year Economic and Fiscal Outlook was released in December. If this trend continues through to the end of the financial year, the budget deficit could fall to around $15 billion which would be the smallest deficit in the current cycle, that is, since the last budget surplus was recorded in 2007-08 and all of the improvement will have been driven by a surge in tax receipts.

More importantly, the improved budget momentum will almost certainly parlay through to the so-called out-years of the budget which will leave to smaller deficits and larger surpluses.

While there is always plenty of debate about the economic parameters underpinning the budget forecasts over the 3 or 4 years of the forward estimates, when Morrison hands down the budget on 8 May, he is likely to announce that budget position over the four years has markedly improved.

Thu, 22 Feb 2018  |  

This article was written for The Wire, a publication produced by FIIG. This link is here: https://thewire.fiig.com.au/article/commentary/opinion/2018/02/16/could-tax-cuts-threaten-our-aaa-credit-rating

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Could tax cuts threaten our AAA credit rating?

In just over 10 weeks, on 8 May to be exact, Treasurer Scott Morrison will deliver the 2018-19 budget - almost certainly the last before the next election.

The budget is likely to offer mixed news, but encouragingly remain on target to a small budget surplus in 2020-21.

Importantly, from both an economic and political perspective, there has been some upside to government tax receipts since the mid year economic and fiscal update was published in December. This is largely the result of company tax receipts running strongly as profits and therefore tax payments have been buoyed by higher commodity prices, boosting the financial position of mining companies. Strong employment growth has kept income tax payments flowing freely to Treasury, despite soft wages growth.

If the current speculation from Canberra is correct, and it appears to be well founded, the government will use the windfall revenue gains to promise income tax cuts on top of the company tax cuts it is currently trying to get through parliament.

Tax cuts stimulate growth

While the timing and magnitude of the income tax cuts is yet to be revealed, there is little doubt that there will be something of a sugar hit to the economy if the Coalition win the election and the tax cut legislation is passed. There will plainly be more cash in the economy rather than in the government coffers at the time the tax cuts are delivered. This would support bottom line economic growth and at the margin, add to inflation. Financial markets would also be impacted, if the US is any indication.

Wed, 21 Feb 2018  |  

This article first appeared on the Yaho7 Finance web site at this link https://au.finance.yahoo.com/news/next-aussie-dollar-041651007.html 

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What next for the Aussie dollar?

It has been a turbulent few weeks for financial markets, including for the Aussie dollar. The AUD has been on a roller coaster, having reached a high of 81.2 US cents in late January and a low of 77.7 US cents about 10 days ago having traded at a low around 75 cents in December.

It is currently trading around 79.5 US cents, with the market divided about which direction will break over the next 12 months.

Foreign exchange markets are driven by many factors. For the Australian dollar, there are some powerful influences that have shown to determine its fortunes. One of those is the gap in interest rates between Australian and the rest of the world. When Australian interest rates are substantially above those of the rest of the world, there is often a bias from investors towards the AUD which drives it higher. When the interest rate gap compresses, the appeal of the AUD is reduced.

Which brings us to a fascinating situation at the moment, when we compare Australia and the US. With the US Federal Reserve embarking on a series of interest rate increases and the Reserve Bank of Australia squarely on hold, the interest rate gap between Australia and the US is effectively zero. This is not only for the official cash rate, but also for 10 year government bonds. This is a rare occurrence and prospective changes in the interest rate gap is one reason why the risks favour the AUD falling back towards 70 US cents over the next year or so.

Tue, 20 Feb 2018  |  

According to the wonderful Corelogic house price series, Sydney house prices have grown by 0.00 per cent over the past year.

This annual result masks what are some weaker trends for the Sydney housing market including the fact that prices have fallen 3.8 per cent from the September 2017 peak. In other words, a dwelling that was $1,000,000 in September is now worth around $962,000, a drop of $38,000.

Is this a problem?

Not yet.

Could it become a problem?

Fri, 16 Feb 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/2447510-043200008.html 

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Why the jobs market is like baked beans on toast

The January labour force data were a bit like baked beans on toast.

Not horrible, but hardly the sort of thing that is going to inspire joy and optimism about the future. The unemployment rate remains at 5.5 per cent which is significantly above most estimates of full employment for Australia and is exactly the same as it was in May 2017.

In other words, there has been no progress in reducing Australia’s stubbornly high unemployment rate since the budget 8 months ago even though the government likes to crow about the level of job creation in recent times. Despite this bluster and noisy rhetoric about job creation, the fact is the unemployment rate remains uncomfortably high and no one is doing anything about it.

Thu, 15 Feb 2018  |  

This article was written for The Wire, a publication produced by FIIG. The link is here https://thewire.fiig.com.au/article/commentary/opinion/2018/02/13/australia-has-three-problems-chronic-inflation-low-gdp-and-falling-house-prices 

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Australia has three problems – chronically low inflation, low GDP and falling house prices

If the latest forecasts from the RBA’s February Statement on monetary policy prove to be correct, underlying inflation will not hit the mid point of the RBA target for at least the next two years, which is as far as the current RBA forecasts extend. The RBA inflation forecasts are predicated on annual real GDP growth registering what seem at face value, decent levels around 3.25 per cent. If this figure comes to fruition, inflation will still remain low, as the RBA notes. Implicitly, GDP growth needs to be materially faster – say 3.75 per cent per annum – for inflation to accelerate to the middle of the target band.

Conversely and obviously, if there is any slight disappointment on the growth outlook – perhaps with housing being weaker than anticipated, or global conditions undershooting the current rosy outlook that results in annual GDP hovering around 2.75 per cent rather than at 3.25 per cent – the risk on those already weak inflation forecasts from the RBA will be squarely to the downside.

The December quarter CPI figure confirmed inflation was running dead. Underlying inflation is actually decelerating with an annualised increase of just 1.6 per cent in the second half of 2017, down from 2.1 per cent in the first half of the year.
While there is considerable debate why this inflation undershoot has been occurring, one simple point is that economic growth in Australia has been too low for many years. Since the start of 2013, the average annual rate of real GDP growth has been a tepid 2.4 per cent. This is a stunning 0.75 per cent per annum below what was considered the long term trend, which means that a large output gap has been accumulated over the time.

The hangover of the global financial crisis is still with us

With the economy underperforming over all those years, it is little wonder that over 13.5 per cent of the labour force is ‘underutilised’ – either unemployed or underemployed.

THE LATEST FROM THE KOUK

Podcast: The case for rate cuts, the wages conundrum and the end of QE

Tue, 19 Jun 2018

This is a thoroughly enjoying and I trust interesting podcast I did with the excellent Paul Colgan and the hugely knowledgeable David Scutt.

Click on the link: https://www.businessinsider.com.au/podcast-devils-and-details-stephen-koukoulas-2018-6

Paul and David do a regular podcast "Devels and Detals" on the economy and markets - I strongly recommend it.

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The case for rate cuts, the wages conundrum and the end of QE

Stephen Koukoulas is one of the few economists in Australia who believes the RBA should be cutting rates.

That’s where we start this week on the Devils and Details economics and markets podcast, with the conversation also covering the major central banking decisions from the Fed and the ECB this week, and the impact of the proposed changes to negative gearing on the housing market — which gained a lot of attention this week after the release of the report by RiskWise warning of the potential for severe unintended consequences in some geographical areas from Labor’s policy plans.

You can find the show on iTunes or under “Devils and Details” on your podcasting platform of choice.

 

The remarkably simple case for an RBA rate cut

Mon, 18 Jun 2018

This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/rba-rate-cut-2018-6

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The remarkably simple case for an RBA rate cut

The performance of the Australian economy is a bit like my old report cards at school: “Doing reasonably well, but could do better”.

Unlike my approach to school work, which only impacted me, the current policy complacency is seeing unemployment rise, wages growth remain in the doldrums and our $1.8 trillion economy underperform. In the latest test of economic growth, the 3.1 per cent annual GDP growth rate for the March quarter was reasonably good.

It was close the long run trend and a welcome result given the performance of the economy in recent years.

Alas, it is probable that this 3.1 per cent growth rate will turn out to be a “one-off” spike, with some pull-back in the June quarter highly likely from a lower contribution to GDP from net exports, inventories and government demand. When the June quarter national accounts are released in early September, annual GDP growth is likely to slip back to around 2.7 per cent.