This article first appeared on the Yahoo 7 Finance web site at this link: https://au.finance.yahoo.com/news/election-results-mean-economy-013232186.html
It’s inequality, stupid
The super-Saturday by-election results over the weekend presented a clear preference from Australian voters – they don’t like policies that increase inequality in society and tax cuts to business are unfair and expensive, draining scares cash from education, heath and other vital services.
In a variance of Bill Clinton’s successful phrase and strategy “it’s the economy, stupid” in winning the 1992 US Presidential election, Labor’s “it’s inequality, stupid” approach to policy is winning it support in the electorate. Or just as accurately, it is the Coalition Government’s policy strategy that increase inequality in society that voters are shying away from.
Credit to the “it’s inequality, stupid” analysis goes to Stephen Moriarty who tweeted that phrase in the aftermath of the by-election results. It summed up the results very well.
It has been obvious with the last year of polling and then the by-election results that voters are not happy with the Liberal Party sales pitch which is framed around a story of a growing economy and the promise of income and company tax cuts. This is because economic growth is not all that impressive, despite the government’s rhetoric, and what growth is being registered is skewed heavily towards rising company profits and away from the wage share. Future company tax cuts will only add to that inequality.
Recent cuts to education and the miserable level of the Newstart allowance are the sorts of policies that are compounding unfairness.
This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/will-falling-house-prices-trigger-next-aussie-recession-000039851.html
Will falling house prices trigger the next Aussie recession?
House prices are falling, auction clearance rates continue to drop and there is a such sharp lift in the number of properties for sale that, for the moment, no one is willing to buy at the given asking price.
Potential house buyers who have held off taking the plunge in the hope of falling prices seem to be staying away, perhaps hoping for further price falls. But also influential factors forcing buyers away is the extra difficulty getting loans approved as banks tighten credit standards, then there are concerns about job security and associated awareness of probable cash flow difficulties given the weakness in wages growth. It is remarkably obvious that house prices will continue to fall and this poses a range of risks to the economy.
Research from a range of analysts, including at the Reserve Bank of Australia, show a direct link between changes in housing wealth and consumer spending. This means that when wealth is increasing on the back of rising house prices, consumer spending is stronger.
This was evident in Sydney and Melbourne, in particular, when house prices in those two cities were booming in the two or three years up to the middle to latter part of 2017. Retail spending was also strong. Looking at the downside, in Perth where house prices have fallen by more than 10 per cent since early 2015, consumer spending has been particularly weak.
If the flow of punter’s money is any guide, Labor are in for a very rough time on Sublime-Saturday on 28 July when there are five by-elections around Australia.
In the three seats where the results are not a forgone conclusion, the flow of money on Liberal candidates over the last few days has been very strong.
The Liberal Party are now favourites to win Braddon and Longman and in Mayo, Liberal candidate Georgina Downer has firmed from $4.20 into $2.75.
If the punters are right, Sublime-Saturday would see Labor lose Braddon and Longman and could see Liberal’s sneak back in Mayo.
If so, it would be odds on that Prime Minister Turnbull would go to the polls as soon as possible, not only to take advantage of the by-election fallout, but, from a different angle, go before the housing market and the economy really hit the wall, probably in late 2018 or 2019.
Liberals $1.70 (was $2.25)
Labor $2.05 (was $1.65)
Liberals $2.75 (was $4.20)
Centre Alliance $1.35 (was $1.15)
Liberals $1.50 (was $2.00)
Labor $2.50 (was $1.85)
This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/inequality-economic-growth-australia-2018-7
Tackling inequality has the potential to drive the kind of economic growth Australia has been looking for
In the decade or so since the global banking and financial crisis plunged the world into the Great Recession, policy makers around the world have been adopting a range of policies that were previously considered ‘unconventional’ as they has sought to promote economic growth, lower unemployment and reflate economic conditions.
Think about some of those policies.
Negative interest rates – fancy being paid to borrow money!
Quantitative easing or QE, which has been colloquially referred to as central banks printing money and dropping it into the streets out of a helicopter. Government debt levels exploded to levels only seen when the world was at war as revenue collapsed and in some instances, fiscal stimulus measures were implemented. To this day, governments are struggling to get their budgets anywhere near balance, let alone in a position to reduce debt.
It is clear, or at least it should be, that these policies cannot be in place forever. At some point, interest rates will normalise, central banks will have to mop up the excess cash from the economy and budgets will need to be repaired. This begs the vital questions of how to pull off these tricky maneuvers without disrupting financial markets and the economy?
I think I have an answer.
It will not appeal to everyone and is politically challenging.
It is to do with making society less unequal or, if you wish to avoid two negatives, making society more equal. The economic debate on inequality of income and wealth shows, unambiguously, that as inequality increases, the rate of economic growth slows or at least is slower than it would otherwise be.
In simple terms, the link between more equality and stronger economic growth is based on the observation that if, for example, a low income earner gets an extra $20 a week in their pocket, they are more inclined to spend most if not all of it, whereas a $20 a week extra to a very high income earner – think a billionaire – will have little influence on their spending patterns. If the tax system is structured in a way that sees low income earners taking home more pay while high income earners take home a little less, the economy will be boosted by the extra spending of the low income earner.
This extra spending will deliver a higher rate of economic growth which will, in turn, boost demand for labour and this will lower the unemployment rate. Such a policy initiative can be revenue neutral to the budget. This requires the very well off to pay more tax or get less tax deductions and those proceeds are redirected to low income earners.
This is where the political problem can emerge. As we can see in the current debate about income and company tax cuts, issues of fairness and equity are important aspects of the case for and against lower company tax rates and the introduction of a flat tax rate for both low and high income earners (those on $40,000 and $200,000 will pay the same marginal tax rate).
Polls show that many people are against the company tax cuts, largely because of fairness issues. There are other areas where inequality can hamper economic growth, including access to education and health care.
People on high incomes usually have little trouble accessing the best quality of health care and education. Poorer people often struggle on these fronts. Think access to health services in the public health system versus the private sector.
Wealth, health, and education This matters for economic growth because good health and high levels of skills and educational attainment are positively correlated with economic growth.
Countries with an educated workforce are generally rich. This is why most people want to have a good education for themselves and their children. It pays off not only for the individual, but for society.
Health care is also important. People who are sick do not go to work as often as those who are healthy. This extends to people taking time off work to care for sick relatives who have less access to health professionals. To the extent that access to high quality health care allows the population to be fit enough to turn up to work, there is a clear productivity boost from wide access to good health care.
All of which goes to the point that economic growth can be nurtured by more than just interest rates, printing money, tax and government spending.
Policies that reducing income equality and improve access of low income people to education and health care is good for GDP.
Maybe policies aimed at reducing inequality will be the new wave of thinking when it come to generating stronger economic growth. It will take bold political leadership but when other policies have had limited success, it seems a matter of time before this path is taken.
I prepared a research paper on issues associated with the economic and financial security for women. The report is being considered by the Minister for Women, Kelly O’Dwyer and will be part of a bi-partisan parliamentary discussion on the critical policy issues associated that can be developed to enhance the economic security for women.
The report can be seen at this link: https://www.security4women.org.au/wp-content/uploads/20180625-eS4W_White-Paper_Defining-the-Concept-of-Economic-Security-for-Women.pdf
Defining the concept of economic security for all women & Policy recommendations to boost women’s economic security
Boosting Economic Security for All Women
OBJECTIVE: To raise awareness and contribute effectively to development and implementation of policy that impacts all women living in Australia and ensures women’s equal place in society, in the Government’s policy priority area of improving women’s economic independence and financial security.
The current policy approach to childcare, superannuation, education, jobs and financial literacy is not keeping up with changes in social attitudes, structural changes in the economy and demographic changes.
The paper brings together research and analysis of specific issues that feed into the overarching issues of economic and financial security for women. We are grateful for the efforts, thoroughness and insightful nature of that work. This paper highlights some of the policy reforms that will be needed if women’s financial and economic security is to be enhanced.
It is a next step in the process that will inevitably be built upon as steps are taken to improve economic security for women.
Economic Security for Women
One of the well-established and central platforms of economic and social policy is to deliver economic and financial security for all members of society.
Economic security entails a number of basic conditions, but has as a central underpinning an ability, throughout life, to afford to have shelter, food and basic living expenses covered. Financial security also means opening access to opportunities not only at these basic levels of living standards, but to also achieve higher levels of security and well-being through education, training and employment opportunities.
Paid employment is one of the benchmarks for financial security, but in the circumstances where many women have either sporadic or minimal opportunities to engage in paid work throughout their adult life, a government provided, broadly based, financial safety net is essential if economic security for women is to be enhanced.
This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/watch-mortgage-rates-rise-001427435.html
Watch out! Your mortgage rates are about to rise
Have you got a mortgage?
Beware! Your interest rates are on the rise and it has nothing to do with the Reserve Bank changes in official rates. Higher mortgage rates are starting to flow because the banks are confronting higher borrowing costs because of a jump in money market interest rates that has been linked to the interest rate hikes in the US and a tightening in global credit conditions.
For owner-occupier loans, the Bank of Queensland has announced an increase of 9 basis points (0.09 percentage points) for principal and interest rate loans and 15 basis points move for interest only loans. The other banks are certain to follow as they struggle to maintain their net interest margins in the wake of the surge in the cost of capital.
While 10 or 15 basis points doesn’t sound like a significant change in borrowing costs, it is about to hit borrowers repayment schedules at a time when household incomes are already being squeezed by near record low wages growth, an uncertain outlook for employment, falling wealth as the house price cycle turns lower and low savings.
This article first appeared on the Business Insider web site at this link: https://www.businessinsider.com.au/the-rba-seems-to-be-running-monetary-policy-on-a-hunch-2018-6
The RBA seems to be running monetary policy on a hunch
RBA Governor Philip Lowe made a few quite sensational comments when he spoke at the European Central Bank’s forum in Portugal last week.
Sensational, because it shows the RBA under his stewardship is targeting higher than necessary unemployment as the tool for containing household debt and he has all but abandoned the RBA’s inflation target which has been in place for over 25 years.
Recent data shows Australia failing to make meaningful inroads into reducing unemployment, as Australian interest rates have remained well above those in the rest of the industrialised world.
Lowe acknowledged he and his RBA were the odd ones out in a room of central bankers, noting that others had reacted to high unemployment and extremely low inflation by cutting interest rates to near or below zero and many implemented quantitative easing as a means to kick-start their economies, while the RBA has stopped cutting interest rates at 1.5 per cent, despite low inflation and persistently high unemployment.
The RBA is the odd one out too, because Australia’s unemployment has been hovering around 5.5 per cent for the past year, little changed from where it was 4 or 5 years ago, when in the US, Japan and Eurozone, unemployment rates have cascaded lower and have started to underpin a noticeable pick-up in wages.
This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/proposed-income-tax-cuts-benefit-230812222.html
Would proposed income tax cuts benefit you?
Cuts in income taxes are a hot political issue at the moment, with the government trying to get its seven-year plan for lower income taxes through the Senate.
Whether those tax cuts are affordable in the current era of budget deficits and rising government debt is an important issue. Many economists reckon the budget should be in healthy surplus before the government sprays tax cuts around the community. This seems a sensible take, given the risks unfolding for the economy as house prices fall, wages growth hovers near record lows and the global economy starts to cool. If these issues bite the Australian economy, the return to budget surplus will be pushed back a further few years not least because of tax cuts that should not have been delivered.
There is also the vital issue of whether there are higher priorities for the $144 billion the government is planning to forgo to fund the lower tax scales. This issue is where the political debate is also gaining heat with Labor reckoning the money would be better allocated to health, education and funding the ABC.
There is another issue, which unfortunately gets too little attention, and that is if we are to proceed with income tax cuts over the next few years, who should get them?
This is a thoroughly enjoying and I trust interesting podcast I did with the excellent Paul Colgan and the hugely knowledgeable David Scutt.
Paul and David do a regular podcast "Devels and Detals" on the economy and markets - I strongly recommend it.
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.
This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/rba-rate-cut-2018-6
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.