Blog

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.

Mon, 02 Apr 2018  |  

This article first appeared on The Guardian website at this link: https://www.theguardian.com/commentisfree/2018/mar/19/the-next-election-is-as-much-about-labor-v-liberals-as-young-v-old 

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The next election is as much about Labor v Liberals as young v old

For younger Australians who are increasingly disaffected and angry about the growth of intergenerational inequality in housing, superannuation and education, there will be a clear choice at the next election.

With its latest policy on the tax treatment of dividend imputation, Labor has added to its policy agenda that promises to tackle some of the intergenerational unfairness that has built up in recent decades. It follows Labor’s proposed reforms on housing and education which should give young people something to be pleased about and a motivation to turn up at the ballot box when the election is held.

For the so-called baby boomers, generally those at or near retirement, Labor’s policies are likely to generate disaffection and shore up their support for the Coalition.

Specifically, the Labor party’s policies on negative gearing will help make housing more affordable, while its plan to adjust the tax treatment of dividends that currently favour well-off baby boomers with shares in their superannuation portfolios will free up cash for spending in education. This in turn will allow younger people to have greater access to gaining a skill, training and education without the burden of huge HECS debt.

These policies should set a clear divide between the young and old, between Labor and the Coalition at the next election.

Mon, 26 Mar 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/australia-urgently-needs-interest-rate-cut-231554621.html 

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Australia urgently needs an interest rate cut

The Australian economy urgently needs an interest rate cut, or two, if there is to be a pick up in activity, lower unemployment, higher wages growth and for inflation to move back to the RBA target range.

The RBA last cut interest rates in August 2016 to 1.5 per cent, having dragged the chain to cut to even that level when the bulk of the industrialised world had already had the benefits of years of near zero interest rates and, in many cases, quantitative easing. This is not to say that Australia needed zero interest rates or QE, but official interest rates below 1.5 per cent a year or two earlier would have helped support growth and not seen Australia stand out like a sore thumb with a lack of progress on reducing the unemployment rate and returning the economy to optimal growth.

Of course, the RBA was worried about house prices. Its problem was its strong philosophical objection to regulatory changes to limit lending for housing, especially investor housing. Had it embraced these changes earlier, it would have been able to cut rates to help the business sector be the lynchpin of stronger growth while the housing market softened.

Thankfully, on the issue of changes to lending regulations, the RBA was left on the sidelines. APRA and other regulators imposed restrictions on bank lending which are now clearly having an impact on the housing market. 

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.

THE LATEST FROM THE KOUK

It’s time to end the “strong economy” propaganda

Thu, 20 Jun 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/its-time-end-strong-economy-propaganda-230414837.html 

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It’s time to end the “strong economy” propaganda

For the last year or so, it has been obvious to anyone with an open mind that the economy is in trouble. Unfortunately, the government and the Reserve Bank not only ignored this growth slump, but they ran a propaganda campaign saying the economy was “strong”, that unemployment would keep falling and wages growth was poised to pick up.

It might have been politics that lead the RBA and Treasury to this view with the recent election swinging on the economic credentials of both major parties. Ahead of the election, the RBA and Treasury were loathe to undermine the government with an honest assessment of the rapidly spreading economic problems.

It is possible that the forecasts were a simple error, which sometimes happens when an external shock hits the economy.

Either way, things are so bad in the economy right now that forecasters are rushing to out-do each other on how low interest rates will go in this cycle. Some are canvassing negative interest rates, printing money or the need for a fiscal policy boost if the economy remains in its economic funk.

Time will tell.

The range of forecasts that where regularly produced by the government (Treasury) and the RBA up until very recently were unambiguously optimistic. The forecasts ignored all hard data on the economy, which suggests it may have been a political strategy to remain upbeat, rather than it being a clumsy forecasting error.

An update on my house price bet with Tony Locantro

Thu, 20 Jun 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/house-prices-are-still-dropping-but-bottom-sight-210000929.html 

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An update on my house price bet with Tony Locantro

It is difficult to think of a bigger issue that gets Australians fired up than house prices.Regular readers will know that back in September 2018, I made a bet on house prices with Tony Locantro, a fired-up Investment Manager with Alto Capital in Perth.

Tony wont mind me saying this, but he is what is called an ‘uber bear’ on house prices – he reckons prices are grossly inflated and are overdue to collapse. On the other hand, I reckon there is a cycle and that after the surge up to 2017, house price falls were inevitable, but that the decline would last only a couple of years and would not be too severe.

The bet was framed around a peak-to-trough fall in prices of 35.0 per cent in either Sydney, Melbourne or the 8 capital cities measure used by the Australian Bureau of Statistics. If prices fell by more than 35 per cent at any stage from the peak until the end of 2021, Tony would win, if the fall was less than 35 per cent, I would win.

Simple.

That background is important because the ABS just released the official dwelling price data for the March quarter 2019.

In the quarter, dwelling prices fell 3.0 per cent in the 8 capital cities and dropped 3.9 per cent in Sydney and 3.8 per cent in Melbourne.