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.
This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/3013537-004842668.html
3 reasons to be spooked about the economy
Optimism about the Australia economy is rapidly being eroded by the hard reality of a weakening in the labour market, falls in house prices, a tightening in credit and chronically low wages growth. The labour force data for May were not good news, even with the blip lower in the unemployment rate.
Employment rose a tepid 12,000 in May, with full time jobs dropping a chunky 20,600 which was offset by a 32,600 rise in part time roles.
The jobs bonanza of 2017 has turning into a jobs famine. In the four months since January, employment has risen by a total of just 26,000 at a time when the working age population has surged by over 110,000. In other words, the economy is generating jobs for less than a quarter of people being added to the workforce. The economy simply isn’t strong enough to create employment for the increase in population through immigration and natural increase.
Indeed, the average monthly increase in employment over the past four months has been a paltry 6,500, down from the 34,400 per month during 2017. At this rate, employment growth in 2018 will be lucky to reach 150,000.
This article first appeared on the Yahoo7 Finance web site at this link: https://au.finance.yahoo.com/news/concern-mounting-australias-economic-outlook-032051438.html
Why concern is mounting for Australia's economic outlook
The latest flood of economic data was more of the same – mixed, with a few snippets of good news offset by bits of weaker news. That said, there is general agreement about the unfolding risks that are pointing to more downs than ups in the period ahead.
The GDP data were reasonable – annual economic growth of 3.1 per cent over the year to the March quarter is around the growth rate that Australia should aim for. But such is the saw-tooth nature of the quarterly data (the last five quarterly GDP growth rates have been 1.0, 0.5, 0.5, 1.0 and 0.3 per cent) that next quarter, annual growth is likely to slip back a few notches. It is also worth noting that the average rate of annual GDP growth since the end of 2007 has been 2.5 per cent which is a long way from what should be registered if the economy was doing well in a sustained fashion. Another quarter or two of 3 per cent plus GDP is needed to confirm the economy is finally into a stronger growth path.
And this is where the concerns lie.
There is growing caution about the economic outlook largely as a result of the risks to household spending.
The level of household savings has dropped to a 10 year low. It seems spending growth is being sustained by lower savings which are in part offsetting falling wealth and weak wages growth. While the Reserve Bank of Australia is comfortable with the recent falls in house prices, there is a clear economic overlap in house price momentum, household wealth and spending.
That overlap goes along the lines that when house prices are strong, many home owners are wealthy and as a result, they are able to build their spending either by saving less or borrowing against their appreciating asset. Until recently, household spending in Sydney and Melbourne was amongst the strongest in Australia and this was where house prices were strongest. In Perth, conversely, where prices have been weak for several years, household spending was particularly weak.
Since late last year, house prices have dropped around 4.5 per cent in Sydney and by close to 2 per cent in Melbourne. This has coincided with a slowing in retail sales in NSW and Victoria which is why the pace of overall economic growth may ease back over the second half of 2018 and into 2019.
It is also important to note that wages growth, the other critical driver of consumer spending, remains mired near record lows around 2 per cent. This is undermining the ability of consumers to increase their spending. With the recent data flow confirming weak retail spending, a lull in dwelling construction, well contained inflation and a potential loss of growth momentum from the global economy, it is easy to see why the Reserve Bank of Australia has not followed through and delivered an interest rate rise.
While business expectations are strong, as measured in both the illion and NAB business surveys, it is not translating to a lift in business investment which is a vital element of any strongly performing economy. Suffice to say, the economy is doing reasonably well but is still not strong enough to drive a lowering in the unemployment rate which has actually edged up in recent months.
The jury is out whether the economy can sustain the good news in areas like GDP growth and business expectations, or whether low savings, weak wages, and a slide in housing will drag it lower.
This article first appeared on the Business Insider web site at this link: https://www.businessinsider.com.au/minimum-wage-increase-stephen-koukoulas-2018-6
Australia's opponents of the minimum wage increase ignore this truth: higher pay means more people working
The 3.5 per cent increase in the minimum wage announced by the Fair Work Commissionwas slammed in some quarters, with Australian Industry Group Chief Executive Innes Willox saying it would “be a major disincentive to employment”. Not to be outdone, Russell Zimmerman, the Executive Director of the Australian Retailers Association said the wage rise would “delay staff employment and potentially lead to job losses”.
These views are commonplace amongst the bulk of economists and policy makers, but it reflects a lop-sided view of the economics of labour markets.
There is an overwhelming bias that looks at low wages as the fundamentally important way to achieve higher employment and a lower unemployment rate, with high wages growth hurting employment as Willox and Zimmerman suggest. As the core of this view is one part of the basic economic theory of supply, demand and prices.
The view is that if wages (the price of labour) are held lower, demand for workers (from employers) would increase and as a result, the level of employment will rise and the unemployment rate will fall. This approach to labour market economics ignores the supply side which in this instance is a workers’ willingness to supply their labour for a given wage.
If wages are too low the worker will not supply their labour. Wages being “too low” includes leaving the worker a sufficient surplus of cash after covering the cost of transport to and from work, making alternative plans in their household when the worker is at work and the give up of leisure time, among other things.
This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/aussie-economy-rocks-050403466.html
Is the Aussie economy on the rocks?
I often wonder why people who analyse and comment on the economy don’t keep up to date with unfolding events.
Economics is a wonderful thing. It is vibrant, it changes every week, every month and every quarter as fresh news on inflation, employment, consumer spending, housing, business investment and a whole host of other variables are released. The reason this is important is that the recent, up to date information on the Australian economy is, all of a sudden, disconcerting.
While 2017 did see the strongest growth in employment on record, with an average increase in employment of 34,600 a month, in the three months to April 2018, the averAge monthly increase WAs just 4,800. This has seen the unemployment rate rise from what was a 5 year low of 5.4 per cent to 5.6 per cent.
The labour market has moved on from 2017.
What’s more, the ANZ job advertisement series, which provides a good guide to future trends in the labour market, has fallen for the last three months.
I was one of the panel members of this podcast which was on ABC Radio National. 25 minutes of interesting discussion.
Politics Panel: Australia's intergenerational gap
With the federal budget handed down and the battle lines emerging for the next election, Australia's intergenerational gap is shaping up as a major political issue.
The Coalition is promising a host of sweeteners for retired voters while Labor is promising to pump more money into education and get housing prices down.
If you're a voter, there's a good chance your view of those promises will be informed by the year you were born.
This article first appeared on the Yahoo7 Finance web site at this link: https://au.finance.yahoo.com/news/need-worried-australias-economic-outlook-060611703.html
Do we need to be worried about Australia's economic outlook?
The Reserve Bank of Australia reckons that the next move in official interest rates is more likely to be up than down. RBA Governor has said so in recent weeks as he talks up the prospects for the economy over the next year or two.
This is disconcerting news for everyone out there with a mortgage or a small business loan, especially in a climate where the business sector is doing it tough and when wages growth is floundering near record lows. The good news is that the RBA is likely to be wrong and the next move in interest rates could be down, such is the run of recent news on the economy. Failing an interest rate cut, the hard economic facts suggest that any interest rate rises are a long way into the future and if they do come, there will not be all that many.
At this point, it is important to bring together the issues that would need to unfold to see the RBA pull the lever to hike interest rates. At the simplest level, the start of an interest rate hiking cycle would need to see annual GDP growth above 3.25 per cent, the unemployment rate falling to 5 per cent and less, wages growth lifting towards 3 per cent and more and underlying inflation increasing to 2.5 per cent.
This is where the RBA expectation for higher interest rates is on very thin ice.
This article first appeared on the FIIG website at this link: https://thewire.fiig.com.au/article/2018/05/14/.Wv932WJ7Bn8.linkedin
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.