Blog

Mon, 10 Oct 2016  |  

This article first appeared on The Guardian web site at this address: https://www.theguardian.com/business/2016/oct/03/credit-downgrade-assured-if-coalition-keeps-hiding-from-its-debt-and-deficit-disaster 

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Credit downgrade assured if Coalition keeps hiding from its debt and deficit disaster

The treasurer, Scott Morrison, and the finance minister, Mathias Cormann, “took out the garbage” last Friday afternoon, dumping the final budget outcome for 2015-16 on the Treasury website under the cover of the football grand finals, a long weekend and the start of school holidays around much of the country.

Morrison and Cormann came close to breaching the Charter of Budget Honesty, which requires the release of each budget outcome for the prior financial year by 30 September each year. They made it with a few hours to spare.

They also released it without a press conference or detailed media release, making sure there was miniscule coverage of something that would normally be a key area of economic and fiscal management. This is especially the case with “budget repair”, the “return to surplus”, “paying off debt” and dealing with the “budget emergency” being the basis that saw the Coalition elected to power in both September 2013 and July 2016.

Looking at the budget outcome document, it is clear why it was released in the shadows of the Friday night without any fanfare.

Wed, 28 Sep 2016  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/the-recessionary-horror-of-the-western-australian-economy-002509793.html 

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The recessionary horror of the Western Australian economy

Western Australia is in a deep and increasingly nasty recession. There are no signs that the economy is near a bottom which is disconcerting. The plunge in mining investment and the slump in commodity prices have hit WA hard and the economic scorecard is, quite simply, miserable.

During 2008, the unemployment rate in WA fell to a stunning low of 2.3 per cent. After a temporary rise with the GFC, the unemployment rate was 3.5 per cent during 2012. This was the lowest in Australia by a large margin. Most recently, unemployment spiked to 6.3 per cent which is now third highest in Australia, behind only South Australia and Tasmania. Since the middle of 2015, there has been no increase in employment levels.

State final demand, which is effectively GDP excluding net exports, peaked in September 2012 and since then, has been trending lower. From that peak, State final demand has slumped 13.2 per cent. While exports of iron ore and other commodities are strong and adding to activity in WA, from the perspective of private and public sector spending and investment, the economy is going backwards.

Mon, 26 Sep 2016  |  

This article first appears on The Guardian website at this address: https://www.theguardian.com/business/2016/sep/22/why-the-turnbull-governments-plan-to-issue-30-year-bonds-is-an-unnecessary-risk 

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Why the Turnbull government's plan to issue 30-year bonds is an unnecessary risk

The Turnbull government has indicated that it will start issuing 30-year government bonds.

In layperson’s terms, this means the government will be borrowing money for a 30-year fixed term, paying interest every six months over those 30 years to the holder of those bonds. This locks in interest payments as a part of the budget bottom line right through to 2046 and probably beyond. The government will use the revenue from those borrowings to fund the budget deficit and maturities of existing bonds. The deficit continues to hold at levels well above the levels the Coalition government inherited from the Labor party when it won the 2013 election.

The decision by the government to borrow money for such an extended duration – via the Australian Office of Financial Management (AOFM) – sits oddly with the rhetoric from Malcolm Turnbull and Scott Morrison about their core objective of “budget repair” and the goals of returning to surplus. If these objectives were genuinely part of the government’s economic strategy, there would be no need to borrow money for 30 years. The current 25-year bonds are more than sufficient to cover the government’s deficit requirements, especially if the projections for a return to surplus in about three years are still relevant.

Fri, 23 Sep 2016  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/has-the-gloss-finally-worn-off-the-aussie-economy-000224376.html 

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Has the gloss finally worn off the Aussie economy?

Having rubbed shoulders with global leaders at the G20 meeting in China, Prime Minister Malcolm Turnbull said "Our economic performance is the envy of most of those countries around the G20 table. There are very few developed nations that have economic performance as strong as Australia's”.

Mr Turnbull is wrong.

There is no doubt that for the bulk of the past couple of decades, Australia has been a star performer with continuous economic growth, sound budget settings and rising incomes. Australia was one of very few countries to avoid recession during the global financial crisis in the period from 2008 to 2010.

More recently, the gloss has warn off the Australian economy. This is most notably showing up in the unemployment rate which remains higher today than during the GFC. In most other G20 countries, the unemployment rate has fallen as economic recovery has gained traction.

Tue, 20 Sep 2016  |  

Year 12 students are flat out - preparing for final exams and life after school. Some are planning to go straight to university, others are looking to take a 'gap year' before going uni.

Below is a short extract from my book, Myth Busting Economics, about the cost of taking a gap year. Read it and think. 

And if you want a copy of my book, it is available here:  https://www.booktopia.com.au/myth-busting-economics-stephen-koukoulas/prod9780730321958.html 

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A gap year? Don't do it!

A common notion for some students when they finish Year 12 is to have a so-called gap year. That is, they take a year off to do something different and postpone the decision to start university by a year. That is all fine and again, it is your choice, but it is worth thinking about the cost of doing so. Let’s look at a stylised example of the cost of a gap year.


There are two people, they have just finished Year 12, have equal abilities, achieved the same university entry score, aim to do the same three year degree and when they finish their degrees, they will get a job where the starting salary is around the average for university graduates in 2013 at $52,500 a year. One goes straight to university, the other takes a gap year, traveling around Europe and generally bumming around home.

Let’s fast forward four years.

Fri, 09 Sep 2016  |  

This article first appeared on The Guardian website at this link: https://www.theguardian.com/australia-news/2016/sep/09/whats-the-point-of-budget-repair-if-so-many-australians-are-unemployed-and-underemployed 

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What's the point of budget repair if so many Australians are unemployed and underemployed?

What’s the point of budget repair if 725,000 Australians are unemployed and a further 1,067,000 people are underemployed?

At its most basic level, economic policy is about maximising the speed at which an economy can sustainably grow to ensure the pool of unemployed and underemployed workers is as small as possible.

The superficially strong 3.3% annual GDP growth rate in this week’s national accounts would normally signal a stronger labour market. The skewing of that growth to exports of bulk commodities, where employment is small, means the domestic side of the economy is still not growing fast enough to attain full employment.

There was also a significant contribution to GDP from government demand, something that flies in the face of the government’s obsession with budget repair. It is unclear where economic policy is currently being aimed.
The policy priority is to reduce spending to ensure the deficit is as low as possible and to return to budget surplus. Such policies take money from the economy and by definition, growth slows and with that, the rate of job creation softens and unemployment is higher than it would otherwise be.

Thu, 08 Sep 2016  |  

Hidden away in the quarterly national accounts are data on the volume of tobacco consumed in Australia.

The excellent news is that in the June quarter 2016, the volume of tobacco consumed fell 2.3 per cent to be at the lowest level ever recorded in the national accounts, which has data going all the way back to 1959.

More remarkable is the five-fold increase in the population over this time which means the fall in per capita smoking levels are even more acute.

The plain packaging laws for cigarette packets were introduced in December 2012, even though the Liberal and National Parties voted again them (sort of cute in the current debate to note the donations to the Coalition parties from tobacco companies, but that is another matter).

The shadow Health Minister at the time the legislation introducing plain packaging went through the Parliament, Peter Dutton, was doubtful weather the laws would work, when in 2011 he called on the government to prove that plain packaging would cut smoking levels. He said “We would like to see the evidence the government in replying on.”

Thu, 08 Sep 2016  |  

This article first appeared on the Yahoo7 Finance website at this address: https://au.finance.yahoo.com/news/what-is-driving-australia-s-economic-growth---042520309.html 

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What is driving Australia's economic growth?

Can you believe it?

Australia’s economy grew by 3.3 per cent in the year to the June quarter 2016, to lock in the fastest rate of growth in four years.

It’s a growth rate that is hard to fathom given how weak the recent labour market data has been, and given that inflation is well entrenched below the bottom on the Reserve Bank’s target range. Think also of a sluggish stock market, the fact that the RBA has been compelled to cut interest rates to a record low 1.5 per cent and the stubborn widening of the budget deficit and you’d be convinced that the growth performance of the Australian economy was in the slow lane.

So what is happening?

Mon, 05 Sep 2016  |  

As we get well entrenched in the second half of the year, markets and economies continue to track along with more good news than bad.

For RBS analyst Andrew Roberts, who grabbed global headlines with his “sell everything” forecast at the start of the year, this is bad news. Anyone who followed that forecast, which looked absurd at the time, will be hurting badly as most stocks, commodities and other asset prices keep on rising.

For those who might have missed it, when Roberts made his ridiculous forecast, I offered him a bet that he would be wrong – not on ‘everything’, but just 6 of 11 variables. The bet I offered Roberts https://thekouk.com/blog/sell-everything-my-challenge-to-andrew-roberts-of-rbs.html 

He squibbed at the chance to put his money where his mouth was.

Some eight months since the bet and the scorecard reads as follows:

The Kouk   10
Roberts     1

As has been the case for the bulk of the year, the only market where Roberts is ahead is Nikkei which is down 0.6 per cent.

Mon, 05 Sep 2016  |  

This article first appeared on The Adelaide Review web page at this link: https://adelaidereview.com.au/opinion/business-finance-opinion/road-federal-budget-repair-stephen-koukoulas/ 

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On The Road To Federal Budget Repair

Not that you’d know it from the commentary, but the Federal Budget could easily be in surplus in a couple of years. And that is without there being much in the way of spending cuts or tax hikes to get there.

There are a few very important issues in the budget figuring that confirm the Budget is already on the road to repair, and that any efforts to speed up the time to return to surplus would risk hurting the economy as well as pushing the unemployment rate higher.

It is difficult to work out why anyone interested in striving for faster economic growth and more jobs would want to fast-track the return to budget surplus. Given the economy is muddling along with economic growth currently a little below trend – with wages growth running at record lows and inflation decelerating to be well below the RBA target range – a budget deficit now is appropriate. So too is a slightly extended path to budget surplus. Only if the economy was stronger would it be economically responsible to have policies framed towards a more rapid surplus objective.

But the economy is fragile, ebbing between an assessment of a glass half-full and a glass half-empty. Any decision from the government to cut spending and/or hike taxes in the name of budget repair would dampen the economy arguably when it needs a bit more of a boost from the policy makers. Certainly the RBA is of that view having recently cut official interest rates to a record low of 1.5 percent.

THE LATEST FROM THE KOUK

Inflation is low and remains low

Thu, 27 Apr 2017

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/inflation-020818312.html 

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Inflation is low and remains low

Inflation edged up a little in the March quarter – from an annual rate of 1.5 per cent at the end of 2016, the headline rate rose to 2.1 per cent. The underlying rate of inflation, which the RBA trends to place more weight on when it comes to assessments of interest rate policy, was even more muted, lifting from 1.5 per cent to 1.8 per cent.

And recall, the RBA target range for inflation is between 2 and 3 per cent.

Annual underlying inflation has been at or below 2 per cent since late 2015, and has been below 2.5 per cent, the midpoint of the inflation target, since the end of 2014. That is a long time.

The data today confirm that inflation is low and remains low and in isolation, continues to give the RBA plenty of scope to further reduce interest rates. When the recent data on unemployment, building approvals, private sector business investment and wages growth are added to the mix, the case for an interest rate cut is strong.

The Australian budget is likely to confirm this is a big-spending, big-taxing government

Thu, 20 Apr 2017

This article first appeared on The Guardian website at this link: https://www.theguardian.com/australia-news/2017/apr/19/the-australian-budget-is-likely-to-confirm-this-is-a-big-spending-big-taxing-government 

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The Australian budget is likely to confirm this is a big-spending, big-taxing government

While much of the focus of the upcoming federal budget will, quite rightly, be policy issues associated with housing affordability, areas of changes to spending and revenue, there will also be an opportunity to analyse the underlying values of the government.

This will be the fourth budget of the current Coalition government and will show us the ‘big picture’ of government policies and priorities. There will be data on aggregate government spending, taxation receipts, gross and net government debt and the budget deficit.

The most accurate way to analyse the trends in the key budget figures will be to assess them as a ratio of GDP. Government spending, for example, totalled $48.8bn in 1982-83 and this rose to $423.3bn in 2015-16, which is, at face value, an enormous increase. But spending actually fell from 25.8% of GDP in 1982-83 to 25.6% of GDP in 2015-16. It is a similar issue with government debt, the budget deficit and other benchmarks.

Based on the performance of the economy since the last fiscal update in December 2016, the budget is likely to confirm that this is a big-spending, big-taxing government with a strategy for continuing budget deficits and rising debt as it funds some of its pet projects.

It is all but certain that government debt will remain above 25% of GDP in 2017-18 and the forward estimates, meaning the government will be the first in the last 50 years to have spending at more than a quarter of GDP for eight straight years.