Stephen Koukoulas

Stephen Koukoulas

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.

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.

----------------------------------------------------------------------

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.

THE LATEST FROM THE KOUK

Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Thu, 06 Dec 2018

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/dont-fall-spin-scott-morrisons-budget-surplus-no-certainty-224422761.html 

--------------------------------------------------------

Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.

Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.

PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.

If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.

Change of view on monetary policy

Wed, 05 Dec 2018

In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.

For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.

That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.

My updated profile for RBA rates is:

May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%

The risk is for rates to 0.5% in very late 2019 or in 2020

It will be driven by:

  • Underlying inflation remaining below 2%
  • GDP growth around 0.25 to 0.5% per quarter in 2019
  • Annual wages growth stuck at 2.5% or less
  • Global growth slowing towards 3%
  • Labour market under-utilisation around 13 to 13.5%

There are likely to be other influences, but these are the main ones.

AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.