The Kouk's opening remarks to the Senate Committee on the Audit Commission

Fri, 07 Feb 2014  |  

OPENING REMARKS TO THE SENATE SELECT COMMITTEE INTO THE ABBOTT GOVERNMENT’S COMMISSION OF AUDIT

Australia does not have a government debt or deficit problem.

According to Treasury numbers published by Treasurer Mr Hockey in the Mid-Year Economic and Fiscal Outlook in December, over the last 43 years of budget outcomes (the full data set), there have been 19 budget surpluses and 24 budget deficits.

Up until 2007-08, just prior to the collapse of the global financial system and the onset of the deepest recession in the industrialised world since the 1930s Great Depression, surpluses were a little ahead of deficits, 19 to 18. This suggests that the recent move to budget deficit is almost certainly nothing more than the long-run business cycle impacting on government finances.

With the financial crisis slowly but surely passing and the global economy now on a track to record a sustained expansion, there seems little doubt that the mix between surpluses and deficits in Australia will again equal out as we participate in this expansion phase and revenue starts to flow back to the government.

And this is how it should be.

Reinforcing the strength of public finances in Australia at the moment, Treasury data published in MYEFO shows that the level of net government debt stands at 10.0 per cent of GDP, a miniscule level. For the OECD, the average is around 100 per cent of GDP.

By way of background, net government debt was a little below zero before the collapse of the global financial system hit Australia, but those same Treasury documents presented by Mr Hockey show that since the early 1970s, the level of net government debt has never been above 18.1 per cent of GDP and the average level of debt over that long time frame is approximately 7 per cent of GDP, a little below the level now.

This is remarkable and shows just how prudently government finances have, on average, been managed for over 40 years.

For Australia, with the economy clearly entering a phase of stronger growth, it is prudent to move the budget back to surplus. This is a relatively straight-forward task given the solid pace of economic growth unfolding and what we are likely to see in terms of some moderate tightening in fiscal policy in this year's budget.

An unwinding of the government's shifting of payments, in particular the outlay of $8.8 billion to the Reserve Bank of Australia, will also help to see the budget return to surplus in the next few years.

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.

Perhaps the best assessment of the state of public finances in Australia is given from the international credit rating agencies.

All three major agencies, Standard & Poors, Moodys and Fitch assess Australia as a triple-A risk with a stable outlook. They held this assessment even after seeing the seemingly pessimistic view presented in MYEFO. Indeed, Fitch upgraded the rating of Australia to triple-A late in 2011 after it observed the prudent use of fiscal deficits to maintain economic growth and to cap the unemployment rate.

In closing, I also note that Australia is in its 23rd year of continuous economic growth, a quite remarkable achievement. In addition, it has been more than 10 years since Australia's unemployment rate was above 6 per cent and over the past 20 years, inflation has averaged 2.5 per cent.

These are stunning economic achievements.

While there are many reasons for this remarkable trifecta of economic achievement, sound fiscal policy settings would rank highly among them.

Going into budget deficit when needed, staying in deficit when needed, returning to surplus when needed and holding on to surpluses when needed are all part of the policy framework that has helped make Australia one of the richest countries in the world.

Only the economically ignorant would hanker for a budget surplus on all occasions. No credible economist I am aware of would advocate unending surpluses and no government debt in perpetuity. Nor would they argue for a budget deficit on all occasions with forever rising level of debt.

It is not that complex, even though, as we have seen, surpluses or deficits can persist for many years.

These economic achievements over many years have helped propel Australia to the fifth richest nation in per capita GDP terms, according to the International Monetary Fund, behind only Luxembourg, Qatar, Norway and Switzerland.

While the role of government is to prioritise spending and revenue raising measures, and here the Commission of Audit will have some valuable input into the government's deliberations, account of the business cycle is fundamental when considering how much needs to be cut or which taxes need to be raised.

If the pace of economic growth were to remain below trend into 2014 and 2015, perhaps as the terms of trade decline and mining investment falls, an austere budget that returns to surplus in a hurry would be inappropriate policy. It would unambiguously add to unemployment and compound the economic downturn.

Based on the current Treasury projections, the scope for a significant fiscal tightening is limited.

If, as appears more likely, the economy is stronger than the MYEFO forecasts, the scope to trim a little more and lock in the return to surplus would be prudent.

Thank you.

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THE LATEST FROM THE KOUK

The RBA has the tools to fix the economy, but is reluctant to use them

Thu, 05 Dec 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/rba-tools-reluctant-042742904.html

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The RBA has the tools to fix the economy, but is reluctant to use them

The Reserve Bank of Australia has made a range of serious policy errors over the past few years, and the Australian economy is weaker because of those mistakes and misjudgments.

Not only is the RBA on track to miss its inflation target for six years, and perhaps longer, the persistently high unemployment rate in concert with record low wages growth is the result of the RBA’s tardiness in cutting interest rates because of its textbook obsession with house prices and household debt.

It is a mistake that has cost the economy tens of billions of dollars in lost output; employment is many thousands of people below what could have been achieved; and all the while wages growth hovers near record lows undermining the wellbeing of the workforce. What’s worse, the RBA seems to have thrown in the towel on trying to meet its inflation target, even though that target was confirmed a month ago in the recent update of the Conduct of Monetary Policy between the RBA and Treasurer.

In this context, Deputy Governor of the RBA, Guy Debelle, gave a fascinating speech earlier this week on the topic of employment and wages.

Household wealth is booming: What this means

Mon, 25 Nov 2019

This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/household-wealth-booming-200022930.html 

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Household wealth is booming: What this means

$500,000,000,000.

In other words, half a trillion dollars.

That is approximately the amount Australian household wealth has increased since the start of July 2019, with house prices surging, the Australian stock market moving higher, and savings increasing.

The bulk of the gains have occurred via rising house prices, which according to CoreLogic, are up over 5 per cent in less than five months. This move in house prices has added around $360 billion to the value of housing and is driving the rebound in wealth. At the same time, the level of the ASX has risen by around 2 per cent with a further $40 billion being paid out in dividends. This allows for the recent pull back on prices as new banking scandals are exposed.

In these conditions of rising wealth, the household sector is getting a serious financial reprieve, despite the ongoing weakness in wages and the still very high level of unemployment and underemployment which afflicts almost 14 per cent of the workforce.

The good news is that this wealth creation is likely to spark a rise in household spending growth once the gains are widely acknowledged in the community and then feed into consumer sentiment. This is most likely to show up in the first half of 2020, after the usual lags work their way through the economy. History shows that when we consumers experience growth in our wealth, we are more inclined to lift our spending.

Earlier this year, RBA researchers Diego May, Gabriela Nodari and Daniel Rees found that:

“When wealth increases, Australian households consume more. Spending on durable goods, like motor vehicles, and discretionary goods, such as recreation, appears to be most responsive to changes in household wealth”.

We saw this, in the reverse, in the period from the middle of 2017 to the middle of 2019 when Australia-wide house prices fell by 10 per cent, crunching wealth levels. It was no surprise that during this period, household spending growth slumped. The retail sales component fell to its weakest since the early 1990s recession. Consumer spending and confidence was not helped by the coincident weakness in wages growth and the policy mistake of the RBA which refused to cut official interest rates, even though the economy was mired in a low inflation, low growth and falling wealth climate.

Thankfully, common sense has since prevailed at the RBA and it has cut interest rates three times since June.

Demand for housing has also lifted with shrewd first home buyers taking advantage of favourable affordability and investors also stepping back in after the May election saw the return of the Coalition government and the demise of Labor’s proposal to reform negative gearing tax laws. The current wealth surge unfolding now is occurring at a time when there is also a sharp decline in the debt-servicing burden as interest rates fall. This has the dual effect of freeing up cash flows for some consumers and allows other to accelerate their debt repayment.

For the moment, the labour market remains weak and wages are still stuck in the mud. These will constrain any near term lift in household spending, but the wealth lift will be vital for sparking a pick-up in consumption, probably in the new year when the effect is more widely observed and entrenched.

It adds to the scenario where 2020 is looking like a better year for the economy with bottom line GDP growth set to hit 3 per cent in the second half of the year.  If the wealth effects build further over that time and business investment and infrastructure spending continues to lift, the economy in 2020 just might register its strongest growth rate in a decade.