Ignore the spin, government debt is going up and up

Wed, 20 Dec 2017  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/2195187-050039322.html?soc_src=social-sh&soc_trk=tw 

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Ignore the spin, government debt is going up and up

Despite all the spin and torture of the data, government debt is still rising, the return to budget surplus is based on fickle economic forecasts and the Turnbull government is on track to be one of the top 10 taxing governments in Australia’s history.

Gross government debt is already at a record at $520 billion and it will keep rising through till at least 2027-28 when it will reach a new record high just under $700 billion. Net government debt (which allows for some of the assets the government owns to offset gross debt), will reach a peace-time record in 2018-19 when it hits 19.2 per cent of GDP, having roughly doubled from the time of the 2013 election.

This is a long way from promises of the Liberal Party prior to it taking office to run budget surpluses and pay off debt.

With Treasurer Scott Morrison delivering the Mid Year Economic and Fiscal Outlook, the new record levels for government debt were confirmed, notwithstanding a small narrowing in the budget deficit which was driven by an unexpected rise in the iron ore price which fed into company profits and taxes paid to the government, as well as higher superannuation taxes based on the solid performance of the stock market last year.

The budget is forecast to return to surplus in 2020-21, but this will require everything to ‘go right’ with the economy between now and then. GDP growth is forecast to pick up to 3 per cent in 2018-19 which, according to Treasury, will underpin a solid rise in employment and a further acceleration in wages. A stronger economy will deliver higher taxes which is the driver of the return to surplus, so the theory goes.

As has been evident in recent times, wages growth is weak, struggling to break above 2 per cent in annual terms and it is being held back by an underutilised workforce, technological change and globalisation.

The forecasts for a pick up in tax revenue need not only employment growth to drive PAYG tax receipts for the government, but wages growth to exceed 3 per cent for several years. This may occur and the government is banking on it, but at the moment the risks appear to the downside. Even a relatively small undershoot in wages growth costs the budget many billions of dollars which can quickly erode the surplus currently penciled in for 2020-21.

On the upside, Treasury has taken a cautious approach to forecasting the ever-volatile iron ore price. It is assuming the iron ore trades at US$55 a tonne, which is around $US10 a tonne below the current market price. This is an important driver for the budget bottom line. In the budget in May, Treasury estimated that for each US$1 a tonne change in the iron ore price, the budget bottom line is impacted by $430 million in each year. This means that a US$10 upside surprise in the iron ore price would add around $4.3 billion to government revenue in a single year and lock in larger surplus in 2020-21.

If the iron ore price remains firm, at around current levels, a large upgrade to the return to surplus may occur when the annual budget is handed down in May 2018. It would be the sort of news that would see the government move to reduce income taxes as the election draws near.

As is clear, the factors that influence the budget bottom line are many and they are usually unrelated. The key issues for the budget into 2018 will be wages, employment, iron ore and company profits. The government is banking on these being strong so that it can collect the tax revenue it needs to hand back in the form of pre-election tax cuts.

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THE LATEST FROM THE KOUK

Will falling house prices trigger the next Aussie recession?

Tue, 17 Jul 2018

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/will-falling-house-prices-trigger-next-aussie-recession-000039851.html

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 Will falling house prices trigger the next Aussie recession?

House prices are falling, auction clearance rates continue to drop and there is a such sharp lift in the number of properties for sale that, for the moment, no one is willing to buy at the given asking price.

Potential house buyers who have held off taking the plunge in the hope of falling prices seem to be staying away, perhaps hoping for further price falls. But also influential factors forcing buyers away is the extra difficulty getting loans approved as banks tighten credit standards, then there are concerns about job security and associated awareness of probable cash flow difficulties given the weakness in wages growth. It is remarkably obvious that house prices will continue to fall and this poses a range of risks to the economy.

Research from a range of analysts, including at the Reserve Bank of Australia, show a direct link between changes in housing wealth and consumer spending. This means that when wealth is increasing on the back of rising house prices, consumer spending is stronger.

This was evident in Sydney and Melbourne, in particular, when house prices in those two cities were booming in the two or three years up to the middle to latter part of 2017. Retail spending was also strong. Looking at the downside, in Perth where house prices have fallen by more than 10 per cent since early 2015, consumer spending has been particularly weak.

Punters point to by-election troubles for Labor

Mon, 16 Jul 2018

 

If the flow of punter’s money is any guide, Labor are in for a very rough time on Sublime-Saturday on 28 July when there are five by-elections around Australia.

In the three seats where the results are not a forgone conclusion, the flow of money on Liberal candidates over the last few days has been very strong.

The Liberal Party are now favourites to win Braddon and Longman and in Mayo, Liberal candidate Georgina Downer has firmed from $4.20 into $2.75.

If the punters are right, Sublime-Saturday would see Labor lose Braddon and Longman and could see Liberal’s sneak back in Mayo.

If so, it would be odds on that Prime Minister Turnbull would go to the polls as soon as possible, not only to take advantage of the by-election fallout, but, from a different angle, go before the housing market and the economy really hit the wall, probably in late 2018 or 2019.

BRADDON

Liberals $1.70 (was $2.25)
Labor $2.05 (was $1.65)

MAYO

Liberals $2.75 (was $4.20)
Centre Alliance $1.35 (was $1.15)

LONGMAN

Liberals $1.50 (was $2.00)
Labor $2.50 (was $1.85)