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Mar 20, 2012

Playing fiscal games when we no longer set the rules

All politicians now need to accept that we face significant fiscal challenges for years to come. Bernard Keane and Glenn Dyer report.

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One might have thought, for a brief moment, the seriousness of Australia’s fiscal position finally started to sink in to the opposition.

Its refusal to countenance corporate tax cuts associated with the MRRT might reflect its slavish adherence to the interests of the miners, but it might also reflect an awareness that the whole MRRT package will — assuming commodity prices don’t reach new highs and stay there for several years — end up having a substantial cost to the budget, primarily due to the cost of the shift to 12% compulsory superannuation.

Following Treasury secretary Martin Parkinson’s speech on March 7, in which he said “with muted growth in tax receipts projected for much of the next decade, Australia will need significantly greater expenditure restraint in the decade ahead than was seen in the first half of the 2000s” the penny has started to drop that the massive structural adjustment inflicted on us by the Chinese Communist Party will have profound fiscal consequences as well, and nowhere near as positive as we expected.

We noted in January that the higher dollar would have a substantial impact on federal and state revenues.

That impact will be exacerbated by the extent to which over the past decade we have made the budget ever more reliant on corporate tax, and in particular banking and mining profits, which two years ago provided over 50% of corporate tax revenue.

The government is already dealing with the impacts of a high dollar on revenue as it searches for savings to keep next year’s budget in surplus. So are state governments, which are facing falls in property tax-based revenue and flat or falling GST revenues.

Oppositions, collectively, have yet to get the message that the fiscal world has changed and they need, if only for their own long-term good, to be a lot more honest with voters about what they can deliver. Those at the pointy end of the electoral cycle, like the LNP right now in Queensland, are having to accept that the easy calls of “no new taxes” can no longer safely be made.

Tony Abbott and Joe Hockey have been pretending that once they’re back in government, it’ll be like stepping into a time machine that will whisk Australia back to 2006, when John Howard was set to rule forever and Treasury couldn’t keep up with the rivers of revenue flowing in from the mining boom and ultra-low unemployment.

That that period was accompanied by fiscal profligacy and high interest rates is left unsaid, of course, but never mind.

Has the opposition’s refusal to countenance Labor’s corporate tax cut heralded a new era of fiscal responsibility in the Coalition? Alas, the opposition isn’t opposed to a corporate tax cut — it’s just opposed to the government’s corporate tax cut. Tony Abbott promises a “modest” corporate tax cut of his own. Given the government’s tax cut is modest enough already — 1% — the opposition’s tax cut is likely to be downright self-effacing.

Throw into this mix is the problem that too-aggressive-an-approach on savings is going to further undermine growth in the non-mining sector of the economy. State governments are already tightening their belts. An accelerated reduction in Commonwealth spending — beyond even the rapid drawdown currently budgeted for by Labor — will subtract further from growth.

Joe Hockey said recently that he wants monetary policy to do more of the heavy lifting if there’s a need for economic stimulus.

He’s not the only one. Monetary stimulus is back in fashion after our brief global flirtation with Keynesianism during the GFC. But it’s problematic in Australia, because so few of us lower our mortgage repayments when interest rates fall. RBA cuts deliver perhaps only a quarter to a third of the apparent effect. And now there’s the growing tendency of the banking oligopoly, exploiting its market dominance, to ignore the RBA anyway and jack up rates, or lower them by less than the RBA, under the pretence that they are obliged to by higher funding costs.

Quite where this leaves the “heavy lifting” that monetary policy can achieve isn’t clear, but it’s not certainly not the magic bullet some would have us believe.

In a speech in Hong Kong yesterday, Glenn Stevens touched on this point in making a broader observation about monetary policy

“Monetary policy can play a role in supporting demand, to the extent that inflation performance provides scope to do so. But monetary policy cannot raise the economy’s trend rate of growth. That lies in the realm of productivity-increasing behaviour at the enterprise, governmental and inter-governmental levels. Improving productivity growth is just about the sole source of improving living standards, once the terms of trade gain has been absorbed. This is increasingly being recognised in public discussion, but it is important we do more than just debate it.

“Nor can monetary policy obviate the pressure for the production side of the economy to change in response to altered relative prices. These changes in relative prices are essentially given to us by the world economy; they are not driven by any policy in Australia.”

Essentially given to us by the world economy; they are not driven by any policy in Australia. This is a key point missing in economic debate. Our politicians, and particularly those without the responsibility of office, insist that we have far more control over our circumstances than we do. It’s time for more honesty from politicians, especially those without the responsibility of office, to acknowledge this.

The only workable strategy to resolve the dilemma is to put in place long-term cuts to big-ticket budget items such as middle-class welfare and corporate tax expenditures that will phase in over forward estimates, sparing an immediate economic (and political) impact but delivering real savings over the longer term.

But that requires a little responsibility and honesty on the part of the opposition.

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37 thoughts on “Playing fiscal games when we no longer set the rules

  1. drsmithy

    You do realise that while Sweden’s income equality is really good, it’s wealth equality is not great and a lot worse than Australia.

    Is this the same wealth equality measure that says China rates second-best in the world ?

    It’s because the average Swede has little or no wealth. Couple of reasons…taxes mainly, but also because there is no motivation. Why invest or save for a rainy day if you are confident the government will look after you?

    Because even the most generous welfare schemes are bugger all compared to an average middle-class income ?

  2. drsmithy

    But your negative attitude towards the contribution of mining to the prosperity of Australia can’t stand up to scrutiny.

    Absolutely it can, and does. The benefits of the mining boom are localised and isolated (primarily boom towns and, to a lesser extent, boom states), while the consequences are spread throughout the entire economy.

    Mining employs something like 2% of the workforce, a percentage which is unlikely to shift anywhere but down as more automated techniques – sorry, “productivity improvements” – come online.

    It boggles the mind that during a once-in-a-lifetime resources boom, Australia has done little more than sell off (!) national infrastructure and borrow money from foreigners to swap houses with each other and inflate one of history’s largest real estate bubbles. “Lucky country”, indeed.

    From my non expert position I believe floating the dollar in the 80s was one of the best economic reforms we ever did. Therefore any action to try and manipulate the value up or down would in my opinion be bad.

    The value of a floating currency is predicated on the assumption of a level playing field. Ie: that everyone else is also floating their currency subject to market forces and not manipulating.

    Currently Australia is about the only country actually doing this. Everyone else is either artificially devaluing their currency (America) or pegging it at fixed rates to save their local economies from being laid waste to (Switzerland).

    Overall, I think our high dollar is testament to our strong economy and it contributes to our high wages, something no one should complain about.

    High wages are meaningless if accompanied by accelerating living costs, and Australia’s living costs have skyrocketed in the last decade to amongst the highest in the world (driven in no small part by our astronomical real estate bubble).

    The cost of living is higher in Perth than it is in Paris and London. It’s on par with Tokyo, FFS. Something like 4 of the 20 most expensive cities in the world are in Australia. That’s utterly insane.

    We had a strong economy and high wages when the dollar was trading at 1/2 to 3/4 what it does today. Stronger, in fact, because it involved more than selling dirt to China and (completely unproductively) houses-trading. Our economy is rapidly becoming a one-trick pony – what do you think is going to happen when the rest of the world is bored of the trick ?

  3. Peter Ormonde


    You greed-is-good types crack me up …

    I had a look at the list of countries by their “wealth Gini index” … what a hoot!

    Leading the pack at the turn is the USA on 0.801… oh wait no it’s not … it’s Zimbabwe with 0.845. No wait it’s Namibia on an outstanding 0.847 taking it out by a nose.

    Togo does well too with 0.711. Syria seems surprisingly wealthy with 0.704.
    Rwanda makes a surprising surge at 0.704. PNG comes up well too on 0.738. Nigeria makes a late run with 0.738 …

    In fact this index looks like the poorer the country – the more a hell hole – the more guns and dead babies – the better individual wealth seems to score. Who would have thought?

    Even Mali on 0.750 seems to have the right sort of policy and tax settings to encourage you go-getter types to get out and pile stuff up. Haiti does well into the straight with 0.755. It probably went up after the earthquake.

    Sadly most of the really promising countries are actually too poor, too corrupt or too busy making you individuals rich to bother collecting statistics so they don’t actually get a start at the barrier.

    Australia runs a very disappointing 0.622 … nobbled by taxation obviously.

    Now I wonder what we’re actually measuring here Scott? On the numbers it looks like Burkina Faso or Benin would be the sort of place you’d be wanting to bring up your kids.

    This index simply reflects the obvious: That in the midst of great poverty and squalour there is great individual wealth – that’s how they make their dough – a deregulated labor market and lots of desperate hands. I’d reckon that bastion of small government Somalia would romp it in.

    By the look of it I’m actually quite proud that Australia has failed to record a strong result in this race to the bottom. A decent outcome.

  4. Peter Ormonde

    Gee it’s sad isn’t it – the way that the “post-modern” political debate descends into managerialism? Like squabbling accountants.

    We seem to accept that obscene inequality is a necessary feature of modern life, that the wealth creators are the Ginas and the Clives rather than the Toms, Dicks, Harrys and Carolines, that the banks have our best interests – and those of the nation – at heart. That the fluctuations in the AUD and the Nasdaq are worth a mention on the daily news.

    We look to the cold shower austerity of the English speakers for inspiration as if the Yanks had something we wanted, or the English… preferable to the Swedes or the Germans or the Danes who seem to have build stable, efficient and rather egalitarian societies despite their profligate welfare and high tax redistibutions.

    Ah yes but we know that in those cold places with welfare states no one can get rich – how many Swedish Donald Trumps are there? Where are their Ruperts, their Ginas and their Clives? Smothered by socialists? Cruelled by public schools and the welfare state?

    No we’ve bought this notion that the government is about creating the circumstances in which I – maybe everyone – can become rich … where luck, brilliance or hard work will see us on celebrity talent shows, in the news, in unimagined comfort. It’s all about me, me, me.

    Gordon Gecko captured the essence of the times: greed is still good. Good enough for me anyway. Gluttonocracy. Advertising is the real mass medium. Beyond socialism, narcissism. And what a grumbling disappointed complaining heap it has become.

    It is high time we took the economic debate from the clutches of concerned accountants and put the politics back into political economy.

  5. Bohemian

    It’s got nothing to do with the bozos in power in Canberra – Liberal or Labor. The script is written from afar. America controls global currency through the City of London. The US is paying down its debt load by devaluing its global dollar. It has already done so to the tune of 30% against most of the major currencies in the last four years and even more against us. This is of course at the expense of its own population. We are all globalists now whether we like it or not apparently. Either that or the US could be trying to bankrupt the world in order to push the reset button on the same monetary system spawned from the loins of Modern Monetary Realism with a corrupt totalitarian twist.

    Australia appears to be number one fall guy due to an hopelessly inept government and Reserve Bank sucking it up while watching what little manufacturing or agricultural business left slip away as a result of an unsustainably high A$. In effect, we have to deal with higher production costs at home while getting paid in devalued US dollars or other global currencies against which we have re-valued 30% in the last four years.

    We, including the mining industry, are taking a massive haircut on goods we sell in US dollars, Euros, Yen or Pounds and another haircut trying to sell our goods or services in over-valued Australian dollars.

    There is only one reason international students from India, China and SE Asia are turning away from our universities and that is that they are paying 50% more in March 2012 than they did in Feb 2009. It isn’t just tuition. Parents have to stump up for housing and living costs as well. Unless you have so much money you don’t need to worry, even very well off parents in those countries have to take stock. We are pricing ourselves out of all markets including our tertiary markets, as a sop to low inflation which is largely an international effect any way. I think this happened to Japan in the 80’s and then along came China.

    If the Euro falls over (unlikely), the Aussie would slip dramatically as people retreated to the safety of the incumbent global currency despite its weaknesses. Thank goodness we have not started borrowing cheap US dollars because if we did and overnight the US re-valued, this country would go from “best case” to “basket case”.

    Fortunately, we are not running on the German Euro model which, if allowed to continue, will deliver the rest of Europe as vassal states to their German masters. We would we go to relax under that scenario? Rather we still have our own dollar. For the moment that is. So we can, if we want, devalue but as yet we have not.
    By the same token, if you want to rid your country of agriculture, manufacturing and even high level service industries in the name of interdependency, just keep the currency high in the face of what Jim Rickards calls this ongoing global currency war.

    On the other hand, if you want to keep our foreign debt at beneath stratospheric levels then we need to keep the $A high. Another possible benefit of a high A$ might be that those international banks busily buying up everything not bolted down around the world by virtue of their access to free $US money at the moment, are less likely to be inclined to buy over-valued assets in Australia when Greece must surely be beckoning. But then again, free money is free money and the quantum probably doesn’t matter all that much if it doesn’t cost anything and the whole system will be reset before it ever has to be repaid. lol

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