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Oct 12, 2012

RBA now controls the economics of next year's federal election

The economic environment in which next year's federal election will be fought will be affected in large part by how the RBA responds to a worsening international situation.

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While all of us — gallery hack, blogger and Twitterati alike — were engrossed in politics within the House of Representatives this week, events of greater significance for the electoral chances of the government were unfolding elsewhere.

Economic events here and offshore flagged that a resilient Australian economy now faces a more difficult international environment between now and the end of next year than previously forecast, with significant consequences both out in the real world and in Canberra, where an election, if held on schedule, awaits.

First on the resilience: yesterday’s jobs figures reflect exactly how the Reserve Bank described the employment market — there’s been “moderate employment growth” but “the labour market has generally softened somewhat”. The September data showed the economy had put on 14,000 full-time jobs, seasonally adjusted, there was a welcome lift in participation, and a lift in hours worked.

The big problem, however, was Queensland. Since Campbell Newman was elected, Queensland’s unemployment rate has gone from 5.2% to 6.3%. Queensland has lost 23,000 jobs while the country as a whole has put on 16,000. Worse, the jump in Queensland unemployment was on the back of a big fall in participation in September.

Joe Hockey got himself into terrible difficulty trying to explain all that yesterday when he emerged to claim the figures showed “people are starting to feel the pinch of the carbon tax”. Quizzed on Queensland, he insisted the numbers were a lag indicator from Labor’s time in office. “The reality is there are a lot of factors that go into play,” he subsequently admitted. Amongst those factors was “they are feeling the pinch with some of the commodity prices coming off”.

Normally, the topic of recent falls in commodity prices has been entirely absent from the Opposition’s story on the economy, which has emphasised that it’s the carbon price and mining tax that are together entirely responsible for the looming peak in mining investment. Of course, Queensland is tricky territory on that issue since Newman upped mining royalties himself and delivered a Labor-like serve to mining executives. Newman may yet prove to be of substantial assistance to federal Labor in the run-up to next year’s election.

It was that peak in mining investment that encouraged the RBA last week to cut interest rates and indicate further cuts to come, in the light of a weakening international situation that meant lower economic growth globally next year than forecast.

The International Monetary Fund promptly confirmed the RBA’s concerns this week by yet again — how many times in a row is that now? – downgrading its growth forecasts. It also completed the step-by-step change in its thinking on austerity that has been underway for months, and admitted what most Europeans, and particularly the millions without jobs, could have told them — slashing government spending in the name of reining in debt dramatically slows economic growth, making the task you’re trying to achieve more difficult and inflicting serious economic and social damage along the way.

Things got even worse on the EZ front yesterday with Standard and Poor’s downgrading Spain’s credit rating — to “one notch above junk” as every report insisted on noting. As one of the Eurosceptic Daily Telegraph’s commentators spotted, however, S&P had also expressed real concerns about whether the much-heralded June commitment to recapitalise Spanish banks was worth anything.

Meantime there’s growing concern in Germany –- heartland of the axis of austerity — that it too may succumb to the recession its approach has inflicted on others. Although, of course, the Germans are so obsessed about inflation that they can worry about that at the same time as watching nervously for recession.

At this point, only the improving jobs market in the US is a cause for optimism for international growth, but the fiscal cliff threat continues to lurk as a cloud over 2013.

The Reserve Bank has to handle all this itself. The government has made clear it is determined to pursue, and most likely accelerate, its contractionary fiscal policy. Fiscal debate has entered a twilight zone in Australia in which the government is attacked for spending too much, courtesy of its long-term commitments to new spending initiatives like the NDIS and Gonski, when it is politically locked into a severely contractionary fiscal commitment in spite of a slightly-below-trend economic growth trajectory.

It’s all summed up in the bizarre fantasies of David Murray, a man who refuses to believe in climate change but who is convinced Australia is on the verge of going the way of Greece or Spain, and has multiple national platforms — the two national newspapers and the ABC — to spruik his eccentric views.

The immediate challenge for the government is MYEFO. But the problem there is the first two letters of the acronym. It is committed to a surplus this year, and we’re already nearly at the mid-year point. Options for increasing revenue this year are slim to none; changes to superannuation concessions, for example, won’t kick in until 2013-14. The best options for saving the surplus in the face of weaker revenue are delaying or cancelling spending: departments will be asked to identify programs tracking below forecast, or suffering significant delays, with spending either returned to the budget or pushed past July next year.

The net result is that the economic environment in which the election will occur next year — and how realistic both sides’ fiscal policies will be judged — is now even more in the hands of the Reserve Bank and its judgment about how best to time stimulus in conditions of global uncertainty and sluggish growth and a government committed to taking a great whack of spending out of the economy.

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Hunt Ian
Member

Good to see some good reporting on what the RBA has to face over the next year.

David Hand
Member
It’s good to finally see a comment in this organ of the influence of the mining sector on the national economy though I guess it had to wait till the trend is down and an excuse is needed to explain why the economic downturn is not Swan’s fault. For too long I’ve been assaulted by Crikey’s gleeful endorsement of Swan’s attacks on “greedy miners and billionaires”, a “tiny part of Australia’s economy” etc etc. Yep, the boom is over and we will really see how the multiplier effect caused the mining sector to influence jobs right across the economy. But… Read more »
Hamis Hill
Member
Why worry, Australians are officiall-y the wealthiest people on Earth, on the back of an unburst housing bubble of the highest house prices on Earth. All care of escaping the GFC caused by bursting housing bubbles all over the world. But don’t be concerned, Abbott and co will remedy this defect by following his little Queensland mate into a slash and burn exercise at the federal level, bursting the housing bubble and putting us all back in our place. Now if the RBA wants to avoid all that it had better start leaning on its business partners to, Alan Jones… Read more »
Jimmy
Member
This line is the big danger for thsi country”It also completed the step-by-step change in its thinking on austerity that has been underway for months, and admitted what most Europeans, and particularly the millions without jobs, could have told them — slashing government spending in the name of reining in debt dramatically slows economic growth, making the task you’re trying to achieve more difficult and inflicting serious economic and social damage along the way” given the results of MR Newman’s actions and how even the Libs admit they are a precursor to their actions should they win govt we should eb very… Read more »
Jimmy
Member

.

iggy648
Member
I get a bit confused. Taxable income is essentially income minus costs. As mining companies slow down their investment in stuff (i.e. reduce their costs), doesn’t that mean their taxable income, and hence the tax paid, will increase? Herb Elliott has said that Fortescue expects to pay $1B this year and $2B next year in taxes and royalties, presumably up from close to $0B in taxes last year. (It pings me off a bit that they lump royalties in with taxes, as surely royalties are just the cost of raw materials, and not a tax. If I buy steel for… Read more »
taylormade
Member

Am confused also, explain it for me please Jimmy, wasnt the govt planning to reduce the Co tax rate to stimulate the non- mining sectors of the economy ??.

David Hand
Member
Iggy, Slowing down investment in new mines does nothing to reduce costs. Most of the investment in mining is for new projects that will come on stream in the next 2 to 4 years. Once a project starts operating, it has the following operating costs- Wages and salaries Spares Energy Loan repayments Royalties What has happened in the last 4 months is that the spot price for thermal coal has fallen so far that as supply contracts roll over, revenue per tonne is below the above costs. Therefore thermal coal mines are now going on to care and maintenance. The… Read more »
David Hand
Member

In answer to your last qustion, you would deduct the 20c/kg from your revenue to have a gross profit of 30c/kg. you then deduct all your operating costs such as interest and wages etc and what is left over is taxable income. Say that it is 6c. Should the price of steel widgets fall to 40c, you are now unprofitable and cease production. This is what has happened to thermal coal and is possibly going to happen to coking and iron ore – the three commodities that pay the MRRT.

David Hand
Member

Jimmy and Hamis,
What do you think governments in Europe should do to head of the imminent collapse of their economies? Solve chronic endebtedness with more debt?

Hamis Hill
Member
David, what the European governments should do is resume the properties which are now empty because their prospective customers are jobless. These properties should then be rented out peppercorn rents which allow their inahabitants to present themselves for employment without the burdensome costs of exorbitant rents or mortgages which their employers are expected, but now cannot afford,to pay in their wages. This is exactl-y what was done in the immediate post war period in West Germany under the policies of the Marshall Plan, which restricted spending on housing. This plan had,in turn, followed the economic ana-l-ysis of Adam Smith who… Read more »
David Hand
Member
Ahhh… yes Hamis, I did read through your entire marxist polemic. Err, it’s mostly bollocks. Mines typically pay for their workers’ accommodation, especially fly in fly out mines. Towns in the Bowen basin wouldn’t be there without the mines so few employees own their houses which are mostly owned by the mining companies. Many miners prefer to own property on the coast around Mackay and commute to work. So their families live on the coast and they pay a very nominal rent for a donga near the mine. A basic miner earns about $130-150k in the bowen basin and pays… Read more »
David Hand
Member
Ahhh… yes Hamis, I did read through your entire marx ist polemic. Err, it’s mostly boll ocks. Mines typicall y pay for their workers’ accommodation, especially fl y in fl y out mines. Towns in the Bowen basin wouldn’t be there without the mines so few employees own their houses which are mostl y owned by the mining companies. Many miners prefer to own property on the coast around Mackay and commute to work. So their famil ies live on the coast and they pay a very nominal rent for a donga near the mine. A basic miner earns about… Read more »
ZA
Member

“events of greater significance”… The ongoing, reported decline of the Great Barrier Reef and the Oceans? Oh…oops! Of course, my affects my hip pocket…

Hamis Hill
Member
It’s breaking news! According to David, Adam Smith, professor of Moral Philiosophy and author of An Inquiry into the Nature and Causes of the Wealth of Nations, (published in 1776) and Father of Economics is actuall-y Karl Marx? A new Open-Cut coal mine has recentl-y been approved for the upper Hunter Valley. Back in the late seventies a similar approval in the vicinity of Singleton saw a doubling of house prices as highly paid miners came to town. Seventy five year-old ramshackle weather board cottages rose to twice the price of brand new homes on the outskirts of Sydney. The… Read more »
Ian
Member
I don’t know about the effects of housing costs on the decisions of miners to slow their activities down – probably little if any but I’m pretty sure the enormous uncertainty facing the world, China and Australia included, has a lot to do with it as has the recent fall in prices. Whatever it is I’m grateful. As to austerity? Well, it patently clear that in Europe it has not and will not work and neither will it do so here. In fact I’d go so far as to say this is ideologically driven insanity. Stimulus? That might work in… Read more »
Jimmy
Member
David – “What do you think governments in Europe should do to head of the imminent collapse of their economies? Solve chronic endebtedness with more debt?” It is clear that the austerity measures being employed across Europe are driving the recession deeper by removing billions from the economy which then reduces the govt’s income and increases welfare expenditure causing further austerity cuts to pay the debt which then starts the cycle again. Better targeted spending is the answer, embark on infrastructure projects that create jobs and provide lasting benefits while gradually cutting spending in other areas. Also David given Australia… Read more »
David Hand
Member
Jimmy, I think a significant asset devaluation would help a lot. This is what happened in America and why, after a couple of years hardship, the US economy is showing the odd gasp of life here and there. The US budget deficit is still an issue but if they can grow the economy, they can manage that. Europe on the other hand has its industry and working population in a regulatory straight jacket that must change or they are doomed. I read recently that a French company cannot make a worker redundant until they have reported a loss two years… Read more »
David Hand
Member
Australia is embarking on “massive austerity measures” so that Wayne Swan has a fig leaf to cover his nakedness. The RBA is calling for stimulation of the economy at the same time as Swan is putting the brakes on. Debt in Australia is an issue mostly in regard to where it leads. Few people are saying our debt is too high. A lot of people are saying that we must manage it well through fiscal control. From my point of view, I’d like to see Swan fail to deliver a surplus mostly because it will be a complete fabrication, such… Read more »
Jimmy
Member
David Hand – America hasn’t gone in for the Austerity measures that Europe has (that will change if the republican get in) and in have used stimulous and Obama tried to get a significant infrastructure package through but was denied. One of the big things America has had going for it over the EU is the curency, the US dollar has devalued making their experts Cheaper where as because the EU has some strong economies the Euro hasn’t devalued like it should to help the weaker countries. And the US’ free market approach to employment where the can hire and… Read more »
Jimmy
Member

David Hand – “Australia is embarking on “massive austerity measures” so that Wayne Swan has a fig leaf to cover his nakedness. The RBA is calling for stimulation of the economy at the same time as Swan is putting the brakes on.” This is simply untrue, the size f the fiscal consolidation it overstated due to some bringing forward of expenditure into the 2012 year and the govt’s change to a more neutral fiscal position is giving the RBA the room to more to a more expasionary position, this should mean the public sector retracting as the private sector expands.

David Hand
Member

Jimmy,
I think the austerity measure Americans experienced was a massive collapse in the value of their homes. This has driven the American recession more than anything else. What’s bringing them through is that flexibility in workforce management has always been there. US companies can sack workers at a whim and they did. This has enabled them to respond to a falling dollar and the improving trade opportunities that have come in a way that Europe simply cannot do.

Asset devaluation would occur most easily if the Euro fell 25%.

David Hand
Member

Jimmy,
I don’t think Australia is embarking on massive austerity measures. I think I misunderstood your question about why Australia would do such a thing and took the opening to have a gratuitous whack at the best treasurer in the world.

Hamis Hill
Member
Some sort of fatigue setting in there for David? The esoteric term “Asset price inflation” is an oblique reference to the unsustainabl y high housing prices in Australia and formerl y in the GFC stricken economies. It is a term used to avoid panicking the “market” and so inducing negative “sentiment”, the other side of the coin of “irrational exuberance”. All other inflation, eg wages etc, is bad and can be stated as such. “Asset price inflation” is good for the speculators and so cannot suffer any negative connotations for fear of hurting their ponzi schemes. Remember the old real-esate… Read more »
Hamis Hill
Member

Abbott, the self-greasing policy pig?

David Hand
Member

But Hamis,
The “unwitting mortgage slaves” are all busy paying down their debt. Maybe acting like adults. Maybe being rational.

Hamis Hill
Member
Glad you understand that “Iron Law” David. Breaking it during the Howard-Costello feel good mortgage debt orgy has taken the nation to the brink of financial disaster and with the greased pig running towards the PM office on the back of a hard to shake addictive lust for capital gains that hard core of still unwitting mortgage junkies will have a long time to repent of their stupidity and self-indulgence in the apocalypse of the Abbott Aftermath. And because it is a democracy, no matter how deprecated by selfish and ungrateful swine,it will be all their own fault for voting… Read more »
Jimmy
Member

David – The maasive drop in US house prices was a cause of the recession, the austerity measures in Europe were in response to it but have made it much worse.

And Australia isn’t embarking on massive austerity measures but if you look in QLd and at Abbott’s policies the libs currently favour the UK method of “expansionary austerity” which simply doesn’t work.

Ian
Member

Hamis,

Do you think the RBA will really get us out of our looming problems or that either Liberal or Labor will be able to do much given the disastrous situation in the North? I personally think not.

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