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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.


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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29 thoughts on “RBA now controls the economics of next year’s federal election

  1. Hunt Ian

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

  2. David Hand

    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 Swan is hell bent on a surplus. Bernard, any ideas where he will attack the prosperity of ordinary Australians by contracting the economy while he should be stimulating it? Or am I in for months of defence of an indefencibly useless, shallow, politically crude and incopetent Treasurer?

    Thev RBA is not only on its own. The Treasurer is working against it.

  3. Hamis Hill

    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 style, start withdrawing their cretinous support for the imbecile conservatives.
    Otherwise both they and the economy will be dying of shame.
    Pandering to middle class aspirational idiocy, all care of the credit card and mortgage orgy, is what has brought the nation to this brink of economic disaster.
    The RBA knows this and has known all this for some time, when will the rest of the economy wake up to the absolute economic bankruptcy of the Howard Hangovers?

  4. Jimmy

    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 worried about the economic consequences of an Abbott govt.

    Also did anyone else wonder what Old Joe Hockey had been doing the night before his press conference yesterday, he sounded like he couldn’t really give a stuff.

    David Hand – This countries current issues aren’t due to the introduction of a mining tax but that one wasn’t introduced sooner.

  5. iggy648

    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 20c/kg and sell steel widgets for 50c/kg, can I claim that I’ve already paid 20c/kg in tax?

  6. taylormade

    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 ??.

  7. David Hand

    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
    Loan repayments

    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 impact of this is that royalties stop and the resources companies stop paying the mineral resources rent tax.

    The metallurgical side, coking coal and iron ore is holding up but barely. When iron ore collapsed to about $80 a tonne, it made every iron ore miner in Australia except Rio Tinto and BHP unprofitable. It has bounced back to about $120 but such events do nothing for confidence about future investment, which is why they are all postponing new projects

  8. David Hand

    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.

  9. David Hand

    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?

  10. Hamis Hill

    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 argued that “A dwelling house, as such, adds nothing to the income of its inhabitants”.
    The wages costs of your miners, of which much complaint is made, are greatly increased by exhorbitant housing prices.
    These exhorbitant housing prices, caused by speculation, indulged in mainl-y by the right wing elements of Labor, Liberals and the Nationals, are making the mines unprofitable.
    What do you propose to do about this David?
    Since these essential components of the Monopolist housing/banking cartel are entrenched in government all over Australia, where they differ in name onl-y?
    Apparentl-y the “Watermelon Greens” so named for their international principle of economic and social justice are the onl-y politicians who are acting against the economic depredations of the Housing/Banking cartel, whose flunkies on the right then attack The Greens as economy destroying “communists” out to undermine the famil-y etc etc.
    Now David, your miners in Australia, you might reasonabl-y argue, are not in the business of providing housing for their employees, rel-ying,instead, on specialists in the “free market” to provide that service for them.
    With your apparentl-y superior access to the details perhaps you could determine the total wage costs for the mining industry and what excess of the conventional 25% of same set aside for housing costs (See Adam Smith above as the source of this prudent ecomomic convention) are paid by the mining companies to property speculators.
    Is this simpl-y a private “TAX” on economic stupidity and how does it compare to royalties and the MRRT as a component of those costs contributing to the unprofitabilty of these patheticall-y duped mining companies.( as in their totall-y unfounded “Faith” in the patent nonsense of a free market in housing)
    Take as much regard of the reality of housing speculation, as the cause of the econmomic problems you refer to in Europe, as you wish, to help your understanding of this repl-y to your question.
    If you choose to ignore any of these arguments ( as do the housing/banking cartel’s captive politicians- now they would do that wouldn’t they- in on the scam) then perhaps you are not serious in seeking a solution to this problem.
    To help you can just imagine youself as General Marshall trying to create employment in post-war Europe as a bulwark against the attraction of communism to people condemned to poverty.
    Do you think the people responsible for the vast new “systems operations ” discipline involved in winning the second world war just might have known something?
    Or did it all sort of, you know, just happen?
    Perhaps the sinister neglect of this vast and powerful new field of systems operations is responsible for the idiots who believe that we were simpl-y incapable of putting people on the moon in 1969.
    A monopoly of Eisenhower’s Military/Industrial complex, the creators of Systems Operations and the modern computer?
    Sort out the economy?- well what can you do, it’s so complicated? More induced idiocy in action.
    It is good to see your ana-l-ysis of mining costs, it at least goes against all this dumbing down and presumes we all have the wit to understand.
    Thank you for your confidence, David, it is sincerel-y appreciated.

  11. David Hand

    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 stuff all rent.

    When the mines are worked out, the mining companies will leave and the towns will die. Do you want to own property in Middlemount?

    Forgive me for not signing up for your socialist revolution.

  12. David Hand

    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 $130-150k in the bowen basin and pays stuff all rent.

    When the mines are worked out, the mining companies will leave and the towns will die. Do you want to own property in Middlemount?

    Forgive me for not signing up for your social ist revo lution.

  13. ZA

    “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…

  14. Hamis Hill

    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 response of the local council headed by a local accountant and future leader of the National Party in NSW?
    Despite years of fore knowledge, they would “think” about increasing the housing suppl-y by putting through some new residential subdivisions. Speculation? The principle of economic and social justice in action?
    The council of Australian Catholic Bishops promotes the principle of “Social Justice”, making them, consistent with David’s estimation, “Marxists”.
    No, David, your brilliant miners are the dupes of housing speculators, they pay a tax on idiocy for supposing that a “free market” suppl-ies their miners’ housing which the company pays for through wages and salaries.
    Tell all the struggling economies overseas how they should emulate your FIFO mining workers’ investment in capital city housing. That seems to be your answer to your own question David. Let the miners fund the asset-price inflation in the cities which grinds the non- mining sectors into the dust, all to line the pockets of a housing/ banking cartel and their complicit politicians.
    Gee, those mining companies just cannot get away from corruption no matter where they go in the world.
    All, according to David, a “communist” plot, not a bunch of real estate speculators “fixing up” an un-freemarket for, ha ha, private fun and profit.
    David, you are obviously not serious in your arguments.

  15. Ian

    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 the short term and, if it’s properly considered for a bit longer as, if properly designed, it can more or less just transfer debt from the private to the public sector and at the same time provide infrastructure such as, for example, a solar thermal facility in Port Augusta and more money into education at all levels etc. At least that way can improve our chances of seeing it through while we make an attempt to break away from a system that is killing us.

    The capitalist system is broken, kaput, finished and we need to rethink ways to extradite ourselves from the mess if that is even possible, which I doubt given the world is rapidly running out of resources, climate change is kicking in, politicians are corrupt, corporations are too big to control and the war machines and police forces are poised to protect the status quo no matter what.

  16. Jimmy

    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 does not have anywhere near an issue with govt debt levels why would we embark on massive austerity measures?

    Iggy – Mining investment is of a capital nature not an expense – it is depreciated over time.

    Taylro made – What is your point?

  17. David Hand

    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 in a row. So they don’t sack workers. So then they don’t hire workers. The massive unemployment in Europe is mainly structural, with companies unwilling to take the entrepreneurial risk. So the taxpayers are funding Spain’s 25% unemployment. Now it’s German taxpayers doing it for Spain. I think slashing government spending is not going to solve it but debt reduction is in the long run, inevitable. Either by paying it off or by defaulting. The latter seems more likely.

  18. 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.

    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 as paying carbon tax compensation in the 11/12 FY and collecting the tax in the 12/13 FY and then not adjusting the books to put both the revenue and the expense in the same year just like any accountant worth their salt will tell you.
    Government fiscal stimulation is needed at the moment.

  19. Jimmy

    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 fire at will hasn’t stopped their economy from tanking.

    What exactly do you mean by asset devaluation.

  20. Jimmy

    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.

  21. David Hand

    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%.

  22. David Hand

    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.

  23. Hamis Hill

    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 adage about the the man who grew old waiting for real-estate prices to drop?
    Silly not to get into debt then Eh?
    Unfortunatel y housing debt does not pay for itself, as it “adds nothing to the income of its inhabitants”.
    An “Iron Law” of economics.
    Housing, as a reflection of the ego of the owners, is all very emotional, ie irrational, hint hint.
    Nevertheless, highl y educated Australians, with the exception of mining companies, are getting the picture and reducing their private debt and the housing market is stagnating.
    This is in line with the advice of overseas commentators who recognise the Howard-Costello induced housing bubble in Australia and have advocated that housing prices should not rise until wages have caught up.
    The RBA knows all this, and incidentall y, the banking sector has become more regulated and prudential in Australia as a result of past banking and building society collapses, nothing to do with Howard or Costello.
    Swan’s surplus may be aimed at the “sentiment” that things are under control and business “confidence” can recover.
    An election year budget following a previous surplus can be expansionary to protect the economy.
    All this has to take place under the economic illiteracy and unrelanting negativity of the conservatives who would prefer to destroy the economy in order to bring down their political opponents, as was shown by their opposition to the original economic stimulus package.
    The conservatives are concentrating on presenting Labor as bad economic managers as the means to winning government and is why Abbott et al are acting like greased pigs on policy, determined never to be caught, with the MSM acting as swineherds. Why? Are bank shareholding ponzi schemers intent on beggaring all the productive sectors of the economy by sleight of hand? GFC anyone?
    That is the problem of a Liberal minority government, it is all about ruling a majority of unwitting mortgage slaves, oohing and aahing about unsustainable, fanatsy world capital gain. Blah blah blah.
    The RBA knows this and it is about time they let the cat out of the bag.
    Australians are all grown up now, aren’t they?
    It’s time RBA, it’s time to start treating citizens as adults and educate them to make rational voting decisions.
    And, quite frankly, this has absolutel y f ckall to do with “Marxism”!

  24. Hamis Hill

    Abbott, the self-greasing policy pig?

  25. David Hand

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

  26. Hamis Hill

    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 for their own demise.
    Unfortunately they will take the rest of the economy with them. Doing your bit there David to educate them out of nearly two generations of economic idiocy?
    As has been pointed out the causes of the GFC were warned of long before the event and were scoffed out of consideration by the various experts.
    Or did it all vapidl-y sort of just, you know, happen???
    Emerging from denial on this issue or will we just wait and see what happens in the magicall y protected kingdom of OZ?
    Hopefully the RBA is taking its job seriousl y while all the others lounge about in a reality denying debt junkie haze. The times which suited John Howard to do it again for his Hangover Horrors?

  27. Jimmy

    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.

  28. Ian


    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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