Category Archives: Australian economy

The GST will not be raised

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Good!

DEPUTY Liberal leader Julie Bishop has ruled out accepting Treasury advice to expand the GST or re-index the fuel excise, as former treasurer Chris Bowen claimed the department “never” advised him to increase the consumption tax.

Treasury secretary Martin Parkinson last night warned that Australia must be prepared for a recession in the next decade and cannot rely on rising income taxes to restore budget health.

Dr Parkinson, whose term as Treasury secretary has been extended by Tony Abbott for six months to the end of the year, also argued for increases in the GST to ease the burden on personal and company income taxes.

So the question remains, why is Martin Parkinson being kept around till November? Is there really no one the Coalition can think of to put in his place? It is a worry that Treasury, as in all departments, promote clones of the people at the top so where are they going to find someone who has a feel for the private sector. Still, Peter Costello was Treasurer as recently as 2007 so there must be some plant of his that has grown into the job and can be put into this slot

An Australian balanced budget amendment

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I may have been too hasty in judging our Treasury Secretary. My own fault for taking the word of the SMH. I, of course, remain adamantly against raising taxes to fix our current problems and repeat what I wrote yesterday:

Stop fixating on the deficit. Do the specific things that make the economy work better. Lower public spending. Reduce regulation. Fix up IR. Encourage private industry in every way you can.

But with my morning reading of the AFR there was an important detail left out of the SMH story. The AFR headline reads:

Push to lift GST, cut income tax

This is, of course, different and even if initially the size of the tax take stayed the same this would be a genuine benefit, both in terms of economic prosperity and broadening the tax base.

But the problem remains how you could make such a shift stick. If we raise the GST, it will stay raised forever. But if we cut income taxes, it is not likely at all that they would stay down. Governments are revenue hungry and very weak on keeping the lid on expenditure. There really needs to be something in place to ensure governments do not pocket one tax increase and then go back to where we were on the others.

An idea whose time may have come is the notion of a balanced budget constitutional restriction on governments. It appears that some kind of critical mass may have taken place in the United States over whether enough states have passed a balanced budget amendment that must lead to a constitutional convention which will determine whether or not the federal government of the United States must by constitutional restriction maintain a balanced budget. The article is titled, Balanced budget convention gains steam as congressman calls for official evaluation and this is how it begins:

Rep. Duncan Hunter on Tuesday asked Congress to evaluate whether enough states have officially called for a constitutional convention to propose a balanced budget amendment — marking the next step toward what could be an historic gathering.

Mr. Hunter, California Republican, said Congress should take stock of where things stand after Michigan last week approved an official call for a balanced budget amendment convention. According to some analysts, Michigan’s move makes it the 34th state to request a convention.

For something as unconventional as the notion of a balanced budget amendment to have passed at different times and in different states through 34 different state legislatures shows there is an understanding of the problems that runaway federal spending has caused. The multiplying economic problems that have befallen one economy after another due to the insane levels of public spending after the GFC are due almost in their entirety to the spending that followed the financial crisis and not to the crisis itself. But you almost have to be a non-economist even to notice. Economists still think that C+I+G provides them with some form of understanding about what to do in recessions, with no lessons learned from the past five years.

Since we will already be having a vote on amending the constitution at our own next election, I cannot see why we shouldn’t include one on a balanced budget as well. If we really want to fix our governments’ addition to higher spending we will have to tie their hands. If they want the money they will have to raise our taxes. Then we’ll see just a tad more care in what they do and how they spend.

Parkinsons’s disease

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If you keep a Keynesian as Treasury secretary you are going to get Keynesian advice. If you take advice from a Keynesian, you will never get the economy working properly again.

I have just seen this story at Andrew Bolt and it is a report of a speech given by the Treasury Secretary, Martin Parkinson, on what the government needs to do. Here is how it starts.

Treasury boss Martin Parkinson says the goods and services tax will have to be boosted or broadened if the budget is to have any hope of returning to surplus.

He must be from the same school of advisors who told the first President Bush to break his “no new taxes” promise. Paying for public service waste with higher tax revenues is both an economic loser and even worse, a political loser.

Stop fixating on the deficit. Do the specific things that make the economy work better. Lower public spending. Reduce regulation. Fix up IR. Encourage private industry in every way you can.

If you start raising taxes you will be out on your ear at the next election.

If it’s not in itself value adding don’t do it

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I share Judy’s exasperation at the push for more infrastructure spending which is a code word for more government waste. If it is government spending, it will never repay its costs. Occasionally a government will grab hold of some natural monopoly – Telecom in the old days – from which even with all of the usual incompetence they were able to take in more money than they paid out. But past those few and far between projects, I cannot think of a single instance where governments take on projects which leave us economically better off. So this from The Australian this morning fills me with tremendous foreboding:

Joe Hockey says state treasurers will find it “very hard to resist” a federal proposal to recycle government-owned assets and boost spending on infrastructure.

State treasurers are in Canberra this morning to discuss spending on infrastructure and the carve-up of the good and services tax.

The federal Treasurer expressed optimism about the discussions ahead of today’s meeting.

The Abbott government is pushing for a deal that will unlock billions of dollars from the privatisation of state government assets to be reinvested in significant new infrastructure projects.

It’s understood proposals put to state treasurers will include new incentive payments from the commonwealth which will be linked to qualification deadlines.

“I have no doubt that the states will find it very hard to resist what the commonwealth is prepared to offer them,” Mr Hockey said.

Mr Hockey said the proposal would be “for the recycling of state government assets and investment in new productive infrastructure that is going to create jobs and improve the capacity of the economy”.

Governments do not create jobs. If you believe that government spending leads to an outcome where there are more jobs in an economy than there would have been had the government not indulged in this kind of spending, or that the economy will end up stronger and more productive, you will never understand a thing about how an economy works. And as an added extra, with increased government spending there will be lower real earnings as well. So let me repeat what Judy said below:

The bigger issue is with all this talk of INFRASTRUCTURE, what we are about to witness is just a monumental waste of taxpayer money on politically popular and excessively expensive projects for which there have been inadequate assessments. Just a continuation of Albo, really, who ramped up infrastructure spending from 1 to 2 per cent of GDP.

The disaster that overcame the Victorian economy in the dismal Cain-Kirner years were built on just those same “hollow logs” they thought they could tap into. If it’s not value adding – that is, if it does not pay for itself after every cost is taken into account – it makes us worse off, not better. Call it charity or welfare or whatever else signifies that it draws down on our productivity if you must do it. But for heaven’s sake, don’t pretend it is a contribution to economic growth.

UPDATE: Here is the Treasurer’s press release, Treasurers agree to boost infrastructure.

The Commonwealth’s incentive will be 15 per cent of the assessed value of the proposed asset being sold for capital recycling. If proceeds are used by the States and Territories for the retirement of debt or other purposes, rather than for agreed, new productive infrastructure, they will not be eligible to receive payments under the initiative.

This is an important initiative to remove debilitating infrastructure bottlenecks, stimulate construction and drive real activity in the economy when it is most needed, as investment in the resources sector declines.

Infrastructure Australia estimates that at least $100 billion in commercial infrastructure assets are currently tied up on government balance sheets and could be sold.

The partnerships could overcome the fiscal constraints Governments face to increase the pipeline of projects and improve Australians’ quality of life, tackle congestion, reduce business costs and help firms better link with their employees and customers.

Those who think this will be of the roads-rail-and-sewers variety of expenditure will just have to wait to see what gets floated instead. At least on the up-side, the States will have to sell up various capital assets to private owners to secure the funds so it’s not all bad.

The Australian way – cut taxes, raise productivity and reduce regulation

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The front page story in this morning’s Australian is one more piece of evidence on the death of Keynes and the return to economic management of a kind not seen for almost a century. Its enemies have called it “austerity”, but what you are looking at is a return to a market-based approach to getting economies to work. As the headline says, Tony Abbott tells Davos: let business lead way. And this is what the Prime Minister means:

In meetings in Zurich with Switzerland’s top investors in Australia and an address to the Australian business delegation to the forum, Mr Abbott has launched a pitch for the “absolute centrality” of private business to sustainable economic growth.

Declaring that Australia will take its own actions to cut taxes, raise productivity and reduce regulation, the Prime Minister will call on other nations to make way for business and free trade. . . .

Addressing Australian business leaders, Mr Abbott said it was easy for commentators and governments to forget “the absolute centrality of successful private business to prosperity”.

“You cannot have a society, you cannot have a community and you can’t have an economy without successful private business,” Mr Abbott said.

It sounds so obvious you have to wonder why it isn’t said more often. And this is the new world we are in and I hardly think what the PM will say will fall on deaf ears. If the socialist President of France is quoting Say’s Law, you may be sure that there is a light dawning that will move us towards a kind of prosperity that has been suppressed for seventy years.

And as for the economic textbook writers of the world, if we suddenly find that the road to prosperity is made up of Y=C+I-G, there may have to be a global book burning as macroeconomic theory finds the need to start again.

It’s a matter of will

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Getting things done is firstly knowing what you want to do and then doing whatever it takes to get them done.

Our new government has shown that so far as illegal migrants are concerned, where there’s a will there’s a way, or at least that’s been the case up until now and hopefully into the future. You really can stop the boats. But more importantly, it shows that if you are determined to find solutions, solutions that will work, you are more than half way towards solving the problem.

Would that I could say the same about the economy. I suppose we will eventually get a commission of audit report, around a year or perhaps more after the last election. But seriously, did we need a commission of audit to make a song and dance about the idiocies of Labor and the mess they made? Before the election there was something. Since then there has been hardly a word. And my question is why the Government has not gone in as hard on the economic side as it has on stopping the boats.

In The Australia today, there is a story on page 2 mentioned on the front page where it says:

Tony Abbott has made it clear that this will be the year in which he focuses on, and commits to economic management as never before.

On that same front page there is an actual story, that is also on the front page of the AFR, in which Bill Shorten “promises to fight for jobs in ‘middle ground’.” The AFR story is that “Shorten offers reform help”.

Why is Bill Shorten on the front pages about fixing the economy and not Tony Abbott or Joe Hockey? Where’s the plan, the strategy, the determination to fix things up?

I know it’s not the done thing to turn over these neutral public servants who run the various departments, but give me a break. These people pushed the stimulus and public spending because that is what their judgment told them was the right thing to do. Why are they still there? Why is their judgment still the primary advice the Government gets? There is not a chance in the world that they have changed their minds about the ruinous strategies they followed and therefore there is equally not a chance that they are capable of offering the advice that will bring the kinds of full scale recovery we had under John Howard and Peter Costello.

So here’s my advice. Get people at the top of our various economic agencies of government who really want balanced budgets and lower public outlays in the same way that Scott Morrison wants to stop the boats. It will make all the difference.

The limits of state socialism

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I was just thinking this very thought myself:

TONY Abbott says the government does not have an ‘endless supply of money’ to prop up businesses like Qantas or Holden, warning the companies must operate profitably if they want to survive. . . .

‘In the end, businesses have to operate profitably. And in the end they have to operate profitably because of their own decisions and from their own resources. They can’t expect government to do anything other than to create … the best possible market conditions for them to operate.

‘And that means getting taxes down, getting regulation down, creating as far as we can a climate of confidence and certainty.’

This is the right answer anyway, but the way the union-run Labor Party raided the cookie jar has meant that the workers in both firms cannot look to the government for assistance. There’s nothing there. So it’s a bit rich to read this:

Federal Labor is demanding Prime Minister Tony Abbott personally intervene to resolve a dispute between government ministers about more taxpayer support for Holden.

Why do they suppose the money has run out? Would they have gone even deeper into debt to fund yet more assistance while trying to pay for everything else they’ve put on the tab.

And this is going to become the story on a wider variety of issues. The government will be unable to afford bailouts and injections and forms of assistance that might once have been routine.

And it will roll on from there elsewhere.

And if this is the way it is with Holden and Qantas who represent two of Australia’s oldest and best known brand names so it will be down the line with others and hopefully with other parts of our welfare dependency-ridden state as well.

Labor’s baseline economic legacy

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nat acc 1309

nat acc 1309 contributions to growth

On the left are the figures for GDP. On the right are the figures for contributions to growth. Conveniently the GDP data go back to September 2007 so there are a couple of things that are worth pointing out.

First we should note the recession we never had which is quite prominent. You will see a major drop in GDP that somehow escaped being recorded as two consecutive quarters of falling output. Same time as the unemployment rate went from the 3.9% recorded at the time to 5.8%. Didn’t have a recession? It was the recession we didn’t have to have, had it anyway but called it something else.

Then a mint of government spending later we have a massive debt as well as low growth and rising unemployment. GDP growth for the quarter was 0.6% and for the year less than two and a half. And if you’d like to see the evidence of public spending, look at the figures for GFCF-Priv and GFCF-Pub, that is private investment and public investment. Private is falling. Public is rising with a full year reduction in investment in both sectors together of negative 2.0%.

More evidence to ignore that shows public spending does not get you growth, employment or higher living standards.

These are very revealing figures. I only hope our new government understands that growth and prosperity can and will only come from the private sector acting on its own initiative.

Being in government is hard

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Whatever else Tony Abbott may or may not do over the next three years, I doubt that he will go back on any of the promises he made. Politics is politics and running an economy is something else. So where Maurice Newman has written in today’s AFR how the Prime Minister must attend to various economic issues, I fear they will fall on deaf ears. They will fall on deaf ears in part because of what the PM said before the election, and they will fall on deaf ears because aside from paid maternity leave, every one of the policies he took up from the ALP would arrive back in spades if the Labor Party should happen to be returned.

Nevertheless, Newman does have a point:

The federal government’s top business adviser has criticised the cost of the National Disability Insurance Scheme and the school funding reforms, slammed wages as too high and industrial relations as being too rigid, and urged the government to push the envelope in order to ‘repair’ the economy.

In a fiery speech on Monday night, Maurice Newman, the head of the Prime Minister’s Business Advisory Council, lamented as ‘hasty’ Tony Abbott’s pre-election promises to quarantine such areas as health and defence from budget cuts and suggested the Prime Minister ‘disturb the comfort zones of many’ to pay down debt and cut the deficit as soon as possible.

Vowing to furnish Mr Abbott with ‘dependable and fearless advice’, Mr Newman said the economy was ‘running on empty’ and, without reforms and fiscal discipline, it was ‘facing the prospect of growth with a zero in front of it’.

‘That will feel like hitting a brick wall,’ he said.

That GDP growth will decline for around a year is just how it is if there is to be a redeployment of resources to where they might actually be used productively. And I wish there was more explicit recognition that the only way for a recovery ever to occur will be if it is driven by the private sector.

But almost everyone only likes market outcomes when it suits them. I can only hope that the politics doesn’t overwhelm economic reform.