Monthly Archives: August 2013

Flat retail leaves rate cut door open

No wonder the Reserve Bank of Australia appears so comfortable with the inflation outlook.

When retail sales fail to grow in a quarter, and edge just 1.1 per cent higher in the course of a year, that tells you everything you need to know about the extent of consumer caution and a lack of pricing power among retailers.

For a central bank contemplating a cash rate cut to 2.5 per cent, the environment doesn’t get much more unthreatening than this.

And the RBA Board, when it meets tomorrow, will have to taker into account the market’s emphatic expectation that monetary policy will be eased.

But this rate cut will not be the political tonic that governments usually get from moves that make borrowing cheaper – this time around it is a potent sign of how soft conditions in the economy have become – and how much more work the RBA may yet have to do.

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Tobacco excise hike not a long-term budget fix

It will be no surprise if there is a fall in rates of smoking after the announcement of a 12.5 per cent hike in the tobacco excise over the next four years.

Put up the price of cigarettes enough and even hardened smokers may think twice about the cost of their habit.

Treasurer Chris Bowen has been eager to repeat Heart Foundation claims that tobacco consumption tumbled 11 per cent when the excise was raised 25 per cent in 2010.

Higher prices are likely to be part of the explanation for a steady and sustained fall in rates of smoking – from 34 per cent of adults in 1980 to 17 per cent in 2010.

All in all, the excise increase is laudable as a public health measure.

But lets not kid ourselves that this is why the Government has taken the political gamble of jacking up the cost of smokes in the shadow of a federal election.

Any smokers who are encouraged to give up the habit, or any kids deterred from lighting up in the first place, is merely a happy by-product.

The Government’s real motive for the excise increase is to help plug the gaping hole in its revenue bucket.

According to the Treasurer, the change will net the Commonwealth an extra $5.3 billion over the next four financial years.

It is a hefty sum, but still well short of what the Government needs.

Bowen is expected to reveal tomorrow (August 2) there has been a $20 billion revenue write-down over the forward estimates.

That is why there is plenty of speculation swirling about what else might be cut, delayed or rejigged in order to staunch the haemorrhaging budget.

But back to the tobacco excise.

Two concerns immediately spring to mind – the credibility of the $5.3 billion revenue estimate, and reliance on excise revenue from a declining activity to help cover recurrent costs.

On the credibility issue, it is vital to know what assumptions Treasury has made in arriving at its estimate, particularly whether it factored in a decline in smoking rates and, if so, to what extent.

As mentioned earlier, the popularity of smoking has been in long-term decline.

Other assumptions Treasury may have made about smoker behaviour could also have important implications for revenue, such as the propensity to swap to cheaper brands as prices rise, or what might happen to the trade in illicit tobacco.

On the second concern, the Government could be setting up the budget for further trouble if it relies on the increased tobacco excise as part of a long-term financial fix.

Its own public health policies are aimed at the continued decline and eventual elimination of smoking.

This would certainly deliver big savings to the health budget in fewer cancers and less chronic disease, and would likely deliver a boost productivity because of fewer work days lost to illness.

If the proportion of smokers does indeed continue to decline, the only way to maintain the revenue stream will be to raise the excise even higher, encouraging even more to give up the habit.

It is similar to the problem created by trying to use a temporary burst of revenue (like a once-in-a-century surge in the terms of trade) to pay for massive ongoing personal income tax cuts (hello Peter Costello, hello Wayne Swan).

Smoking is very unlikely to die out (pardon the pun) as quickly as the commodity price boom, and tobacco excise revenue will probably continue to flow for many years to come.

But whoever is Treasurer in 2030 may find it is not the quick fix to a budget hole it once was…

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