Monthly Archives: February 2014

Joe Hockey’s G20 secret: believe

Treasurer Joe Hockey appeared to be channelling the eponymous self-help bible The Secret as he talked up the significance of the G20 summit on Sky News last Friday.

“Australians and people around the world have to believe that tomorrow is going to be better and more prosperous than today,” he told interviewer Kieran Gilbert. “Therefore, if they do believe that – if it is going to happen – then they are prepared to invest and create jobs for others in the community.”

When the G20 finance ministers and central bank governors, prodded by Hockey, declared their commitment to raise their collective GDP by more than 2 per cent the existing five-year trajectory, they appeared to be adopting the sort of “believe it, and it will happen” logic that is the The Secret’s mantra.

Their declared intention to “significantly raise global growth”, accompanied only by vague commitments to cut unemployment and increase investment, sounded suspiciously like the The Secret’s advice to “see yourself living in abundance and you will attract it. It works every time, with every person.”

There’s nothing inherently wrong with setting ambitious targets. Just ask Wayne Swan and his commitment to a return to Budget surplus in 2012-13.

But the essentially naive and ignorable nature of the commitment presided over by Hockey was neatly encapsulated in a put-down by German officials, who dismissed Australia’s initiative as a “slightly antiquated form of economic planning”.

Ouch.

The great thing about a collective commitment to something like a growth target is that everyone – and no-one – has responsibility to make it happen.

Let’s look at the wording of the relevant part of the G20 communique:

“We commit to developing new measures, in the context of maintaining fiscal sustainability and financial sector stability, to significantly raise global growth. We will develop ambitious but realistic policies with the aim to lift our collective GDP by more than 2 per cent above the trajectory implied by current policies over the coming five years.”

Plenty of wriggle room for governments there if growth doesn’t turn out as hoped – just say the financial system was too fragile to push things harder, or budget pressures were too great.

Then there is the question of how this jump in growth might be realised.

To achieve this 2 per cent acceleration, the ministers and governors said they would take steps to increase investment, lift employment and participation, enhance trade and promote competition.

All worthy goals, but tell me the government who says they won’t take steps to boost investment, employment, trade and competition. Ask most governments, and they will say that is what they are doing every day (even if they are not really).

So where did Joe get this idea for an additional 2 per cent growth target?

Have a look at the briefing prepared for the G20 meeting by International Monetary Fund staff, go right past the Executive Summary and the first 10 pages, and read the 11-page Annex at the back, which is full of worthy suggestions for stronger growth and how to achieve it.

Specifically, IMF staff have modelled the effects of what they see are necessary reforms in six key areas where policy gaps have been identified: fiscal, rebalancing (of sources of growth), labour supply, other labour market reforms, product market reforms, and infrastructure investment.

According to IMF estimates, the “policies assumed in the [plausible reform] scenario raise world real GDP by about 2.25 per cent ($US2.25 trillion) in 2018, relative to the October 2013 World Economic Outlook baseline”.

The biggest gains, the IMF believes, will come from reforms to boost competition and improve the business environment, followed by investment in public infrastructure, getting more people into the labour force, other labour market reforms and rebalancing sources of growth.

As the Lowy Institute’s Mike Callahan points out, we have been here before.

At their Toronto summit in 2010, G20 leaders committed to work together on a set of policies which the IMF estimated would boost global output by $US4 trillion and create 52 million jobs.

What happened? As we now know, the requisite policies weren’t adopted and growth fell well short of the stated mark.

As Callahan says, having a growth target and a plan to get there is only meaningful if the plan is implemented.

He points out that the necessary reforms identified by the IMF and OECD are politically challenging.

In Australia’s case, they include improving the efficiency of the tax system by lowering corporate taxes and relying more on the GST; improving the regulation of infrastructure by expanding user charges and congestion charges; improving childcare support; and reducing the stringency of the scrutiny of foreign investment. As Callahan observes, this is “tough stuff”.

The Abbott Government has already made clear that it has no appetite for taking on the sort of economic reforms that the country is screaming out for, particularly an overhaul of the tax system.

The Commonwealth is over-reliant on income taxation for revenue, and the country needs a broader tax base, of which a higher consumption tax is a key part.

Former Treasury secretary Ken Henry developed a credible and valuable blueprint for tax reform that should be the starting point for the Government.

But, just like the G20 growth commitment, it is hard to see it happening.

Even invoking The Secret won’t make it so.

 

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Record low wage growth gives lie to Abbott’s IR obsession

The ridiculousness of the Abbott Government’s industrial relations obsession has been thrown into stark relief by figures showing wages are growing at their slowest rate since at least 1997.

The Wage Price Index measured by the Australian Bureau of Statistics rose by 0.7 per cent in the December quarter, taking annual growth to 2.6 per cent – the lowest rate in the 16-year history of the series.

The result gives a lie to the inflated rhetoric about out-of-control wage claims blasted out by the Government in recent weeks as it has tried to pin the blame for a succession of high-profile factory closures such as SPC, Holden, Toyota and Alcoa on workers.

It is hard to have much confidence in the economic grasp of the Government while they carry on with their IR sideshow.

Sure, wages are part of Australia’s relatively high (by international comparison) cost base, but so are energy and other utility charges, transport costs, regulatory fees and so on.

Relatively high wages, by themselves, should not be automatically seen or portrayed as something bad and undesirable, as many IR obsessives try to make out. Just ask any merchant banker.

They become a concern where they are not supported by similarly high productivity, and that can be due to a combination of factors that include (but are not limited to) work practices, such as management and investment.

The recent mining investment boom provided a prime example. Resource companies, rushing to cash in on sky-high global commodity prices, threw enormous resources of labour and capital at the task of boosting production. Price was virtually no object. This had the effect of pushing up the cost of labour (wages) and the prices of goods and services.

In the short term, this helped push up labour casts and killed productivity. But as labour-intensive construction has ended and expanded mines and upgraded ports, roads and rail links have come into operation, export volumes have boomed.

In productivity terms, the amount of value produced by each worker left in the mining sector after the building crews have moved out has surged.

Across the economy, there is a need to lift productivity, but the tired old thinking of many in Government and business who automatically equate this with screwing down on wages and conditions needs to end.

Obviously, business models built solely on competing directly with low-cost manufacturers internationally are becoming increasingly unsustainable.

But the answer isn’t to attack wages and conditions.

By many measures, Australia has a highly skilled, flexible and productive workforce.

Employers in both the public and private sectors get an enormous, they rarely acknowledged, subsidy from employees who regularly work many more hours than they are paid for.

Crude calculations using ABS employment and aggregate hours worked figures show that each employee worked an average of 35.5 hours a week in January. Take into account that around a third of these workers were part-time, and that January is traditionally a holiday period, and it suggests that a substantial proportion of the workforce work longer than the ‘standard’ 37.5 hour week, and many are likely to do so without paid overtime.

Another measure is time lost to industrial disputes. Official figures show that in the 12 months to the September 2013 quarter, an average of just 3 working days were lost to industrial disputes for every 1000 workers. These are not the numbers you would expect to see from a habitually disruptive workforce.

As was discussed in an earlier blog, Time to curb outrageous salaries – or lift investment?, labour is losing out to capital in grabbing a share of earnings. The Economist cited figures from the Organisation of Economic Cooperation and Development showing that labour captured 62 per cent of all income in the 2000s, down from more than 66 per cent in the early 1990s.

Yes, the nation has a productivity challenge. And yes, workers have a role to play in lifting productivity.

But maybe employers and managers should cast a critical eye over their own remuneration and ways of operating, rather than simply pencilling in cuts to the pay and conditions of their employees.

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Boxall in the box seat?

Just as Martin Parkinson has been forced to contemplate life after Treasury, Treasurer Joe Hockey has to contemplate life after Martin.
The question is, who will he pick? Or, perhaps more likely, who has he already picked?
Most speculation so far seems to centre around two former senior Costello staffers – Mike Callahan and Phil Gaetjens.
Both have the experience that would seem to make them obvious candidates for the position – solid background in developing and providing economic advice, a record of service to the Coalition, a familiarity with the workings of the public service, and political judgement.
Callahan knows Treasury well. He joined the department in 1974 and has spent much of his career there. Following his stint in Costello’s office (from 1999 to 2000, during the introduction of the GST) he rose through the ranks to become head of the Revenue Group between 2005 and 2007, before moving on to be Executive Director, International, from 2008 until he left Treasury in 2012 to join the Lowy Institute, where he is Program Director of the G20 Studies Centre.
Gaetjens, who has been a career public servant at both the Federal and State level, honed his political skills and judgement as Costello’s chief of staff for a decade, before moving on to become Secretary at NSW Treasury following the defeat of the Howard Government.
But there is a third former senior Costello staffer who, oddly, has so far largely been overlooked in connection with the Treasury job, but who would seem to be better qualified than both – former Department of Employment and Workplace Relations Secretary Peter Boxall.
Few top Federal public servants have borne as many scars for the Coalition as has Boxall.
He served as an economic adviser to Andrew Peacock in the late 1980s, where he helped develop the-the Opposition’s 1990 economic action plan.
Later, in Costello’s office he helped frame the Howard Government infamous first Budget, with its swingeing cuts to the public service and Commonwealth spending.
He subsequently returned to the public service where, as Secretary of the Finance Department, he was responsible for the introduction of the system of accruals, outcomes and outputs that is now in place across the bureaucracy.
But it was perhaps as Department of Employment and Workplace Relations Secretary that Boxall really earned his stripes as far as the Coalition was concerned.
The highly-educated economist, who worked at the International Monetary Fund for many years, led the Department through the introduction of Work Choices, and although the policy was eventually repudiated politically (and is still seen to have the whiff of political death about it), the quality of its implementation has never been seriously challenged.
His reputation as a fiscal conservative won’t harm his chances, either.
In an interview he gave to the Canberra Times in March 2006, Boxall detailed his outlook on the job of the public service, and its stewardship of public monies.
“It’s really our job to look at what is efficient, which is more measurable, and effective and ethical,” he said. “And that’s why in the FMA Act [Financial Management and Accountability Act under which Commonwealth departments operate] they have this section … which says that one of the duties of CEOs such as myself is the three Es: efficient, effective and ethical use of taxpayers money. Fairness is an issue for the politicians.”
It is an outlook in synchronicity with that of the Abbott Government.
As the Canberra Times put it: “He considers himself a classic liberal and thinks there is scope to continue to look at government expenditure in a lot of areas to see whether programs are really necessary. This applies even when there is a significant surplus because then there can be lower taxes.”
Little wonder, then, that when the National Commission of Audit was being formed, Boxall was an early inclusion.
Treasury Secretary is one of the top jobs in the Federal public service, requiring a combination of economic smarts, political nous, a strategic outlook, high order administrative skills and well-earned authority.
It is not a position that would treat an outsider parachuted in kindly.
It is a not a job for heroic ‘Captain’s picks’ (ala Fred Hilmer and Fairfax, or Sol Trujillo and Telstra).
Both Ken Henry and Martin Parkinson had the qualities needed to make a success of the position in generous helpings.
Whoever gets the post, it is not going to be an easy ride.

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Highest unemployment rate in 11 years doesn’t equal interest rate cut

A lift in the unemployment rate to 6 per cent – its highest point in almost 11 years – will surprise no-one.
In fact, the real surprise has probably been that it has taken this long.
In keeping with the trend of previous jobs reports, the Australian Bureau of Statistics has revealed that a further decline in full-time employment occurred in January, this time by 7100 positions, taking the number of Australians employed full-time to 7.95 million – the lowest number in almost two years.
The reason the unemployment rate has jumped to 6 per cent after spending the latter half of 2013 stubbornly stuck around 5.7 and 5.8 per cent is because, perversely, because the number of discouraged job seekers has stabilised.
The participation rate, the proportion of the working age population in the labour force (ie with a job or actively seeking employment), held steady last month at 64.5 per cent.
Amid all the high-profile announcements about factory closures (most notably and immediately, the SPC cannery in Shepparton), few people will be shocked by confirmation that the unemployment rate has increased.
The number of Australians who want to work but haven’t got a job now stands at 728,600 – a jump of almost 17,000 from last December.
But does this mean the Reserve Bank of Australia will put a rate cut back on its agenda?
That appears unlikely.
The central bank had anticipated that the unemployment rate would at some point reach above 6 per cent, so the fact that it has now done so will not be “new news”.
Additionally, inflation has turned out to be stronger than the RBA had anticipated, making it wary about adding further stimulus to the economy.
As noted in a previous post, RBA Governor Glenn Stevens was unusually explicit following the central bank’s February 4 Board meeting about the future course of interest rates.
Usually, like many central banks, the RBA shies away from being too definitive about the future of monetary policy, which is not unreasonable given the fluidity of global economic and financial conditions.
So when Mr Stevens said the most prudent course for the RBA was “a period of stability in interest rates”, it was a clear message to markets not to expect rate cuts – or hikes – any time soon.
An unemployment rate with a ‘6’ in front of it would not appear to change that message.

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RBA locks in 2.5 per cent cash rate – for now

Don’t expect interest rates to go up any time soon but, equally, don’t expect them to go down – that was the clear message from the Reserve Bank today.
In unusually direct language, RBA Governor Glenn Stevens has moved to lay to rest interest rate speculation for the next few months, saying the most prudent course for the central bank to take was likely to be “a period of stability in interest rates”.
That is central bank speak for everyone – those predicting imminent rate rises, and those calling for rate cuts – to take a Bex and calm down.
As mortgage holders ponder the pros and cons of fixing part of their loan, and investors do their credit sums, the Reserve Bank has tried to give some reassurance by flagging official rates are not likely to move for some time yet.
As widely tipped, the RBA has decided to hold the official cash rate at 2.5 per cent this month.
What many may not have anticipated though, was the central bank’s unusual willingness to flag its interest rate intentions.
Following the Reserve Bank Board’s first meeting for 2014, Mr Stevens released a statement that showed the RBA is in no rush to change its policy settings.
“On present indications, the most prudent course is likely to be a period of stability in interest rates,” he said.
The Reserve Bank sees no compelling reasons yet for either a rate increase, or a rate cut.
Unexpectedly strong inflation growth in the December quarter (underlying inflation grew by 0.9 per cent to be up 2.6 per cent from a year earlier), along with the falling exchange rate and increased housing activity, had prompted some to speculate that the RBA would soon have to consider raising the c ash rate.
But while Governor Stevens admitted monetary policy was “accommodative”, interest rates were “very low”, and house prices have surged, there was as no yet sign of a dangerous build up in indebtedness. In fact, household credit growth is moderate.
On inflation, the central bank so far does not seem to be phased by the jump in prices in December, some of which it attributed to importers and retailers quickly passing through to consumers much of the increase in costs caused by the easing exchange rate.
Mr Stevens said that although inflation was stronger than the central bank had predicted when it released its most recent Statement on Monetary Policy late last year, it was “still consistent with the 2 to 3 per cent target over the next two years”.
Those arguing the case for a rate cut have pointed to the nation’s anaemic growth rate (2.3 per cent in the 12 months to the September quarter 2013), a plunge in mining investment and weak labour market (the economy shed almost 32,000 full-time jobs in December and the unemployment rate is expected to rise above its current 5.8 per cent) to show the need for more support for activity.
But to this line of argument, Mr Stevens said monetary policy was “appropriately configured” to foster growth in demand (ie don’t expect them to go any lower).
Of course, the RBA might be considering the possibility (raised by Deloitte Access Economics director Chris Richardson) that commercial banks will lower their lending rates as they secure cheaper sources of funding on international markets. The Governor’s statement gives no hint on this front, except to say that long-term interest rates and risk spreads remain low, and there is adequate funding available through credit and equity markets.
As the economy gropes toward sources of growth to replace the sugar hit from resources investment, conditions are likely to stay rocky and uncertain.
In this shifting economic environment the RBA has moved to provide consumers and investors with one welcome point of consistency, at least for the next few months.

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