Tag Archives: treasury

APRA warns: cut now, pay later

The financial regulator has warned that continued Government cost-cutting could “ultimately compromise” the safety of the financial system.
In its submission to the Financial System Inquiry, released today, the Australian Prudential Regulation Authority (APRA) unsurprisingly expressed satisfaction with its performance.
But, as the Federal Government talks up the prospect of a slash-and-burn Budget next month, the regulator warned that cuts to resources can come at a heavy cost.
APRA said that in recent years the previous Government’s so-called “efficiency dividend” demands had made things increasingly difficult for the agency, which had to compete with a strong private sector to retain talented and experienced staff.
“The mechanism of efficiency dividends is not well-suited to an industry-funded agency,” APRA said. “Continued efficiency dividends will ultimately compromise financial safety but make no contribution to the Government’s budgetary objectives.”
In its, submission, also released today, Treasury warned of the threat to effective financial market supervision from a blurring of the lines of responsibility among the key regulators.
Treasury said the current regulatory framework was sound, with only improvement “at the margin” needed.
In a swipe at those in the finance industry chafing under more stringent international standards, like Basel III’s highly prescriptive rules, Treasury said Australia, as a significant capital importer, had little scope to ignore such developments.
In fact, the department said, many such reforms would bring regulatory standards in other jurisdictions closer to those in Australia.
But it also acknowledged problems in current arrangements, including the distortions caused by the Commonwealth’s guarantee for bank deposits, which not only create moral hazard, but give the major lenders a clear competitive advantage.
And Treasury warned of the danger that the clear demarcations that had existed between APRA and the Australian Security and Investment Commission (ASIC) were becoming blurred, undermining the effectiveness of the regulatory framework.
“Recent proposals for ASIC to take on quasi-prudential functions following the collapse of Banksia illustrate the difficulties in maintaining clear demarcations in the fact of changing products and market structures,” Treasury said.
In a fillip for SMSFs, the department endorsed the current policy approach of relatively low levels of regulation and oversight by the Tax Office to ensure compliance with taxation law.

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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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Dire MYEFO numbers just political theatre

The manner by which the Mid-Year Economic and Fiscal Outlook is being released – a speech by Treasurer Joe Hockey to the National Press Club – tells you all you need to know about what this document is really all about.
For many years now it has been apparent that the main significance of the major Government economic statements, the annual Budget and MYEFO, has been as set pieces of political theatre rather than anything much to do with running the economy.
The days of markets surging or tumbling on Budget forecasts for growth and spending are long gone.
In the hands of Treasurers who were able political operators (think Paul Keating and Peter Costello), Budgets were more about imagery than numbers.
Keating had his emblematic turns of phrase, like “this is the one [Budget] that brings home the bacon”. During the 2000s, Costello delivered a string of Budgets with “surprise” revenue upgrades (to the extent that Treasury’s forecasting abilities became the butt of jokes).
This is how Hockey’s performance today needs to be viewed.
When he bemoans the parlous state of Government finances bequeathed to him by Labor, take it as a piece of political theatre, rather than an unsentimental appraisal of the fiscal position.
As has been extensively telegraphed by the Government through a series of leaks, MYEFO is likely to show the Budget deficit has ballooned out to close to $50 billion – a massive deterioration from the $30.1 billion estimated in the Pre-Election Economic and Fiscal Outlook released in mid-August.
Has the world really become so much darker in the past four months? The short answer is no.
While all the publicity surrounding the departure of Holden and other high profile business problems may have you thinking otherwise, the evidence in fact suggests that things are improving.
Internationally, the US recovery appears to be strengthening, China shows no signs of falling into the hole that many feared, and the euro zone appears to be negotiating the (very) early stages of a recovery.
Domestically, low interest rates are boosting housing activity and the dollar is easing lower. Treasury is basing its gloomier outlook on several developments since PEFO. It says the pick-up in non-mining activity and housing activity is slower than it was expecting, while mining investment has fallen more sharply than anticipated. “As a consequence,” MYEFO says, “employment growth is expected to remain subdued, and wage growth is forecast to remain well below trend.” This in turn will mean households hold back on their spending, restraining growth. All quite plausible.

But as Treasury itself admits, “nominal GDP growth forecasts carry with them additional uncertainty. The 70 per cent confidence interval for average annual nominal GDP growth over the forecast period ranges from 2 per cent to 5 per cent”. That is a not-insignificant range.

The economy’s transition away from mining investment-led growth to other supports for activity remains hesitant, and the speed with which other sources of growth develop is uncertain. But there is evidence that consumers and businesses hare shedding the funk that has held back spending and investment (excepting resources) ever since the GFC.
But the political story line Hockey wants to outline begins with Australia under Labor being driven into the ground. Queue forbidding music, dark skies and storm-lashed seas.
Over coming years, the narrative will go, the storm clouds will gradually dissipate, and at some yet-to-be-determined point in the future (though possibly in the months before the next Federal election) the first rays of economic sunshine will pierce the gloom, and the Coalition will be able to assure voters is has the country on track.
It is all a piece of political alchemy.
The fact is, in recent weeks, Treasury will have presented Hockey with a range of forecasts for nominal GDP (and hence, revenue) that range from the optimistic to the pessimistic, depending on various scenarios regarding developments in international economic conditions, the exchange rate, commodity prices, the rate of slowdown in mining investment and the speed of improvement in activity in other parts of the economy.
For his political purposes, Hockey has plumped for the worst-case scenario of soft growth and weak revenue flows.
This is not to say that Treasury has ‘invented’ the numbers to suit the Government’s political agenda – the forecasts are plausible and justifiable.
But they are just part of a range of possible outcomes, as Treasury itself explains in Attachments A and B in Part 3 of MYEFO.

On page 57, Treasury publishes a chart (Chart 3.9) indicating that “there is notable uncertainty around receipt forecasts and that this uncertainty increases over the estimates period”. For 2013-14, the 70 per cent confidence interval is a range of $20 billion and, at 90 per cent confidence interval, it is $30 billion.

Treasury is similarly cautious about its forecasts for the underlying cash balance (Chart 3.11, p58). The 70 per cent confidence interval for its 2013-14 forecast is $25 billion, and at 90 per cent it is $40 billion.

What the Coalition is doing with the Treasury numbers is nothing new. In the same way, for several years in a row, Labor Budgets contained projections for growth and revenue (particularly earnings from the mining tax) that were much more optimistic than many thought probable, because they supported the-then Government’s political goal of achieving a surplus in a set period.
Don’t get me wrong – Government spending is a problem. But the Coalition so far is taking the same Magic Pudding approach to public finances as Labor.
The current game of deficit/surplus one-upmanship between the major political parties is tiresome and empty.
It will only mean something when there is recognition of the much more important issue (as Rob Burgess highlights in Business Spectator today) of the structural position of the Budget.
The Parliamentary Budget Office forecasts the Budget to be in structural deficit until at least 2016-17, and thought bubbles like the Coalition’s ‘Direct Action’ climate change policy and its over-the-top paid parental leave scheme suggest the Government has no more appetite to tackle the problem than Labor ever did.

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