In the budget, the liabilities levy as we reported will create a 5% problem for the banks in terms of earnings, and as a result they will likely seek to recover these costs by repricing.
However the budget statement also said:
To facilitate the introduction of the levy, the Australian Competition and Consumer Commission (ACCC) will undertake a residential mortgage pricing inquiry until 30 June 2018.
As part of this inquiry, the ACCC will be able to require relevant ADIs to explain changes or proposed changes to residential mortgage pricing, including changes to fees, charges, or interest rates by those ADIs.
So something of a cat and mouse game, as lenders continue to adjust mortgage pricing thanks to changing capital weights, risks and funding.
Or you could look at it as a signal of market failure, insufficient competition requiring additional regulatory intervention. It is an acknowledgement of the market power of the big players!
The budget has hit the banks hard, with a $6bn charge on bank liabilities aimed at the five biggest banks, as well as a focus on competition and executive accountability.
$6bn over four years would equate to an annual amount of around 5% of current year earnings for the big five. We estimate that the net interest margin would need to be lifted by 6 basis points to cover the costs. If this was applied to just the residential mortgage book rates would have to be lifted by around 15 basis points to achieve neutrality.
The key question will how these extra costs are recovered from the banking system. On past performance, they will simply reprice products to their consumer and small business customers.
New levy on the major banks
Consistent with its response to the Financial System Inquiry, the Government and the Australian Prudential Regulation Authority (APRA) remain committed to a range of reforms, including: setting bank capital levels such that they are ‘unquestionably strong’; strengthening APRA’s crisis management powers; and ensuring our banks have appropriate loss-absorbing capacity.
Complementing these reforms, the Government will introduce a levy on major banks with liabilities greater than $100 billion, raising $6.2 billion over four years. The levy will be used to support budget repair.
Ordinary bank deposits and other deposits protected by the Financial Claims Scheme – including those held by everyday Australians – will be excluded from the levy base. It will not be levied on mortgages.
The levy represents a fair additional contribution from our major banks. The levy will also provide a more level playing field for smaller, often regional, banks and non-bank competitors. Superannuation funds and insurance companies will not be subject to this levy.
The Government has also introduced legislation to recover the costs of financial conduct regulation by the Australian Securities and Investments Commission. It will also recover the costs of implementing a new framework for external dispute resolution. A one-stop shop for resolving financial disputes — the Australian Financial Complaints Authority — and a body for raising professional standards of financial advisers will be fully funded by industry.
Major bank liabilities are greater than the size of our economy
A more accountable and competitive banking system
The Government will introduce a new dispute resolution framework that will empower bank, financial services and superannuation customers. The Government will also implement a package to increase accountability in the financial sector and make it more competitive. This will mean more choice, better services and greater protections for all Australians.
Improving accountability and competition
The financial services sector affects all Australians and is a backbone of the economy. For it to work effectively, Australians need to be confident that financial services providers will serve their interests. Too often banks and the sector have not met those expectations.
Building on the major financial sector reforms implemented last year, the Government is taking significant new action to ensure the sector meets the expectations of the Australian community.
The Government will create a new dispute resolution framework. There will be a new one-stop shop — the Australian Financial Complaints Authority (AFCA) — for external dispute resolution and greater transparency of internal dispute resolution by financial firms.
The Government will legislate a new Banking Executive Accountability Regime that will make senior bank executives more accountable and subject to additional oversight by the Australian Prudential Regulation Authority (APRA).
The Government will also introduce a number of reforms to boost competition and choice for Australian consumers in the financial system.
Improving dispute resolution
The Government will introduce major reforms to provide customers with access to fair dispute resolution in Australia by introducing a new one-stop shop.
One-stop shop
A new one-stop shop will deal with all financial disputes, including superannuation, and provide access to free, fast and binding dispute resolution.
The new body AFCA will be able to hear disputes of a higher value so that more consumers and small businesses will have their disputes heard, and if they have wrongfully suffered a loss, access fair compensation.
Financial firms will be required to be members of AFCA, and its decisions will be binding on all firms.
AFCA will be governed by an independent board, with an independent chair and equal numbers of directors with industry and consumer backgrounds, and be wholly funded by industry.
AFCA will commence operations from 1 July 2018. The existing dispute resolution bodies will continue to operate after 1 July 2018 to work through their existing complaints.
Enhanced ASIC oversight
ASIC will be provided with stronger powers to oversee the new one-stop shop. ASIC will have a general directions power to ensure AFCA complies with legislative and regulatory requirements.
Internal dispute resolution
To increase accountability, the Government will also legislate to require financial firms to report to the Australian Securities and Investments Commission (ASIC) on internal dispute resolution outcomes.
Cameo: An improved dispute resolution framework
Sarah was a small business owner with a complaint with her bank over the interest charges on her $3 million loan. As the loan exceeded $2 million, Sarah was unable to access external dispute resolution and although Sarah was eventually successful in having her complaint resolved, she was forced to go through a lengthy and expensive court process.
Under the Government’s new framework, small business disputes related to loans of up to $5 million will be heard by the one-stop shop, which will be able to award compensation of up to $1 million. This will ensure more small businesses have access to free, fast and binding dispute resolution.
Banking Executive Accountability Regime
Registration of senior executives
Senior executives and directors of authorised deposit-taking institutions (ADIs), including all banks, will be required to be registered with APRA. The ADI will have to advise APRA prior to making a senior appointment.
This will mean APRA will have visibility of all ADI senior appointments prior to them being made.
Where senior executives have been found not to have met expectations they will no longer be able to be registered or employed in senior roles.
ADIs will be required to provide APRA with accountability maps of senior executives’ roles and responsibilities to enable greater scrutiny at the time of each person’s appointment and oversight of problems that emerge under their management.
Enhanced powers to remove and disqualify
APRA will be given stronger powers to remove and to disqualify senior executives and directors. These powers will apply to all institutions regulated by APRA.
Persons removed or disqualified under these powers would have to appeal to the Administrative Appeals Tribunal to have a decision reviewed.
Increased expectations and penalties
The new regime will establish expectations on how ADIs and their executives and directors conduct their business consistent with good prudential outcomes.
These expectations would cover matters such as conducting business with integrity, due skill, care and diligence and acting in a prudent manner.
A new civil penalty will be created with a maximum penalty of $200 million for larger ADIs, and a maximum penalty of $50 million for smaller ADIs, that fail to meet these new expectations, increasing incentives for ADIs to put in place processes to ensure they conduct their operations appropriately.
APRA will also be able to impose penalties on ADIs that do not appropriately monitor the suitability of their executives to hold senior positions.
Remuneration
The Government will mandate that a minimum of 40 per cent of an ADI executive’s variable remuneration – and 60 per cent for certain executives such as the CEO – be deferred for a minimum period of four years.
This will increase the financial consequences – by preventing bonuses being paid – for decisions which may take a long time to materialise. Executives will place greater focus on long-term outcomes than when there are shorter deferral periods.
APRA will also be given stronger powers to require ADIs to review and adjust their remuneration policies when APRA believes such policies are not appropriate.
Funding
The Government will provide $4.2 million over four years to APRA to implement these new measures.
The Government will also provide APRA with $1 million per annum for a fund to ensure it has the necessary resources to enforce breaches of the new civil penalty provisions.
Competition in the financial sector
Open data
The Government will increase consumer choice and improve competition in banking by giving customers access to and control over their banking data by introducing an open banking regime in Australia.
Increased access to data will improve the information available to consumers and better enable innovative business models to create new products tailored to individuals.
The Government will commission an independent review to recommend the best approach to implement the open banking regime to report by the end of 2017.
Competition inquiries
Productivity review
The Government has tasked the Productivity Commission to commence a review on 1 July 2017 of the state of competition in the financial system.
The Commission is to review competition with a view to improving consumer outcomes, the productivity and international competitiveness of the financial system and economy more broadly, and supporting ongoing financial system innovation, while balancing financial stability objectives. The Productivity Commission will have 12 months to report to Government.
This also delivers on a Government commitment in response to the Financial System inquiry for such a review.
Regular ACCC inquiries
Building on the Commission’s broad review of competition in the financial system, the Government will provide $13.2 million over four years to the Australian Competition and Consumer Commission (ACCC) to establish a dedicated unit to undertake regular inquiries into specific financial system competition issues.
It will facilitate greater and more consistent scrutiny of competition matters in the economy’s largest sector, which has been lacking to date.
This implements a recommendation of the House of Representatives Standing Committee on Economics report Review of the Four Major Banks.
Could the budget impose an interbank levy on the big four tonight? There is certainly speculation in the media it might raise $6bn over 4 years. That would be enough to lift mortgage rates again. The weakish results in the past week, (NIM under pressure) and the threat of such a levy explains why major bank stocks are down today.
“The banks will be furious,” said one Coalition strategist of the budget that treasurer Scott Morrison will hand down tonight.
In the usual roll calls of winners and losers that follow each federal budget, the major banks are looking like they could be in the latter category in a big way.
Morrison announced yesterday that he had asked the Productivity Commission to review competition in the banking sector, warning there should “be no denying that there has been an increased consolidation of the position of the major banks.”
Now, the details are unclear and the Treasurer’s office isn’t commenting. But flows between the banks as they work on a daily basis to maintain their capital requirements are vast, and a levy – rather than a tax on profit – could conceivably see Treasury clipping billions of dollars over the four-year estimates period.
And the government needs the money: The Australian reports this morning that Morrison will tonight announce full funding of the National Disability Insurance Scheme beyond 2019, which will require finding $6 billion in savings.
It’s all part of a budget that’s increasingly shaping up as a comprehensive effort to reset the Coalition’s economic policy brand in the minds of voters after the Abbott/Hockey train wreck of 2014. Morrison has said the the budget won’t “tickle the ears of ideologues”. The arch-conservative thinking that shaped policy in the Abbott years to the disgust of the electorate is being jettisoned.
Instead, the budget is moving to neutralise Labor’s core political appeal on some hot issues. We’ll have:
Measures to support housing affordability;
The Gonski school funding reforms;
New infrastructure spending;
Some change on the Medicare rebate freeze;
Payments for pensioners to help with energy bills.
Add to this:
A change to the way debt is presented to distinguish between recurrent spending and investments in productive capacity, and
Pain for the banks.
This is a budget that aims to supports people who are struggling, recasts the dumb conversation on “debt and deficit”, and tackles the perception that the Coalition is too cosy with the top end of town. It aligns with Turnbull’s pleas to the Liberal Party to build its support base from the “sensible centre”.
The four major banks have just posted a combined interim profit of $15.6 billion, but there have been warnings that the operating environment for them is starting to look more challenging. And that was before it emerged that there’d be a Productivity Commission review and we had these reports of some kind of levy on interbank lending.
The banks might hate this, but it’s worth remembering that it’s only for the matter of a couple of thousand votes in some marginal seats that the banks are not right now facing a royal commission.
Australians are concerned about housing affordability, so much so that 45.4% say they would be willing to see the value of their home stop growing to improve the situation, only 31.8% of those polled wouldn’t. An ANU poll shows 51.7% of Australians are also in favour of removing tax concessions like negative gearing.
The poll surveyed 2,513 people (representative of the population) and found 63.6% were willing to see an increase in supply of public housing. Only 32.3% are opposed to relaxing planning restrictions.
With these numbers in mind, it is perhaps surprising that state and federal governments have done so little of any substance in housing policy for decades, if anything they’ve contributed to the problem rather than improved the situation.
Potential policy changes that many believe will improve housing affordability, including removing or reducing tax incentives such as the capital gains tax discount or removing supply impediments, have all been considered too politically difficult by the current government.
The government has justified this by playing to the fear that the value of people’s home may decline or that more liberal planning arrangements may mean that new buildings may spoil the look and feel of local neighbourhoods.
The latest ANUpoll shows Australians are very concerned that future generations may be locked out of home ownership. Three quarters believe home ownership is part of the Australian way of life.
In terms of their own investments we found that nearly 68% of homeowners cite emotional security, stability and belonging as a reason for becoming a homeowner. In terms of security factors, 51% cite financial security, 42% refer to “renting is dead money” and 41% cite security of tenure and being able to “bang nails in the wall”.
Of those families who have an investment property (17% in this poll) the primary motivation for the investment was a “secure place to store money” (27.4%) closely followed by rental income (24.3%). Only 11.9% cited negative gearing as the primary motivator and 13.7% were motivated primarily by the capital gains discount.
Housing remains easily the most popular investment vehicle, with 30% saying their preferred investment for spare cash would be an investment property, followed by 18.5% preferring to upgrade their own home. Only 12.6% preferred shares as an investment.
In spite of recent talk of a housing bubble the general population is not particularly concerned with immediate price drops, with 85% expecting house prices to rise over the coming five years. Only 5.4% expect prices to fall and just 1.7% expect prices to decrease a lot.
If interest rates were to increase by 2 percentage points, 6.4% of mortgage holders expected to be in “a lot” of financial difficulty and 16.7% in “quite a bit”. Only 27.9% would be in no difficulty. While financial difficulty does not mean default, in mortgage markets it may not take a large share of loans to default to cause financial problems for an economy.
As pointed out earlier negative gearing was the least cited reason for property investment which suggests removing the incentive would at least not make a dramatic difference to the level of housing investment in Australia.
The ANUpoll shows that the public are concerned about housing affordability and where policy is directed at improving affordability they are likely to be supportive. The policy options, be they demand side – reducing tax incentives, or supply side – building more dwellings and/or relaxing planning restrictions, are available, but greater political nerve may be required to undertake such options.
Author: Ben Phillips, Associate professor, Centre for Social Research and Methods (CSRM), Australian National University
Despite all its huff and puff on housing, a senior economist has warned voters the government will disappoint on the one reform almost everyone wants.
Professor Richard Holden said it would be a “real shame but no surprise” if Tuesday’s federal budget failed to curb tax perks for property investors.
“There is now consensus that there should be a move away from negative gearing and to prune back the capital gains discount. I think everyone agrees except the government and maybe the Property Council,” he told The New Daily.
“It’s very hard to find anybody else. You’ve got Jeff Kennett, John Hewson, Malcolm Turnbull before he became Prime Minister. Everyone seems to agree it’s a bizarre system that’s driving up prices.”
What’s in the housing package? Click to find out
After haemorrhaging support to Labor by doing nothing to help first home buyers in his pre-election 2016 budget, Treasurer Scott Morrison spent the end of last year swearing he’d focus on housing affordability this time around.
He’s been forced to walk back some of that rhetoric, as policy options evaporated under pressure from Labor, interest groups and the Abbott faction.
What hasn’t changed is Mr Morrison’s pledge not to touch negative gearing. But he’s been less emphatic on the capital gains tax discount, which allows landlords to pay tax at their marginal rate on only 50 per cent of the capital gains they realise when they sell a property.
A wide array of experts, including Richard Holden, agree these tax perks favour wealthy investors, and contribute to the difficulty of young Australians entering the property market, at least in Sydney and Melbourne.
A new survey by CoreLogic, a property data firm, found that 87 per cent of non-home owners are concerned about affordability; 30 per cent are looking to inheritance or parents to help them buy; and 62 per cent living with parents say they can’t afford to move out. It surveyed 2010 people aged 18 to 64.
By CoreLogic’s estimate, houses cost 7.2 times the yearly income of an Australian household, up from 4.2 times income 15 years ago. And a 20 per cent deposit costs 1.5 years of household income, up from 0.8 years.
Professor Holden was more enthusiastic about incentives for older Australians to downsize to smaller homes, especially if that involves a stamp duty discount.
“Stamp duty is like the worst tax in the history of the world and everyone with a minute’s economic education thinks it should be replaced with a land tax, so anything that pushes in that direction is a good idea.”
However, if the incentive allowed wealthy individuals to exceed the superannuation balance cap, that “would be a concern, depending on how it’s structured”.
Professor Holden also praised the government’s push to invest more in affordable rental housing: “The idea that housing affordability bites at the very lowest end is a really big deal.”
But he rubbished the government’s proposal to offer subsidised savings account to help first home buyers save a mortgage deposit.
“We saw the government float the idea of accessing super. Now, myself and Saul Eslake and others all came out vociferously and angrily against that. I don’t know if it was causal, but they backed down,” Professor Holden said.
“But now they’re talking about tax-preferred savings accounts for first home buyers, and for the life of me I can’t understand why they can’t seem to get through their heads that anything of that nature is just boosting demand.”
Daniel Cohen, co-founder of lobby group First Home Buyers Australia, said he disagreed with the view that subsidised savings accounts would only push up prices.
“As a standalone policy, they are correct, which is why we want to see policies that are also decreasing demand from investors, and we want to see affordable supply also increase,” Mr Cohen told The New Daily.
“What economists are not considering, I feel, is that first home buyers still have a deposit hurdle, and with the current costs of living, average wages and stamp duty, that is a really big hurdle.”
He said the accounts would act as “financial literacy” to encourage young Australians who might not have considered it to save for a home.
For Mr Cohen, the biggest budget disappointment would be no reform on negative gearing and capital gains.
Given months of polls that show Labor ahead and damaging internal disunity, the politics of this budget are extremely tricky for the government to manage.
It is not just that Tony Abbott’s sniping is causing political headaches for Prime Minister Malcolm Turnbull. Some of the government’s budget problems go back to the 2013 election.
In that campaign, Abbott suggested the budget deficit problems would be easily fixed by simply getting rid of Labor, and the government could somehow do so painlessly without cutting health, education or pensions.
However, as then-treasurer Wayne Swan had noted, Australian budget deficit problems were very complex and included substantial falls in government revenue due to the global financial crisis and the end of the mining boom. They weren’t just due to government spending.
Opponents criticised the size of the Rudd government’s expenditure, including its economic stimulus package designed to counter the GFC. Nonetheless, Kevin Rudd argued that Australian government debt was in fact relatively small compared with many other Western countries in a post-GFC world.
Once he won office, Abbott had to face the difficult realities involved in reducing the deficit. The substantial 2014 budget cuts, including to areas Abbott said would be protected, infuriated many voters and contributed to his poor polls and political demise.
The Abbott government’s woes went beyond the failure to fix a difficult budget situation. Other than attacking Labor, it wasn’t clear what its positive vision for the Australian economy was in terms of how to transition after the mining boom, and how to develop new jobs and new industries at a time of rapid economic and technological change.
Replacing Abbott with Turnbull was meant to provide us with such a positive economic vision. However, Turnbull’s mantra of living in innovative and “exciting times” failed to convince many voters. As one anonymous Liberal MP noted, it actually made some voters highly nervous about what was going to happen to their jobs.
However, the Coalition’s narrow win suggested many voters still weren’t convinced the government knew how to ensure job security and a good standard of living in challenging times. In particular, many voters remained unconvinced that substantial business tax cuts would drive the economic growth and improved government revenues that were promised.
Fast forward to the 2017 budget, and the Liberals are desperately trying to develop a more convincing economic narrative around good economic management, nation-building, and fairness.
Despite their attempts to blame past Labor policy and more recent Labor intransigence at passing budget cuts in the Senate, Liberal ministers are still having trouble explaining how government debt has increased from A$270 billion under Labor to some $480 billion under the Coalition.
Fortunately for them, Treasurer Scott Morrison now argues there is “good debt” and “bad debt”. Good debt covers areas such as infrastructure that assists economic growth. Bad debt apparently covers areas such as welfare.
Morrison is partly belatedly accepting advice on infrastructure-funding debt from bodies such as the International Monetary Fund, while trying to argue that the government’s new debt policies will be very different from past Labor economic stimulus ones.
Needless to say, these areas of “good” and “bad” debt aren’t quite as simple to define as Morrison suggests. Furthermore, so called nation-building infrastructure spending is sometimes more electoral pork barrelling than economic necessity. Doubts have already been raised over the economic, rather than political, benefits of a second Sydney airport and inter-capital city rail links.
The NBN: ‘good debt’ or ‘bad debt’?AAP/Mick Tsikas
Meanwhile, Turnbull struggled to explain whether Labor’s National Broadband Network was good or bad debt in terms of building necessary infrastructure.
Australian businesses that are struggling with Turnbull’s cheaper version, with its continuing use of 19th century derived copper wire technology or 1990s pay-TV-derived hybrid fibre coaxial cable technology may be wondering whether the Coalition should have discovered “good” infrastructure debt earlier and supported Labor’s more expensive fibre-optic to-the-premises model.
After all, under Rudd, the NBN was meant to be the nation-building 21st century equivalent of 19th-century government infrastructural expenditure on building railways.
Consequently, the government faces questions about whether its economic policy positions have been consistent, particularly given past Coalition rhetoric about debts and deficits.
Furthermore, while Morrison apparently characterises it as bad debt, providing temporary welfare benefits for those who lose their jobs because of economic downturns or restructuring helps keep up consumption levels. This in turn means it potentially has flow-on benefits for the private sector, as well as the individuals concerned.
It is a central lesson of the Keynesian economics that Robert Menzies’ Liberal Party embraced at its foundation, but was rejected under John Howard in the 1980s.
Does all of this mean that Turnbull is now acknowledging a lesson of the 2016 election: that neoliberalism is harder to sell than it used to be? Are his backdowns on “small-l” liberal values now being combined with back-downs on some of his long-held free-market values?
That seems to be going too far at present, especially given the government’s continued belief in the “trickle-down” benefits of corporate tax cuts and attacks on welfare expenditure.
However, there is some nuancing taking place as Turnbull tries to throw off the image of “Mr Harbourside Mansion” who loves hobnobbing with bright young technology entrepreneurs, and instead stress he is in touch with the concerns of ordinary voters.
Consequently, and much to Labor’s outrage, the government has now repositioned itself as an advocate of equal opportunity and fairness that supports a Gonski-lite needs-based education funding model.
While the government’s cuts to higher education will still have a negative impact on universities, and particularly students, the measures are less harsh than those in the 2014 budget.
It seems likely there will be some attempt in the budget to assist first home buyers. Various options have been canvassed.
Turnbull has already tried to position himself as taking action on household energy costs by criticising renewable energy costs and ensuring gas reserves. Meanwhile, there are suggestions the government will improve Medicare benefits in an attempt to counter Labor’s controversial “Mediscare” campaign at the last election.
All budgets are about politics, not just economics. But this budget will be even more so. Not all the measures are working out politically. Abbott is already threatening dissension over the impact of the education measures on Catholic schools.
This is a government in trouble. On one side it faces internal disunity and pressure from Labor’s emphasis on reducing inequality and fostering “inclusive growth”. On the other it has One Nation’s mobilisation of race and protectionism to appeal to the economically marginalised.
Then there is Cory Bernardi, the Greens, Nick Xenophon and a host of independents and other groups to consider.
After all, the budget is only the beginning. The next test is getting key measures through the Senate, perhaps even wedging Labor by deals with the Greens, so that the Coalition is in a stronger position to face the next election.
Author: Carol Johnson, Professor of Politics, University of Adelaide
The Australian economy is limping along – growing barely fast enough to absorb new workers, with interest rates at record lows, slow wage growth constraining household consumption, and investment relatively weak and declining due to weak business confidence according to Ross Guest Professor of Economics and National Senior Teaching Fellow at Griffith University in his post on The Conversation.
The 2015-16 Budget is not going to turn this around. The deficit is expected to decrease from A$39.4 billion to A$33 billion which, given the margin for error that we’ve observed in past budgets, is neither here nor there in its economy-wide impact. It is the change in the deficit, not the size of the deficit itself, that determines whether a budget is contractionary or expansionary. So this budget will have a roughly neutral impact on the aggregate demand for goods and services.
This is the right fiscal policy stance. In fact, a neutral fiscal policy stance should be the general rule for Australia. It is unwise to attempt to use the Australian federal budget to manage economic growth.
Fiscal vs monetary policy
The Australian economy is periodically buffeted by large swings in commodity prices – base metal prices in particular, the last decade being a prime example. These swings are a major influence on growth in nominal GDP – the dollar value of the goods and services we produce. And this, in turn, is a key driver of the budget balance.
These relationships are illustrated in the chart below. You can see how closely the swings in base metals prices match growth in nominal GDP, especially over the past decade.
Attempting to use fiscal policy to smooth out these fluctuations is fraught with risks. Commodity prices can bounce back quite suddenly and unexpectedly, as they did in 2010-11 following the financial crisis (see chart). Fiscal stimulus is not so nimble.
In fact, the A$42 billion National Building and Jobs Plan – introduced in 2009-10 by then-Treasurer Wayne Swan to stimulate Australia in the aftermath of the global financial crisis – took years to roll out, with some school buildings still to be constructed in 2014.
As the chart shows, commodity prices had by, that time, risen and then fallen again, as had nominal GDP growth. That meant the government’s fiscal stance was out of sync with the state of the economy; it wasn’t clear exactly what cyclical downturn the stimulus was supposed to be smoothing out.
The claim that the Federal Government should have spent more in this Budget because Australia’s debt is low by international standards misses the point.
If you have no debt and then take a four week overseas holiday on your credit card, is it all OK because your debt is still lower than most other people’s? That depends on whether the holiday was better than the alternative use of the funds. Or is it OK because in a couple of years your income will pick up and you’ll be able to pay down the debt then? What if your income doesn’t pick up or you don’t have the discipline to pay down the debt?
This is what governments face when they try to stimulate the economy with borrowed money. Six years after the spending binge that started in 2009, the economy has not bounced back to enable the debt to be repaid as a naïve textbook model might assume. Rather, it sits on the balance sheets of current and future households, through their government, as future tax liabilities which will dampen future growth and cost future jobs.
Managing the swings in the economy is best left to the Reserve Bank of Australia (RBA). The RBA is more nimble than the government when it comes to stimulating aggregate demand.
For example, the RBA increased the cash rate seven times between 2009 and 2011 when nominal GDP recovered (see chart) at the same time as the Government was still pumping out billions of (borrowed) stimulus spending. So we had conflicting policy responses.
Also, the Australian dollar is very responsive to the RBA’s interest rate policy and supports it. It falls when rates are cut (which stimulates tradable goods and services) and rises when rates are increased.
Not so for active fiscal policy – the Australian dollar fights against active fiscal policy. It wants to rise when the government is trying to pump up the economy and fall when the government tries to slow down the economy.
Consumer confidence
Going forward, the main brake on the Australian economy is the lack of business and consumer confidence, as noted in the RBA’s May Statement on Monetary Policy. Consumers seem to be less responsive to lower interest rates than they have typically been. They have not responded much to the eight cuts in official interest rates from 4.75% to 2.25% that occurred between 2011 to 2014.
Why are consumers and business so cautious? One reason is because we have no idea whether a range of government policies in relation to taxation, superannuation, pensions, family benefits and so on, will get through the fractious Australian Parliament. So the less controversial this budget is, the better for consumer and business confidence.
There may be another factor at play. Households may worry that the Australian Government’s rising debt is, in fact, their own future tax liabilities (which they are, or those of their children). This debt has reduced the Government’s net financial worth by 20% of GDP since 2007, according to the latest Mid-Year Economic and Fiscal Outlook (Table D9).
Worse, the Budget Papers project a further 20% decline in the Government’s net worth in the next two years. This is a large transfer of net worth from future households to today’s households. So even though the deficit is stabilising and projected to decline, it is still significant and adding to government debt and future tax liabilities.
If this Budget does not kick-start confidence, we have to ask whether the large build up of future tax liabilities is partly to blame.
However the budget statement also said:
