Tag: The Conversation

5 Things MYEFO Tells Us

As we come to the end of 2019, you’d be forgiven for being confused about the health of the economy. Via The Conversation.

Treasurer Josh Frydenberg regularly points out that jobs growth is strong, the budget is heading back to surplus, and Australia’s GDP growth is high by international standards.

The opposition points to sluggish wages growth, weak consumer spending and weak business investment.

Monday’s Mid-Year Economic and Fiscal Outlook (MYEFO) provides an opportunity for a pre-Christmas stock-take of treasury’s thinking.

1. Low wage growth is the new normal

Rightly grabbing the headlines is yet another downgrade to wage growth.

In the April budget, wages were forecast to grow this financial year by 2.75%. In MYEFO, the figure has been cut to 2.5%.

Three years ago, when Scott Morrison was treasurer, the forecast for this year was 3.5%.

Each time wages forecasts missed, treasury assumed future growth would be even higher, to restore the long-term trend.

Today’s MYEFO is a long-overdue admission from treasury that labour market dynamics have shifted – in other words, lower wage growth is the “new normal”.

Even by 2022-23, wages are projected to grow at only 3% (and even that would still be a substantial turnaround compared to today).

Of course, wages are still rising in real terms (that is, faster than inflation), a fact Finance Minister Mathias Cormann is keen to emphasise.

But Australians will have to adjust to a world of only modest growth in their living standards for the next few years.

2. Economic growth is underwhelming, especially per person

Economic growth forecasts have received a pre-Christmas trim.

Treasury now expects the economy to grow by 2.25% this financial year, down from the 2.75% it expected in April.

Particularly striking is the sluggishness of the private economy, with consumer spending expected to grow by just 1.75%, despite interest rate and tax cuts, and business investment idling at growth of 1.5%, down from the 5% forecast in April.

The longer term picture looks somewhat better, with growth forecast to rise to 2.75% in 2020-21 and 3% in 2021-22, although treasury acknowledges there are significant downside risks, particularly from the global economy.

The government has made much of the fact our economy is strong compared to many other developed nations. But much more relevant to people’s living standards is per-person growth. Australia’s international podium finish looks less impressive once you account for the fact Australia’s population is growing at 1.7%.

As one perceptive commentator has noted, while Australia is forecast to be the fastest growing of the 12 largest advanced economies next year, it is expected to be the slowest in per-person terms.

3. The government is at odds with the Reserve Bank

You can imagine the government’s collective sigh of relief that it is still on track to deliver a surplus in 2019-20, albeit a skinny A$5 billion instead of the the $7 billion previously forecast.

Given the treasurer declared victory early by announcing the budget was “back in the black” in April, missing would have been awkward, to say the least.

And another three years of slim surpluses are forecast ($6 billion, $8 billion and $4 billion respectively).

The real issue for the treasurer is how to deal with the growing calls for more economic stimulus, including from the Reserve Bank.

Depending on what happens to growth and unemployment in the first half of 2020, he will come under increased pressure to jettison the future surpluses to support jobs and living standards.

4. High commodity prices are a gift for the bottom line

High commodity prices are the gift that keeps on giving for the Australian budget.

Iron ore prices in excess of US$85 per tonne, well above the US$55 per tonne budgeted for, have helped to keep company tax receipts buoyant.

Treasury is maintaining the conservative approach it has taken in recent years by continuing to assume US$55 per tonne.

This provides some potential upside should prices stay high – Treasury estimates a US$10 per tonne increase would boost the underlying cash balance by about A$1.2 billion in 2019-20 and about A$3.7 billion in 2020-21.

The budget bottom line remains tied to the whims of international commodity markets for the near future.

5. The surplus depends on running a (very) tight ship

The forecast surpluses over the next four years are premised on an extraordinary degree of spending restraint.

This government is expecting to do something no government has done since the late-1980s: cut spending in real per-person terms over four consecutive years.

The budget dynamics are helping. Budget surpluses and low interest rates reduce debt payments, and low inflation and wage growth reduce the costs of payments such as the pension and Newstart.

But the government is also expecting to keep growth low in other areas of spending, in almost every area other than defence and the expanding national disability insurance scheme.

As the Parliamentary Budget Office points out, it is hard to keep holding down spending as the budget improves.

It is even more true while long term spending squeezes on things such as Newstart and aged care are hurting vulnerable Australians.

Where does it leave us?

The real lesson from MYEFO is that Australians are right to be confused: there is a disconnect between the health of the budget and the health of the economy.

MYEFO suggests both that the government is on track to deliver a good-news budget surplus underpinned by high commodity prices and jobs growth, and that the economy is in the doldrums with low wage growth in place for a long time.

Top of Frydenberg’s 2020 to do list: how to reconcile the two.

Authors: Danielle Wood, Program Director, Budget Policy and Institutional Reform, Grattan Institute; Kate Griffiths, Senior Associate, Grattan Institute

MYEFO – What To Expect

On Monday the Australian government will release the Mid-Year Economic and Fiscal Outlook (MYEFO). This will – as required by the Charter of Budget Honesty – provide an update on the key assumptions made in this year’s budget, and track the implications of decisions made since the budget for the projected surplus. Via The Conversation.

There are two things you can count on about MYEFO.

First, the government will have to pare back its forecasts for economic growth, wages growth and employment growth.

Second, no matter what the economic reality is, the forecast for a budget surplus will remain.

The government has made economic management – as measured by the rather dubious criterion of budget balance – the central plank of its electoral strategy. As the Australian National University’s 2019 Australian Election Study revealed, voters preferred the government’s economic policies to Labor’s by a wide margin (47% to 21%, with 17% thinking there was no difference). On the management of government debt, the margin was 44% to 18%.

But the economy isn’t doing very well. GDP annual growth is 1.7%, not the 2.75% forecast in the budget. The unemployment rate is 5.3%, compared to the forecast of 5.0%. Wage growth is 2.2%, not the 2.75% forecast.

Iron ore supplements

The forecast budget surplus for the fiscal year to June 2020 will be made to hang together, thanks to a higher-than-forecast iron ore price.

That price – which determines the dollar value of Australia’s biggest export and hence the tax revenue it generates – is not reflected in the GDP figure, which only takes into account volumes.

The iron-ore price is now US$92.50 a tonne. The budget assumed the average price would be $US88 for the 2020 budget year, thanks to a reduction in the international supply of iron ore caused by a tailings dam bursting in January at the Córrego do Feijão mine near the town of Brumadinho in southeastern Brazil.

The dam’s collapse released a tsunami of sludge that destroyed farms, houses, roads and bridges, and killed 272 people.

The river of sludge released by the dam spill in Brumadinho, Minas Gerais, Brazil, January 26 2019. Antonio Lacerda/EPA

Ensuing mine shutdowns reduced iron ore output from operator Vale (the world’s biggest iron ore miner) by about a third. This in turn led to the price of iron ore this year being very high, as the following chart illustrates.

Iron ore price (US$/MT) tradingeconomics.com, CC BY-NC-SA

The Australian government sensibly assumed the Brazilian mine would come back online and the ore price would revert to $US55 per tonne by March 2020.

But just think about the 2020-21 fiscal year. The government’s own sensitivity analysis shows for the full 2020-21 budget year a difference in the iron ore price of US$10 a tonne translates to a A$3.7 billion difference in the budget bottom line.

That has helped this year, but it also shows how dependent the budget’s relatively small A$7.1 billion “underlying cash balance” is on a commodity price that’s out of our control.

Yet, given the political non-negotiability of the surplus, we can expect assumptions that stretch credulity to maintain a surplus forecast.

Some action?

This is all against a backdrop of calls for fiscal stimulus from the governor of the Reserve Bank of Australia, the Business Council, every mainstream economist and recently Australia’s top chief executives.

But any stimulus meaningful enough to boost the ailing economy would blow the budget surplus. And the assumptions have already been stretched to breaking point, so there’s very little room for the government to manoeuvre.

The government will probably announce some sort of “investment allowance” – where companies get a modest tax break for specific types of investments in the short term. As I have argued before, this will do something to boost investment and the economy generally, but not nearly as much as a full-scale reduction in the company tax rate to 25% for all businesses.

But the government can’t afford to do a proper tax cut because of its devotion to a wafer-thin surplus.

The danger of too little action

In the end, what the government ends up announcing will really be an allocation of responsibilities. It will determine how much of the work of economic recovery it will do itself, and how much it will want to palm off to the Reserve Bank.

The downside of the former is losing the budget surplus.

The downside of the latter is that the Reserve Bank will have no choice but to cut the cash rate to 0.25% in early 2020 and then embark upon a bond-buying program – i.e. “quantitative easing” or “QE”.

As even Reserve Bank governor Philip Lowe has himself admitted, more aggressive monetary policy brings with it the (further) risk of asset-price bubbles and financial instability.

Right now the government is putting all its chips on the surplus. Will that turn out to be a good bet? Time will tell.

2020 will reveal much about the future of the Australian economy and whether we manage to escape dramatic problems like a recession.

We live in interesting times – but perhaps more in the “Ancient Chinese curse” kind of way than any of us would like.

Author: Richard Holden, Professor of Economics, UNSW

GDP update: spending dips and saving soars

Australians saved rather than spent most of the budget tax cuts, almost doubling the proportion of household income saved, leaving spending languishing. Via The Conversation.

The September quarter national accounts show that in the first three months of the financial year real household spending grew by just 0.1%, the least since the global financial crisis.

Over the year to September, inflation-adjusted spending grew by a mere 1.2%, also the least since the financial crisis. Australia’s population grew by 1.6% in that time, meaning the volume of goods and services bought per person went backwards.

Quarterly growth in household spending

Household final consumption expenditure, quarterly real growth. Australian National Accounts

Separate figures released by the Federal Chamber of Automotive Industries on Wednesday show November new car sales were down 9.8% on November 2018.

By the end of November the Tax Office had issued more than 8.8. million tax refunds totalling A$25 billion, 30% more than a year before.

Instead of being largely spent, they were mostly saved, pushing up the household saving ratio from 2.7% to 4.8%, its highest point in more than two years.

Household saving ratio

Ratio of household net saving to household disposable income. Australian National Accounts

Treasurer Josh Frydenberg put the best face on the result, saying whether they had been spent or saved, the cuts had put households in a stronger position.

The government’s goal has always been to put more money into the pockets of the Australian people, and it’s their choice as to whether they spend or save that money

Separately calculated retail figures show that in the three months to September the volume of goods and services bought fell 0.1%.

The disposable income households had available to spend grew an outsized 2.5%, driven by what the Bureau of Statistics said were the budget tax cuts.

Growth at GFC lows

The Australian economy grew just 0.4% in the three months to September, down from 0.6% in the June quarter, and 0.5% in the March quarter.

Over the year to September it grew 1.7%, well short of the budget forecasts, which in year average terms were 2.25% for 2018-19 and 2.75% for 2019-20.

Real GDP growth

ABS, Commonwealth Treasury

After taking account of population growth, GDP per person grew not at all in the September quarter. Over the year to September living standards grew a bare 0.2%.

Gross domestic product per hour worked, which is a measure of productivity, fell 0.2% during the quarter and fell 0.2% over the year.

Company profits were up 2.2% in the quarter and 12.7% over the year. Wage and superannuation payments grew at about half those rates: 1.2% and 5.1%.

Housing investment was down 1.7% over the quarter and 9.6% over the year.

What household spending growth there was was concentrated on essentials, led by health and rent. So-called discretionary or non-essential expenditures fell, led down by spending on cars, dining out and tobacco.

Consumption growth by category, quarterly

Treasury definitions of discretionary and non discretionary spending. ABS, Commonwealth Treasury

The economy was kept afloat by a surge in government spending. It grew 0.9% in the quarter and 6% over the year. Growth in government spending and investment together accounted for 0.3 of the quarter’s 0.4 points of economic growth.

Government and mining to the rescue

Mining production grew 0.7% over the quarter and 7.4% over the year. A mining-fuelled surge in exports (which eclipsed imports for the first time since the 1970s) contributed almost as much to economic growth as government spending.

Drought-affected farm production fell 2.1% over the quarter and 6.1% over the year.

Business investment fell 4% in the quarter and 1.7% over the year, led down by a 7.8% fall in mining investment in the quarter and a 11.2% fall over the year, as liquefied natural gas projects came to completion. Non-mining investment fell 0.4%.

Asked whether the December budget update would contain tax measures designed to boost business investment, the treasurer said he was in discussions with business. The update is expected in the week before Christmas.

There’s little evidence in today’s figures of the “gentle turning point” spoken about hopefully by the Reserve Bank governor as recently as Tuesday.

If things don’t pick by the bank’s first board meeting for the year in February, it is a fair bet it will cut its cash rate again. By then it will know what the treasurer did (or didn’t) do in the budget update and whether we decided to spend over Christmas.

Author: Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

Limiting cash payments to $10,000 is more dangerous than you might think

From The Conversation. We are used to being able to pay for things with legal tender.

Other than in special circumstances, refusing to accept cash can have legal consequences.

The Currency (Restrictions on the Use of Cash) Bill 2019 at present before the Senate seeks to make it an offence to use “too much cash” to pay your bills.

The intent is clearly stated in Section 4:

This Act places restrictions on the use of cash or cash-like products within the Australian economy. The Act imposes criminal offences if an entity makes or accepts cash payments in circumstances that breach the restrictions.

The proposed limit is A$10,000. Section 8 would make it an offence to make or accept cash payments of $10,000 occurring either as one-offs or in a linked sequence.

Extract from Currency (Restrictions on the Use of Cash) Bill 2019

In parliament the minister said the $10,000 limit would not apply to person-to-person transactions, such as private sales of cars.

But these exceptions are not included in the the Bill. What is included is the phrase “specified by the rules”. Section 20 puts those rules in the minister’s hands. Future ministers may narrow exceptions and change rules.

It would remain legal to withdraw and hold more than $10,000. The stated intent of this Bill is to modify the use of cash, not the holding of cash.

All Australians will continue to be able to deposit and withdraw cash in excess of $10,000 into and from their accounts, and to store more than $10,000 of their money outside a bank.

Cash overboard

What’s proposed would limit competition (Visa, Mastercard, and PayPal would face a lesser competitor, for example) and limit long-held rights.

Everyday behaviour at present protected by the law would be criminalised.

In some cases, and perhaps many, the onus of proof would be reversed, with an “evidential burden” imposed on cash-using defendants.

As stunning is the assignment of “vicarious criminal liability” in Section 16.

Each partner in a partnership, each committee member of an incorporated association and each trustee of a trust or superannuation fund might become individually culpable for their entity’s use of cash.

Oddly, “bodies corporate and bodies politic” are treated differently (Part 3), and the government itself cannot be prosecuted, an uneven application of the law which has attracted little attention.

In my submission to the Senate inquiry (Submission 146) I argue the provisions would, among other things:

  • undercut the ability of banks to head off a banking crisis by providing a trusted and useful form of money
  • funnel more financial traffic through the equivalent of private toll roads
  • remove a guaranteed and always available fallback from electronic transactions
  • increase societal ill-ease and polarisation as citizens realise their rights have been eroded for not particularly compelling stated reasons.

Each point and many presented in other submissions need serious consideration, including in public Senate hearings.

The rationale presented

The speech to parliament introducing the bill was built around the hardly-new observation that cash payments can be “anonymous and untraceable”.

The government’s Black Economy Taskforce produced no detailed analysis but recommended the ban as a means of fighting tax avoidance, to:

make it more difficult to under-report income or charge lower prices and not remit good and services tax.

The speech also asserted that “more crucially” the ban would fight organised crime syndicates, although organised crime was not mentioned in the part of the taskforce report that dealt with the problem the limit was meant to address.

The guarantee dishonoured

Every pound note and then every dollar note issued by the Commonwealth Bank and then Reserve Bank of Australia bears this unconditional promise signed by the head of the bank and the head of the treasury:

This Australian note is legal tender throughout Australia and its territories.

The bank’s website suggests the promise is ongoing:

All previous issues of Australian banknotes retain their legal tender status.

Its note printing arm was mortified earlier this year at the apparently accidental omission of the last letter “i” from the word “responsibility” on the new more secure $50 note.

The Bill before the Senate contains many and much more serious errors.

Cash has been one of the few things we can absolutely rely on, whatever our status, situation or access to other payment means.

Removing (and dishonouring) that guarantee, while criminalising reliance on it, should not be done lightly in a mad rush to an arbitrary date.

Until now public debate about the proposal has been light, but concern is growing, even among quiet Australians.

Each Senator should ensure that last “i” in responsibility isn’t missing here either.

Author: Mark McGovern, Visiting Fellow, QUT Business School, Economics and Finance, Queensland University of Technology

RBA’s Plan For “Zero” Rates

Last night, in a much anticipated speech broadcast live on the Reserve Bank’s website, Governor Phil Lowe laid out in very clear terms the circumstances in which the bank would resort to quantitative easing and the way in which it would implement it. Via The Conversation.

Quantitative easing is simply a change in the way it eases monetary policy when the official interest rate approaches zero.

Usually it does it by cutting the so-called cash rate, which is the rate banks pay each other for money deposited overnight.

Eight years ago the cash rate was 4.5%. Three years ago it was 1.5%. After the most recent three cuts in June, July and October, it is just 0.75%

Source: RBA

Last night, Governor Lowe said the effective lower bound was 0.25%. Rather than let the cash rate get any lower or negative (an option he explicitly ruled out), the bank will push down other longer-term rates by buying government bonds.

It’s the “quantitative easing” approach adopted by the US Federal Reserve between 2009 and 2014.

Government bonds are sold by governments in return for money, a means of borrowing. The buyer gets guaranteed interest payments and a guarantee that their money will be returned in full after three, five, ten or even 20 years depending on the length of the bond.

Once issued, bonds can be traded on a market, and the price at which they change hands can be expressed as an implied interest rate, which becomes the risk-free rate against which all other interest rates are benchmarked.

How quantitative easing would work

Buying bonds from investors would push down that risk-free rate, pushing down the entire structure of long-term interest rates.

All other things being equal, this should also push down the exchange rate by reducing the return on Australian dollar denominated financial investments.

Governor Lowe indicated he might buy state government bonds as well as Commonwealth bonds.

Importantly, he argued that although the bank would be mindful of the need to ensure private banks had enough access to the bonds they needed to hold for regulatory purposes, those holdings would not be an impediment to quantitative easing.

He ruled out buying residential mortgage-backed securities and other private assets given that those markets are currently functioning well and Reserve Bank purchases could distort them.

The approach borrows heavily from the US Fed.

As in the US, Lowe says quantitative easing would be complemented by “forward guidance,” where the Reserve Bank would signal early how long-term interest rates would be kept low and the circumstances in which it expected to raise them again.

The guidance is designed to influence market expectations for future interest rates, enhancing the effectiveness of cuts in long term interest rates.

When it would happen

In addition to “how,” Governor Lowe spelled out “when” – the economic circumstances in which the bank would resort to quantitative easing.

It would do it when the cash rate was at 0.25% and inflation and unemployment were moving away from its objectives.

The bank targets 2-3% inflation on average over time and has recently identified 4.5% as the “full employment” unemployment rate.

Importantly, Lowe emphasised that the Australian economy has not yet reached the point where a cash rate as low as 0.25% would be needed and argued quantitative easing was unlikely to be needed in future.

The cash rate is at present 0.75%. Setting 0.25% as the effective lower bound gives the Governor 0.5 percentage points left to cut before implementing quantitative easing.

Implicitly, Governor Lowe is saying that those cuts of 0.5 percentage points will be enough to stabilise the economy.

A pause for a breath at 0.25%

Lowe also indicated the bank would not seamlessly transition to quantitative easing.

He implied there was an additional hurdle or threshold that would need to be crossed, suggesting he would be reluctant to make the transition.

His big problem is that neither inflation nor the unemployment rate are moving in the right direction.

The bank has undershot its inflation target since the end of 2014, giving the economy a weak starting point going into an emerging global downturn.

My research on the US experience for the United States Studies Centre shows that the main problem with is quantitative easing was that it was not done soon enough or aggressively enough.

It might be better to be bold

While quantitative easing was effective, it could have been made more so had what was going to happen been made clearer.

The Fed went out of its way to limit the transmission of quantitative easing to the rest of the economy, fearful it would be too potent and lead to excessive inflation.

Those concerns proved misplaced. By pulling its punches, the Fed ended up being less effective and having to pursue quantitative easing for longer than if it had used it more aggressively.

Governor Lowe’s very obvious reluctance to go down the quantitative easing route suggests the Reserve Bank is in danger of making the same mistake, but it is not too late to learn from what happened in the US.

Author: Stephen Kirchner Program Director, Trade and Investment, United States Studies Centre, University of Sydney

Australia Is Too “China Dependent”: Rudd

Kevin Rudd has warned Australia is too “China dependent” in economic terms, and must diversify its international economic engagement. Via The Conversation.

Setting out principles he believes should govern the way forward in dealing with China, the former prime minister said for too long Australia had been “complacent in anticipating and responding to the profound geo-political changes now washing over us with China’s rise, America’s ambivalence about its future regional and global role, and an Australia which may one day find itself on its own”.

Launching journalist Peter Hartcher’s Quarterly Essay, Red Flag: Waking up to China’s challenge, Rudd said Australia needed a regularly-updated “classified cabinet-level national China strategy”.

This should be based on three understandings. The first was that “China respects strength and consistency and is contemptuous of weakness and prevarication”.

The others went to awareness of China’s strengths and weaknesses, and of Australia’s own strengths, weaknesses and vulnerabilities.

Rudd, who was highly critical of the government, declared “Australia needs a more mature approach to managing the complexity of the relationship than having politicians out-competing one another on who can sound the most hairy-chested on China”. This might be great domestic politics but did not advance the country’s security and economic interests.

Australia should “maintain domestic vigilance against any substantive rather than imagined internal threats” to its political institutions and critical infrastructure.

He fully supported the foreign influence transparency act, but he warned about concern over foreign interference translating “into a form of racial profiling”.

“These new arrangements on foreign influence transparency should be given effect as a legal and administrative process, not as a populist witch-hunt” – a return to the “yellow peril” days.

Rudd said Australia must once again become the international champion of the South Pacific nations, arguing the government’s posture on climate change had undermined Australia’s standing with these countries and given China a further opening. “The so-called ‘Pacific step-up’ is hollow.”

Australia should join ASEAN, Rudd said; this would both help that body and assist Australia to manage its long term relationship with Indonesia.

On the need to diversify Australia’s international economic engagement, Rudd said: “We have become too China-dependent. We need to diversify further to Japan, India, Indonesia, Europe and Africa – the next continent with a rising middle class with more than a billion consumers. We must equally diversify our economy itself.”

Rudd argued strongly for Australia to continue to consolidate its alliance with the United States.

But “Australia must also look to mid-century when we may increasingly have to stand to our own two feet, with or without the support of a major external ally.

“Trumpist isolationism may only be short term. But how these sentiments in the American body politic translate into broader American politics with future Republican and Democrat administrations remains unclear.”

Rudd once again strongly urged a “big Australia” – “a big and sustainable Australia of the type I advocated while I was in office.

“That means comprehensive action on climate change and broader environmental sustainability,” he said.

“Only a country with a population of 50 million later this century would begin to have the capacity to fund the military, security and intelligence assets necessary to defend our territorial integrity and political sovereignty long term. This is not politically correct. But it’s yet another uncomfortable truth.”

Author: Michelle Grattan, Professorial Fellow, University of Canberra

The RBA has a new brain

MARTIN stands for “Macroeconomic Relationships for Targeting Inflation”, or perhaps merely for “Martin Place” which is the location of the Reserve Bank’s headquarters in Sydney. Via The Conversation.

It’s the bank’s new computer model of the Australian economy, made up of 147 equations working in concert. Some are quite simple, such as how global oil prices affect domestic petrol prices, whereas others are more complex, such as how a rise in the unemployment rate affects household spending.

Reserve Bank of Australia

Unveiled in August in a discussion paper entitled “MARTIN has its place”, the model is available for use by analysts outside the bank for whom it can serve as something of a guide as to what the bank might be thinking.

It provides useful insights into what the bank will do next, after it has cut its cash rate as close to zero as possible and needs to stimulate the economy further.

It’s a topic Governor Philip Lowe will expand on tonight in a landmark speech to business economists in Sydney.

What’s MARTIN, what’s a model?

Economists use models like drivers use maps – to take a large and complicated country and simplify it to its essential ingredients in the hopes of providing a useful guide to navigating it.

A map doesn’t tell you everything about a route – that would be hard to come to grips with – but it highlights important features or paths you should watch for. Models do the same – simplifying the complex Australian economy into the paths that matter.

But instead of breaking Australia down into rivers and roads, or cities and states like a map might do, MARTIN divides the Australian economy into different sectors such as households, firms and the government with the 147 equations describing the ways they interlink with each other.

This map is principally designed for two purposes.

  • The first is forecasting. Every three months the bank looks inside its crystal ball to try and divine how the economy will evolve in the years to come. MARTIN has become a key input into that process.
  • The second use is the ability to run “what if” simulations to see how the economy would react in different scenarios. For example, what would happen if the price of iron ore crashed tomorrow, or what would be the impact if the government ramped up its spending on infrastructure?

What does MARTIN say about quantitative easing?

MARTIN will have been put to work pondering the implications of deploying so-called “quantitative easing” after the Reserve Bank’s cash rate gets too low to cut.

Quantitative easing involves the Reserve Bank buying financial assets, such as government or mortgage bonds, in order to continue to supply money to the economy after its cash rate has fallen to zero.

I have used MARTIN to model three different scenarios for quantitative easing in the Australian economy.

The first is what would happen if quantitative easing isn’t used at all.

The second is what would happen if the bank started a modest quantitative easing program in early 2020 lasting around a year.

The third is what would happen if the bank commenced an aggressive quantitative easing program to simulate the economy for 18 months.

I assume the bank would purchase assets in a similar manner to how the US conducted quantitative easing after the global financial crisis, buying bonds to lower interest rates on two year and ten year government securities.

MARTIN says quantitative easing would have two major effects on the economy. First, it would lower the cost of borrowing for Australian businesses. They would be expected to increase investment as more projects become viable as the interest rates they were charged fell.

Second, the lower rate structure would weaken the Australian dollar by as much as 5 US cents. A cheaper dollar would make our exports more competitive and make foreign imports more expensive.

MARTIN thinks it could work

MARTIN predicts quantitative easing would boost manufacturing, agriculture and mining exports relative to where they would be without it.

The depreciation would also encourage Australian households to spend more on local goods and less on what would be dearer imports. This should lead to higher wages, increased household incomes and spending, and improved economic growth.

In fact, MARTIN predicts that, by boosting economic growth, quantitative easing would actually lead to higher interest rates as inflation returns to the Reserve Bank’s target, allowing interest rates to return to more normal levels.

Combining these two effects, MARTIN suggests a large quantitative easing program would reduce unemployment by 0.3 percentage points, equivalent to 40,000 extra jobs, and boost wages across the economy.

The output of any model is only as good as the information and data that are fed into it, but the output of MARTIN is why more and more economists expect the bank to quantitatively ease in the new year. Its brain says it should work.

Author: Isaac Gross, Lecturer, Monash University

Westpac’s scandal highlights a system failing to deter corporate wrongdoing

The news that Australia’s anti money-laundering regulator has accused Westpac of breaching the law on 23 million occasions points to the prospect that powerful members of corporate Australia are still behaving badly. Via The Conversation.

This despite the clear lessons offered by the Banking Royal Commission.

Regulators are still struggling to find the right balance between pursuing wrongdoers through the courts – an admittedly costly, time-consuming and highly risky business – and finding other means to punish and deter misconduct.

Australia’s anti money-laundering regulator, AUSTRAC, is seeking penalties against Westpac in the Federal Court.

Each of the bank’s alleged contraventions attracts a civil penalty of up to A$21 million. In theory, that could equate to a fine in the region of A$391 trillion. In practice, it is likely to be a mere fraction of that sum. Commonwealth Bank breached anti-money-laundering laws and faced a theoretical maximum fine of nearly A$1 trillion, but settled for A$700 million.

No doubt the reality that companies can minimise penalties is a factor in why breaches continue.

This impression is reinforced by revelations last week that financial services company AMP continued to charge fees to its dead clients despite the shellacking it received at the hands of the royal commission.

Last month a Federal Court judge refused to approve a A$75 million fine agreed between the Australian Competition and Consumer Commission and Volkswagen to settle litigation over the car company’s conduct in cheating emissions tests for diesel vehicles. The judge was reported to be “outraged” by the settlement, which meant Volkswagen did not admit liability for its misconduct.

The A$75 million is a drop in the ocean of the likely profits obtained from this systemic wrongdoing and pales into insignificance next to fines imposed in other countries.

Proposals for law reform

So business as usual, right?

Maybe not for long. The Australian Law Reform Commission has just released a discussion paper on corporate criminal responsibility.

It points out that effective punishment and deterrence of serious criminal and civil misconduct by corporations in Australia is undermined by a combination of factors.

These include a confusing and inconsistent web of laws governing the circumstances in which conduct is “attributed” to the company. Similar problems of inconsistency arguably also undermine other key areas, such as efforts to give courts the power to impose hefty fines based on the profits obtained by the wrongdoing

The repeated attempts to come up with new and more effective attribution rules arise because corporate wrongdoers are “artificial people”. For centuries, courts and parliaments have struggled with how to make them pay for what is done by their human managers, employees and (both human and corporate) agents. All too often a company’s directors disclaim all knowledge of the wrongdoing.

To fix this, the ALRC recommends having one single method to attribute responsibility. It builds on the attribution rule first developed in the Trade Practices Act 1974 (Cth) and now used, in various forms, across various statutes.

The ALRC proposes that the conduct and state of mind of any “associates” (whether natural individuals or other corporations) acting on behalf of the corporation should be attributable to the corporation.

This goes well beyond the traditional focus on directors and senior managers and would provide some welcome consistency in the law.

Importantly, serious criminal and civil breaches that require proof of a dishonest or highly culpable corporate “state of mind” can be satisfied either by proving the state of mind of the “associate” or that the company “authorised or permitted” the conduct.

A “due diligence” defence would protect the corporation from liability where the misconduct was truly attributable to rogue “bad apples” in an otherwise a well-run organisation. There would be no protection in the case of widespread “system errors” and “administrative failures” so pathetically admitted during the royal commission.

The ALRC also proposes that senior officers be liable for the conduct of corporations where they are in “a position to influence the relevant conduct and failed to take reasonable steps to prevent a contravention or offence”.

This would place the onus on those in a position to change egregious corporate practices to show they took reasonable steps to do so.

Removing the penalty ceiling

These recommendations, if adopted could prove a game-changer for regulators asking themselves “why not litigate?” and corporations used to managing the fall-out of their misconduct as simply a “cost of business”.

The ALRC’s recommendations that the criminal and civil penalties should be enough to ensure corporations don’t profit from wrongdoing will be welcomed by many. Some academics have gone further and argued that the law should be changed to make it clear that civil, not just criminal penalties, should be set at a level that is effective to punish serious wrongdoing.

The ALRC also raises the question whether current limits on penalties should be removed. The Westpac scenario might be just the kind of case to make that option attractive.

Authors: Elise Bant, Professor of Law, University of Melbourne; Jeannie Marie Paterson, Professor of Law, University of Melbourne

‘OK boomer’ at work = age discrimination?

The phrase “OK boomer” has become a catch-all put-down that Generation Zers and young millennials have been using to dismiss retrograde arguments made by baby boomers, the generation of Americans who are currently 55 to 73 years old. From The US Conversation.

Though it originated online and primarily is fueling memes, Twitter feuds and a flurry of commentary, it has begun migrating to real life. Earlier this month, a New Zealand lawmaker lobbed the insult at an older legislator who had dismissed her argument about climate change.

As the term enters our everyday vocabulary, HR professionals and employment law specialists like me now face the age-old question: What happens if people start saying “OK boomer” at work?

Evidence of discrimination

A lot of the internet fights over “OK boomer” revolve around whether the phrase is offensive or not. But when you’re talking about the workplace, offensiveness is not the primary problem. The bigger issue is that the insult is age-related.

Workers aged 40 and older are protected by a federal statute called the Age Discrimination in Employment Act, which prohibits harassment and discrimination on the basis of age.

Comments that relate to a worker’s age are a problem because older workers often face negative employment decisions, like a layoff or being passed over for promotion. The only way to tell whether a decision like that is tainted by age discrimination is the surrounding context: comments and behavior by managers and coworkers.

If a manager said “OK boomer” to an older worker’s presentation at a meeting, that would make management seem biased. Even if that manager simply tolerated a joke made by someone else, it would suggest the boss was in on it.

Companies also risk age-based harassment claims. Saying “OK boomer” one time does not legally qualify as harassing behavior. But frequent comments about someone’s age – for example, calling a colleague “old” and “slow”, “old fart” or even “pops” – can become harassment over time.

Gen Xers are covered too

And it doesn’t matter if the target isn’t even a boomer.

Gen Xers were born around 1965 to 1979. That makes them older than 40 and covered by federal age discrimination law.

Yes, I get that the comment is a retort to “unwoke” elders who cannot be reasoned with. The problem is that the phrase is intended as a put-down that is based, at least partly, on age. If you say it at work, you’re essentially saying, “You’re old and therefore irrelevant.”

Lumping Gen Xers into a category with even older workers doesn’t make it better. Either way, you are commenting on their age.

Funny or not

I recently watched some of the “OK boomer” TikTok compilations.

A lot of them were quite funny, like the hairdresser imitating a customer who criticized her tattoos as unprofessional. She responded, “OK boomer,” while appearing to lop off a huge swath of the customer’s hair.

When I was an employment lawyer, I heard tons of hilarious stories of things people said in the workplace. But that’s the point: The story ended with a lawyer on the other end of the phone.

One of the most famous age-discrimination cases – which made its way all the way up to the Supreme Court – involved a manager who described an employee as “so old he must have come over on the Mayflower.”

In other words, “it was just a joke” is an awful legal defense.

Tit for tat

To millennials who have suffered through years of being called “snowflakes” by their elders, protests of age discrimination can seem a bit rich. Why didn’t HR ban all those millennial jokes about avocado toast?

The Age Discrimination in Employment Act only kicks in for workers who are 40 or older, which means millennials aren’t covered. For now.

The oldest millennials will turn 40 later this year. So fear not, the millennial jokes may eventually become a legal problem for companies as these workers age.

Also, a few states, including New York, ban age discrimination for all workers over 18, and employers in those states probably should have done something about the millennial jokes.

Millennials tired of their elders making fun of their love for avocado toast are out of luck. By Nelli Syrotynska/Shutterstock.com

Why older workers need protections

Boomers might seem really powerful, and yes, they might be your boss’s boss’s boss.

But older workers are more vulnerable than they seem. Older workers are expensive – by the time they’ve worked their way up the corporate ladder, their generous salaries start to weigh on the balance sheet. And management may have trouble envisioning spectacular growth and innovative ideas from them years into the future, even if they are ready and willing to deliver.

That’s why Congress thought it was important to extend protections to those workers. It wanted employers to treat them as individuals who shouldn’t be dismissed out of hand because of their age.

And in many ways, that’s what young people seem to want as well: a little respect for what they bring to the table. After all, that meme didn’t make itself.

Author: Elizabeth C. Tippett, Associate Professor, School of Law, University of Oregon

Why Sweden’s Central Bank Dumped Australian Bonds

Suddenly, at the level of central banks, Australia is regarded as an investment risk. Via The Conversation.

On Wednesday Martin Flodén, the deputy governor of Sweden’s central bank, announced that because Australia and Canada were “not known for good climate work”.

As a result the bank had sold its holdings of bonds issued by the Canadian province of Alberta and by the Australian states of Queensland and Western Australia.

Martin Flodén, deputy governor Sveriges Riksbank Central Bank of Sweden

Central banks normally make the news when they change their “cash rate” and households pay less (or more) on their mortgages.

But central banks such as Australia’s Reserve Bank and the European Central Bank, the People’s Bank of China and the US Federal Reserve have broader responsibilities.

They can see climate change affecting their ability to manage their economies and deliver financial stability.

There’s more to central banks than rates

As an example, the new managing director of the International Monetary Fund Kristalina Georgieva warned last month that the necessary transition away from fossil fuels would lead to significant amounts of “stranded assets”.

Those assets will be coal mines and oil fields that become worthless, endangering the banks that have lent to develop them. More frequent floods, storms and fires will pose risks for insurance companies. Climate change will make these and other shocks more frequent and more severe.

In a speech in March the deputy governor of Australia’s Reserve Bank Guy Debelle said we needed to stop thinking of extreme events as cyclical.

We need to think in terms of trend rather than cycles in the weather. Droughts have generally been regarded (at least economically) as cyclical events that recur every so often. In contrast, climate change is a trend change. The impact of a trend is ongoing, whereas a cycle is temporary.

And he said the changes that will be imposed on us and the changes we will need might be abrupt.

The transition path to a less carbon-intensive world is clearly quite different depending on whether it is managed as a gradual process or is abrupt. The trend changes aren’t likely to be smooth. There is likely to be volatility around the trend, with the potential for damaging outcomes from spikes above the trend.

Australia’s central bank and others are going further then just responding to the impacts of climate change. They are doing their part to moderate it.

No more watching from the sidelines

Over thirty central banks (including Australia’s), and a number of financial supervisory agencies, have created a Network for Greening the Financial System.

Its purpose is to enhance the role of the financial system in mobilising finance to support the transitions that will be needed. The US Federal Reserve has not joined yet but is considering how to participate.

One of its credos is that central banks should lead by example in their own investments.

They hold and manage over A$17 trillion. That makes them enormously large investors and a huge influence on global markets.

As part of their traditional focus on the liquidity, safety and returns from assets, they are taking into account climate change in deciding how to invest.

The are increasingly putting their money into “green bonds”, which are securities whose proceeds are used to finance projects that combat climate change or the depletion of biodiversity and natural resources.

Over A$300 billion worth of green bonds were issued in 2018, with the total stock now over A$1 trillion.

Central banks are investing, and setting standards

While large, that is still less than 1% of the stock of conventional securities. It means green bonds are less liquid and have higher buying and selling costs.

It also means smaller central banks lack the skills to deal with them.

These problems have been addressed by the Bank for International Settlements, a bank owned by 60 of the central banks.

In September it launched a green bond fund that will pool investments from 140 (mostly central bank) clients.

Its products will initially be denominated in US dollars but will later also be available in euros. It will be supported by an advisory committee of the world’s top central bankers.

It is alert to the risk of “greenwashing” and will only buy bonds that comply with the International Capital Market Association’s Green Bond Principles or the Climate Bond Initiative’s Climate Bond Standard.

Launching the fund in Basel, Switzerland, the bank’s head of banking Peter Zöllner said he was

confident that, by aggregating the investment power of central banks, we can influence the behaviour of market participants and have some impact on how green investment standards develop

It’s an important role. Traditionally focused on keeping the financial system safe, our central banks are increasingly turning to using their stewardship of the financial system to keep us, and our environment, safe.

Author: John Hawkins, Assistant professor, University of Canberra