What’s the point of Scott Morrison’s ‘policy speed limit’?

Fri, 11 May 2018  |  

This article first appeared on The Guardian web site at this link: https://www.theguardian.com/australia-news/2018/may/09/australia-budget-2018-whats-the-point-of-scott-morrisons-policy-speed-limit 

 --------------------------------------------------------------

What’s the point of Scott Morrison’s ‘policy speed limit’?

The budget confirmed a deluge of tax revenue for the government that will see the tax-to-GDP ratio rise over the next few years to a peak of 23.9% in 2021-22.

The treasurer, Scott Morrison, has decided to use that peak as a self-imposed “policy speed limit”: in other words, he will put a cap on the tax-to-GDP ratio at this arbitrary level to 2028-29. This cap is effectively how the income tax cuts have been funded, as excess tax revenue is recycled back into lower tax rates.

It is an odd speed limit for a treasurer to embrace and it means there is either an economic timebomb in the budget for a future government or Morrison has no intention of sticking to the cap.

It is important to note, in this context, that the budget is framed on a series of realistic and reasonably conservative economic forecasts for economic growth, wages and company profits, while it makes the usual technical assumption of broadly flat or even lower commodity prices than recently seen.

But in the world of budgets, where even the best medium-term economic projections are inevitably wrong, there needs to be some thought given to scenarios and contingencies as unforeseen events unfold.

Suffice to say, the business cycle is alive and well, which means that over a period of a few years there will be the usual ups and downs in the economy.

Over the bulk of the past decade since the global crisis was unleashed, the biases on the economy have generally been down. That is, the economy has experienced subtrend growth, with inflation remaining below the bottom of the Reserve Bank target band and wages growth hovering near record lows. No one can accurately anticipate when the next economic upswing will be but one day it will happen.

This means that Morrison’s 23.9% tax cap will be tested when the economy experiences an unexpected lift, manifest in a surge in economic growth.

It will happen one day, perhaps soon, and when it does the strong economy will lift employment, wages, company profits and consumer spending to well above the level projected in the budget papers.

A torrent of tax will flow to the government, which could easily see the tax-to-GDP ratio exceed 25%, more than a full percentage point above the Morrison cap. History suggests that when an economy booms and overheats, it tends to do so for several years, so it would be realistic to expect a scenario that sees the tax-to-GDP ratio hold around the higher level for a few years when the upswing comes along.

When this happens, what will Morrison and the Coalition do?

Cuts in taxes, either personal or company, to meet the tax cap would be grossly irresponsible.

Throwing extra cash into an overheated economy via tax cuts in the clamour to meet the 23.9% cap would fuel inflation and there would no doubt be interest rate hikes to offset the inflationary effects.

There was a similar episode in the period around 2004 to 2007 when the budget surplus massively exceeded forecasts year after year on the back of the mining and commodity price boom. While the Howard government did not have an arbitrary tax cap, it nonetheless chose to use the bulk of these windfall tax gains slash tax rates and boost spending. As a result, inflation spiked, peaking at a stunning 5% and official interest rates were hiked, as a result, to an unthinkable 7.25%.

With the Morrison tax cap, when the next economic upswing unfolds, either history will repeat or the tax cap will be breached and the extra revenue allowed to accrue as a fiscal war chest to be deployed when the next economic downturn unfolds. It is obvious what the prudent policy response would be.

Which comes back to the original point.

Because of the tax cap, either Morrison will blow up the economy with excessive tax cuts when the economy is strong and overheating, or the “policy speed limit” is a glib soundbite that he has no intention of sticking to if the economy turns out to be stronger than expected.

comments powered by Disqus

THE LATEST FROM THE KOUK

Don’t look now – you are almost certainly poorer than a year ago

Wed, 09 Jan 2019

This article first appeared on the Yahoo Finance web page at this link: https://au.finance.yahoo.com/news/dont-look-now-almost-certainly-poorer-year-ago-211934583.html 

------------------------------------------------------------

Don’t look now – you are almost certainly poorer than a year ago

I am sorry to kick off the new year with some gloomy news of your finances.

It is never nice to discuss how much money you have lost, but if you are a home owner in Sydney, Melbourne, Perth or Darwin and if you have a superannuation nest egg, the odds are you are less wealthy today than you were a year or two ago.

Here are some uncomfortable facts.

The Australian stock market, where the bulk of your superannuation assets are likely to be invested, has slumped 11 per cent since August, reducing the value of stocks by around $200 billion.  No doubt your superannuation has suffered part of this loss.

At the same time, home owners in Sydney, Melbourne, Perth and Darwin are seeing the value of their homes getting crunched.

Here are some examples.

Falling dollar reflects global concern all is not well in the Australian economy

Mon, 07 Jan 2019

The article first appeared on The Guardian website at this link: https://www.theguardian.com/business/2019/jan/03/falling-dollar-reflects-global-concern-all-is-not-well-in-the-australian-economy 

--------------------------------------------------------- 

Falling dollar reflects global concern all is not well in the Australian economy

The Australian dollar was hit hard overnight, Australian time, slumping below 70 US cents before a sharp and more extreme move saw it temporarily crash to a low of 67.40 US cents. It subsequently recovered marginally, but remains weak at around 69.40 US cents.

Rather than focus on the micro aspects of minute-by-minute or hour-by-hour moves in the dollar, which can be more noise than substance, the trend for the dollar over the past year has been down.

In January 2018, the Australian dollar was trading at 81.50 US cents.

There is increasing concern from global investors that all is not well with the Australian economy. Policy is in a do-nothing phase. Entrenched low wages growth is hampering growth in household spending. This is being complemented, in a negative way, by a sharp fall in wealth as house prices drop and the share market weakens, both of which will be a negative for the economy during 2019. This is because householders are simply not getting the income growth nor wealth accumulation needed to allow them to keep spending at a rate that will see the economy expand at a pace that will generate upside wage and inflation momentum. Strategies aimed at reducing debt and paring back new borrowings mean, by definition, weaker economic growth over the near term.