News + Views, March-April, 2017
President Trump's first 100 days, 30 April.
Henry can recall no more divisive US politics. Around 40 % of voters seem warmly supporting President Trump, and a small number previous 'establishment' dwellers seem unable to recognise his legitimacy. Compare the rally in Pennsylvania - a previously long-standing Democratic state - with anti-Trump demonstrations in Washington.
The new President is 'all over the place' according to many establishment figures, but seems to be learning fairly fast. Has he 'drained the swamp'? No, but he has surely tested many entrenched positions. He has stood up to Russia in Syria and palled up with China in the hope, perhaps expectation, that China will help bring sense to North Korea.
Policies for recovery, 9 April
Last week's offering listed Australia's ten unsustainable trends. As promised, today we offer a list of how to fix them. Difficult? Certainly. Impossible? Not if we wish to avoid a deep and damaging recession, which is the old-fashioned way to fix unsustainable economic trends.
1. Unsustainable growth of government debt
Implement serious program of productivity increase, using current lists provided by Productivity Commission, Harper Review and the work of Industry Group headed by Richard Morgan.
Increasing Australia's productivity will help make other issues easier to deal with. It will create a self generated boom that could rival the recent mining boom, and make the budget deficit shrink way faster than now imagined.
Turn budget deficit into a surplus by mix of spending cuts and tax increases.
2. Household debt by 2020 will be of the order of 2 times household income.
Raise GST, make it broader (eg 15%) and without exceptions.
Cancel negative gearing of investments in houses. Reduce degree of income tax discount for capital gains.
Government promote benefits of self sufficiency and saving rather than spending.
3. Falling numbers of full-time jobs and increasing numbers of people who declare themselves underemployed, with wages barely growing.
Reduce immigration, leaving more jobs for people already here. However, we must leave the door open for people with skills now available here.
Improve education system with focus on employability of graduates and certificated tradespersons.
Eliminate penalty rates. Australia needs to work 24/7 if we are to compete in a tough global marketplace.
Cut company tax, especially for small companies. (Done!)
Government promote benefits of self sufficiency and hard work.
4. Uncontrolled increases on housing prices in Sydney and Melbourne.
Impose tax on capital inflow. Or on overseas buyers of Aussie houses and other existing assets. Allow free capital inflow for projects that create jobs and exports.
Reduce immigration, leaving more houses for people already here.
Cancel negative gearing of investments in houses. Reduce degree of income tax discount for capital gains.
Government to encourage Reserve Bank to raise interest rates and to discuss risks of financial instability with financial regulators.
5. No realistic prospect of reducing debt to manageable levels with existing policies.
Government to begin discussion with people about whether they should be aiming for a tiny surplus in the deficit or a substantial surplus when current crisis is over.
Keynes is frequently misquoted. Keynes recommended balancing budgets over the cycle, meaning budget surpluses in the good years.
Government add plan to create a serious Sovereign Wealth Fund when its budget is next in surplus.
6. No apparent way to avoid expensive and unreliable electricity in coming 5-7 years.
A viable national plan is needed. This must allow for national or regional distribution and reliable base load capacity.
Governments to explore modern 'clean coal generating option, create new gas-fired generators and hydro plans and explore battery storage.
Federal government should plan for nuclear generation and begin dialogue with voters about this.
7. No apparent way to avoid sharply rising costs of living for ordinary Australians.
Governments should explore ways to increase competition and fix rorts in current electricity generating business and other monopoly enterprises.
See point 1 re productivity increases.
8. Rising cost of debt servicing by governments will limit necessary spending on defence, border security, welfare, education and both national and regional infrastructure.
Get serious about fixing budget mess, if necessary via a political agreement with Labor (or a coalition of cross-bench Senators) to solve a problem that must reflect different aims about the detail of budget reform.
Note in point 1 benefit of productivity increases.
9. Equity between states has become unacceptable.
Compare WA's GST rebate with that of the Northern Territory. Plus allocations of Federal handouts for infrastructure spending. Make allocations far more equal on per capita basis.
10. Unworkable degree of national political cohesion severely limits any government's ability to govern.
Devote serious time and energy to reaching political accord with Labor (or a coalition of cross-bench Senators) that increases productivity (see point 1) and restores a balanced budget as quickly as possible.
Comments.
This list is guaranteed to fix Australia's unsustainable trends. In the process we shall become an economy admired by policy makers everywhere.
Readers may think this set of policies would be impossible to achieve.
The alternative is a deep recession which does great damage to most Australians.
Please Mr Turnbull use the Easter break from politics as usual to think carefully about this list.
Australia's unsustainable trends, 2 April
1. Unsustainable growth of government debt
Commonwealth and State govts debt currently approx $800B. At average interest cost of 4% pa, this means interest payments of $32b. By 2020, debt will be approx $1Tr. With average interest costs of, say, 8%, this will mean a national interest bill of $80b. Average liability of 25 million Aussies for government debt will be $200,000.
2. Household debt by 2020 will be of the order of 2 times household income.
Debt per household by 2020 will be even higher than current crisis levels. Extreme house prices help to explain excessive debt levels, but also a consequence of consumption-focus of most Australians and current very low rates of interest. This will change with the severe recession to come, possibly by 2020.
3. Falling numbers of full-time jobs and increasing numbers of people who declare themselves underemployed, with wages barely growing.
Very poor employment prospects help to explain wages barely growing. Is Australia a high wage growth or a low growth nation? With the world's highest immigration (relative to population) we need to generate more jobs if wages are to keep rising.
4. Uncontrolled increases on housing prices in Sydney and Melbourne.
Rapid population growth is one of the sources of excessive house prices. Growth of near 20 % in the past year in Sydney and Melbourne house prices is another unsustainable Australian trend. Is a soft slowing possible, dear readers? More likely a hard landing leading to severe recession.
5. No realistic prospect of reducing debt to manageable levels with existing policies.
The Coalition has no plans to lead to budget surplus, merely to 'balance the books'. Does Australia need a severe recession to fix the various unsustainable trends currently wrecking the Australian economy.
6. No apparent way to avoid expensive and unreliable electricity in coming 5-7 years.
Batteries are improving but are currently unable to cope with whole days with little sun and no wind. Gas or coal-fired electricity generation is required but prospect of this look poor. Price and reliability of supply will be highly likely to pressure people whose wages are static and where welfare is limited.
7. No apparent way to avoid sharply rising costs of living for ordinary Australians.
As well as expensive electricity, prices of water, basic foods and other rises will produce many more strugglers. People struggling to keep paying excessive mortgages will feel real pain and many will lose their homes.
8. Rising cost of debt servicing by governments will limit necessary spending on defence, border security, welfare, education and both national and regional infrastructure.
Servicing rising government and household debts against a background of high costs and low wages growth will limit spending on all the categories of government spending listed above. Household spending will also be heavily constrained.
9. Equity between states has become unacceptable.
Compare WA's GST rebate with that of the Northern Territory. Or allocations of Federal handouts for infrastructure spending.
10. Unworkable degree of national political cohesion will severely limit any government's ability to govern.
A populist Senate and an unreasonable Labor opposition in the Reps makes effective governing impossible, at least with the current government. We need a Treasurer willing to leave the 'she'll be right' rhetoric to telling it how really is, and to make clear sense in doing so.
We shall outline such a program next week, but one thing is sure - current policy settings are leading Australia into a big mess and deep recession.
Australia's housing fiasco, who is to blame?, 30 March
'It's not a bubble' say the housing boosters, even though average Sydney house prices have risen by 19 % over the past year after years of double-digit price increases. The mighty OECD have expressed concern, suggesting sensibly enough that a collapse might plunge Australia into recession.
Principal villains abound.
* The RBA cut interest rates too far. * The chief prudential supervisor, APRA, failed to play its part. * Excessively generous tax treatment of houses owned by investors via a 50 % discount on capital gains and 'negative gearing'. * Local governments have failed to move quickly enough to allow denser population in the inner parts of Sydney and Melbourne and to free up rural land for new suburbs. * The Federal government has been too keen on attracting migrants. And also failed to insist newcomers be required to live for, say 5 to 10 years in towns or cities needing a population boost.
It's quite a story, dear readers, with many apparently uncordinated villains. Perhaps when we see the benefits of a housing slump followed by a severe recession these villains will be heroes, but that is a thought too close to the bone to be entertained.
More here, including caveats and qualification.
Economic misery ahead, 25 March
The government has had some recovery in the polls, due to a stronger performance by Prime minister Turnbull, especially his thought bubble called Snowy 2.0, action on section 18C of that so-called Human Rights law and some minor social welfare reforms passed by the Senate.
Yet there are skeptics about Snowy 2.0. Mainly the 5-7 years before it is working, but also an argument that it will cost more to recycle water that the value of the electricity generated by the recycling process. Reforms to 18C may be blocked in the Senate, and there seems to be tacit agreement that it is no use even thinking about serious work to turn the budget deficit into a surplus. Even when that did look worth chasing, there was never a plan to produce a surplus large enough to repay a chunk of the debt.
The unavoidable problem in Henry's view is that with the rise in global interest rates currently underway servicing the debt will be far more costly. That means government deficits will rise, leaving less money for more welfare, defence spending or other things any same government would worry about. But the even bigger problem is Australia's households' massive debt - soon to reach 2 times household income. When borrowing costs double, there will be much misery - on one estimate up to 30% of households will experience serious financial difficulty.
Monetary policy and financial stability policy, 18 March
Some time ago America's monetary policy boss, Janet Yellen, changed the goalposts for American monetary and financial stability policies. I reported on June 4, 2014: 'Earlier this week, the Fed's new chief, Janet Yellen, changed the goalposts for US policy, supporting the UK, hints from Ben Bernanke and the RBA.
End negative gearing, 12 March
The housing bubbles in Sydney and Melbourne have finally caught some attention. The main way to stabilise things is to reform negative gearing and reducing the degree to which capital gains are taxed at less than income. Henry is prepared to bet [unsuccessfully as it turned out] that the forthcoming budget will do this. If it does, Labor will immediately change tack and say Bill Shorten's arguments for this were misunderstood, and they really had been against this all along.
Leaders and narratives, 5 March
President Trump finally looked 'Presidential' as he addressed the joint houses in Washington. This political follower from tiny Australia could not help feeling impressed and the scope and ambition of Mr Trump's plan for America, or the enthusiasm of his listeners. Hard core Democrats of course were less impressed but at least some of the Dem leaders looked pretty gob smacker. Do not miss the chance to watch the whole event if you can find it.
Here our Dear Leader has had another bad week. Apparently said Leader has no view he will share with us about his support, or otherwise, for reduced penalty rates for work on Sundays. There are two powerful arguments for this. Australia is now a 24/7 sort of nation, and lower Sunday wages will mean more opportunities for businesses to make a few more shekels, young would-be workers to get jobs and consumers to get coffee and snacks more readily.
Dear Leader also apparently has no view he wishes to offer on reform of Section 18C of the anti-Free Speech legislation. Richo said early on that Malcolm was a man with no ticker, which at the time we at HenryThornton.com thought was harsh. Now Richo looks like a prophet.
With further rises in the prices of houses in Melbourne, and especially Sydney, where house prices are almost certainly in a bubble, the mighty OECD has discerned a risk that the bubble bursting might create a recession in the world's apparently fastest growing developed nation. (The difficulty of governing makes Australia more like a 'Banana Republic' but it's good to know we are still regarded by some influential folk as a worthy 'first world' nation.)