“This Economy has Oomph”

…quoth Federal Treasurer Peter Costello. 0.1% growth in the December quarter, 1.5% over the year. This character is looking more and more like a clown, or as Homer Paxton argues, a barrister with no grasp of economics making the best case. Since everything’s currently (and tediously) discussed through the lens of the Liberal leadership, including the GST “accountability” crusade, I predict that Costello’s chances are heading south along with economic growth. There’s only so long he’ll be able to keep blaming Peter Beattie for not subsidising a privatised port, and minimum wage workers for earning too much. Even if as some reports suggest, the ABS figures understate growth, perceptions are all important – particularly to consumer confidence and the housing market, which will also be hit by the rate rise. Since Costello has now defined any interest rate “with one figure in front” as “low” (oblivious to the fact that most home-owners now have twice as much debt as the last time rates were higher than 10%), expect a lot of stories in the media about struggling battlers and aspirationals selling off the plasma tv to pay the mortgage. Channel 9 kicked off last night. As one citizen interviewee said “I’m dirty at the Government at the moment”. It’ll be no good blaming the Reserve or the over-mighty Unions, since the Howardians convinced everyone in the last election that interest rates depended on the political party in power in Canberra.

ELSEWHERE: Andrew Bartlett argues that the rate rise was avoidable. There’s lots of comment at The Daily Flute.

About Mark Bahnisch

Mark Bahnisch is a sociologist and is the founder of this blog. He has an undergraduate degree in history and politics from UQ, and postgraduate qualifications in sociology, industrial relations and political economy from Griffith and QUT. He has recently been awarded his PhD through the Humanities Program at QUT. Mark's full bio is on this page.
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C.L.
2022 years ago

OT/

I’ve been watching Costello since the election: performance in parliament, body-language, that old frontbench joi de vivre. IMO, his heart’s no longer in it. Asking one man to be the face of the economy and to prepare more than several budgets – as has been shown before – is too much to expect.

He’s a talented man, brilliant, with a wide small ‘l’ agenda of his own, he has a young family, he’s now entered early middle age. I thinks he wants out. (Or up).

The Liberal Party and the PM have to decide whether he’s worth losing for the sake of another Howard term. Howard may say yes to that but I’m not sure the party would.

If this unremarkable cyclical development – botched BTW by a Reserve which should concentrate on policy and not media telegraphing – trends into bad headlines for a year and if Kimbo gets Labor level-pegging with the government, Howard may be gone in early 2006.

Cos is no clown Mark. I think that’s gratuitous. Keating was more of a Bozo – he was run by Treasury, scarcely understood what he was being miked to sprout, had his entire agenda supported by the Coalition, boasted about keeping workers poor and in the top job proved to be all tip and no iceberg.

James Hamilton
James Hamilton
2022 years ago

Yes, dammnit. Why did I get sucked in? Why couldn’t I see that the left has always been the Sensible Choice? It’s not as if a quick scan of history won’t show you that where Leftist parties get government, money falls from the sky. Put aside all the gentle hints from Sharran Burrow, or a face saving centrist compromise offered by Bob Brown; Whitlam himself annointed Latham and yet I persisted in my folly. Why? Why? Why?

Petulant wilful stupidity, that’s why.

Alex
Alex
2022 years ago

With GDP growing at 1.5 per cent and the housing boom already over, it’s hard to see why the Reserve thought an interest rate rise was necessary. I predict they will be lowering rates before the next election.

Ken Parish
Ken Parish
2022 years ago

I don’t have major problems with a 0.25% interest rate rise as such. It’s better to ratchet up small increases than big ones that might cause an over-reaction and recession as in 1990. And Howard clearly didn’t promise that interest rates would never rise under the Coalition, although I certainly don’t blame Beazley for trying to create that impresson given that Howard’s election campaign acusations about Labor and interest rates were far more misleading and unfair.

I agree with some but not all of Andrew Bartlett’s comments. Clearly the Coalition’s ill-advised liberalisation of CGT was a major reason for the blowout in housing prices in eastern states, along with over-generous homebuyer grant schemes at both state and Commonwealth levels. However I don’t agree that negative gearing is a problem in itself, and I certainly don’t believe it should be abolished. There might be a case for quarantining of negative gearing housing investment tax losses, so that they could only be deducted against profits from those sorts of sources. But even that should be examined cautiously.

I also agree with Andrew’s comments about Commonwealth failure to take effective action in relation to the blowout in consumer credit. In many ways the Coalition has been asleep at the wheel for quite a long time, presumably believing that deregulating the labour and financial markets and flogging off Telstra was a complete prescription for endless economic prosperity.

As for the surprisingly sluggish growth, I can’t help but think (perhaps over-optimistically) that the chickens may finally be coming home to roost for the Coalition’s 8-9 years of neglect of public investment in higher education, vocational training and retraining, infrastructure and stimulating R & D.

The Coalition’s period of government will eventually be seen as one of squandering the opportunities created by the Hawke/Keating economic reforms of the 1980s and early 90s. What a shame Beazley was too busy keeping a low profile, Crean too miserable and whining, and Latham too erratic and undisciplined, to imprint these facts on the public consciousness.

Rafe
2022 years ago

Unless the Coalition lifts its game it will indeed be guilty of failing to build on the gains made by Hawke and Keating. However if they fail it will be due to rampant pork barelling (a bipartisan game) and timidity in the face of an electorate that has been spooked by the spoiling game that the the left has played in rubbishing economic rationalism, especially in the labour market. Still, maybe this year…

BTW, what are governments supposed to do about people who run up personal debt? This is a bit like asking the NSW government to stop P plate drivers from killing themselves by driving far beyond the speed limit. What happened to personal responsibility?

Mark Bahnisch
2022 years ago

Rafe, you can’t wish personal responsibility into being. Requiring banks to do more due diligence on people’s ability to repay debt before sending off letters saying “as a valued customer, we invite you to increase your credit limit to $20000” might be a start.

Mark Bahnisch
2022 years ago

“timidity in the face of an electorate that has been spooked by the spoiling game that the the left has played in rubbishing economic rationalism, especially in the labour market”.

How about the spoiling game the Howardians have played by throwing around tens of billions on wasteful middle class welfare, propping up the private health insurance cartel, giving token and meaningless payments to pensioners, etc etc? And encouraging the expectation that economic boom times last forever?

The Beazer was on the money when he said that it takes a special kind of incompetence to get interest rate rises combined with falling growth and failing exports and a ballooning current account. And I think C.L. is right – the Beazer is doing a good job making Howard’s insinuations of the election come back to haunt him. Ken’s masters of the dark arts, Textor et al, no doubt intended people to believe that interest rates were the result of government policy and that they would not rise under the Libs. What else were those outrageous mortgage tables everyone got in the letterbox supposed to suggest? Semantic quibbles are going to be dangerous territory for the Howardians in light of the expectations they themselves created in the campaign.

Oh, and C.L, yes maybe I am being a bit unfair, but he does carry on like a porkchop in parliament and in pressers…

Phil
Phil
2022 years ago

When I came to Australia, in 1969, I immediately thought that you were 20 years behind the rest of the world, for everything, work, food, cars, houses, etc… Now, in 2005, as I read your political arguments, you must still be in the pre-war ( 1940-1945 ) period. Poor socialists who will never learn, communists du pass

Ken Parish
Ken Parish
2022 years ago

Rafe

In addition to Mark’s suggestion of governments applying the blowtorch to the banks over their extraordinarily loose approach to pushing credit cards at people, there is also the amazing proliferation of ads trying to persuade young people what a great idea it is to rent or hire purchase all their furniture and worldly goods. “Flexirent” and such orgnaisations, showing cool young people who rent everything so they’re free to spend their savings and income on, well, clothes and alcohol and having a good time, are thoroughly noxious to my way of thinking. Some might accuse me of nanny stae-ism for wanting to regulate such things, but I reckon those ads are so grossly misleading and exploitative of the susceptibilities of young adults who mostly DON’T know any better, that they ought to be restrained (or at least screened with a government warning like cigarette packets!!!)

Then there’s the blowout in housing prices that I talked about in my previous comment. That blowout is a major cause of the contemporaneous blowout in consumer credit. People get a somewhat false idea of how wealthy they really are and, because they suddenly discover they have substantial equity in their home because of the effects of rampant price inflation, they feel confident enough to go out and take personal loans, lines of credit, borrow on credit cards etc to fund excessive consumption spending. They’re able to do that in large part because of the housing price bubble that federal government policies (CGT changes etc) have created, along with associated material expectations of an endless boom created by the bullshit propaganda Howard and Costello have gotten away with for so long.

The bottom line is that I reckon Howard and Costello ARE in considerable part responsible for the blowout in consumer credit by their policy settings, inaction and rhetoric. It wouldn’t have occurred had they acted more responsibly.

Tony.T
2022 years ago

What the … ?!? How come this post isn’t about post-modernism?

What is post modernism, anyway?

observa
observa
2022 years ago

“With GDP growing at 1.5 per cent and the housing boom already over, it’s hard to see why the Reserve thought an interest rate rise was necessary.”

Tend to agree Alex. You would have thought by the Reserve’s logic that rate rises would have occurred in the past 6 months. You get the feeling in hindsight that it was politically impossible for them to do it for a few months either side of the election. Nevertheless they do have business types like Robert Gerrard to give them the pulse of where biz is at right now, despite the stats.

Me, I wouldn’t join the gallery here indulging in a bit of a feeding frenzy like Andrew Bartlett has just yet. (for him the ‘icing on the cake’ was the 8% rise in health insurance to get him salivating a bit) Oz has enjoyed a long boom despite terrorism, drought, Asian meltdowns and bird flu. This govt won’t be too perturbed by the electoral timing of a possible economic slowdown for the next 12 or even 18 months, so pop your tongues back in and wipe the drool off your chins.

Nabakov
Nabakov
2022 years ago

“A beautiful set of numbers.”
“This is one that brings home the bacon,”
“The recession we had to have.”
“This is an economy which has got some oomph.”

I reckon we’ll have enough material for the Tresua Rap soon.

“by the electoral timing of a possible economic slowdown for the next 12 or even 18 months, ”

Perhaps, but a lotta chickens are now coming home to roost as the December quarter current account figures underlined. Aging population and infrastructure, declining workforce participation rates and the increasing vertical fiscal imbalance between levels of government.

Not mention rising oil prices, a slowing Chinese economy and the very real possibility of some major global currency volatility soon which is gonna dry up Foreign Direct Investment into Australia.

They’ve had eight years now where the only real economic reform was the GST. There’s gotta be some real heavy lifting needed soon and I don’t think they’re in match training for it.

Nabakov
Nabakov
2022 years ago

“Why couldn’t I see that the left has always been the Sensible Choice? ”

Well yes it often has.

Curtin: The war leader we needed to have.

Chifley: Major nation building. Established Snowy Mountain Scheme, automotive industry, Australian citizenship – and ASIO. (And incidentally Chifley and Hawke were the only two PMs in modern times to use the military to break strikes, which I think shows rather more cojones than a few plausibly deniable blokes in balaclavas lurking on the docks. )

Menzies, Holt, Gorton, McMahon: Stagnation, selling off the farm to help Japan become industralised faster than us – and what the fuck were we doing in Vietnam anyway? Even the Brits managed to stay out of that one.

Whitlam: Out of Vietnam and into China. Free uni education (which many current conservative pollies benefited from), Medicare, sewering Sydney and pushing back the cultural cringe (probably not unrelated).

Frazer/Howard: Yes, did restore confidence in the economy but not for long. More stagnation. And bottom of the harbor schemes.

Hawke/Keating: Turned us into a modern, open and competitive economy, industry plans that actually worked (I was at a bunfight recently, full of Australia’s, and some of the world’s biggest auto industry honchos, and they gave John Button a standing ovation when he stood up to speak), the world’s best AIDS campaign and making Australia an influential global player.

Howard/Costello: Gun laws, GST and East Timor. Not to mention the whole fibre-optic/broadband/digital TV fiasco at a time when getting it right would have given us a real boost. And what have they done for us lately?

So yes, James, big shit that really improves our quality of life seems to happen more often under centre-left than centre-right governments.

Homer Paxton
Homer Paxton
2022 years ago

The RBA have to worry about what happens in the future which is why they raised rates.

The economy slowed LAST year because of the current account problem we have and inventories.

Costello was lazy in Opposition where he gained the blonde Andrew Peacock tag and he remains so.

He was comprehensively beaten by Slimey Simey in the 2001 campaign where he showed he did not understand the implications of telstra toward the budget.
He walked away from that to allow the two chrises to fight it out.
Chris Richardson who did the ALP costings comprehensively knocked out Chris Murphy from Econtech. No surprise there. Chris M’s reputation has never recovered.
Acess Economics, the best in the business no longer do federal costings! wonder why?

come the 2001 election we had the embarassing situation of :
1) Costello only debating Slimey simey at the press club and nowhere else
2) being torn apart on basic budgetary costings by a reporter on AM

He is now presiding over a current account deficit when commodity prices are at highs not seen since Whitlam was in office ( We actually had a curent account surplus then.)

In other words he has been asleep at the wheel.
Apart from the GST he hasn’t really done a lot.

Rafe
2022 years ago

Thanks Mark and Ken, now you mention it, I remember the letters offering to extend my credit card limit, with no questions asked (which I speedily commit to the flames). And the ads encouraging us to buy boats and cars out of the equity in our small castle. Point taken! To their credit, some financial columnists have been good in warning people to be careful of using a mortgage to buy consumer goods and luxuries.
As for personal responsibility, you can’t wish it but you can say out loud that it matters:)

Andrew Bartlett
2022 years ago

Most of the arguments people seem to be having in this thread is about Labor vs Liberal (which weirdly also seems to serve as a sort of odd proxy for left vs right). I’ve been very dubious about the value of the left-right terminology for some time, but seeing Mark has listed my blog as being ‘centrist’ I guess I can at least claim to be balanced about it :-)

I don’t see much that Labor has suggested in recent times that would have resulted in anything very different with interest rates, which is why I don’t think Labor has any great claim to criticise the interest rate rise.

Labor supported the slashing of capital gains tax and the exclusive tax cuts for higher income earners. They have also ruled out doing anything on negative gearing (while accepting Ken’s point that abolishing may be too extreme, some sort of quarantining should be looked at).

The Libs have to bear main responsibility, seeing as they are in Govt and all that, but I don’t see Labor having proposed (or done) much different in the last 5 years that would have addressed the housing price boom that is at the centre of the private debt problem.

(although Labor has proposed means testing the Forst Home Owners Grant, which would have helped a tiny bit)

Polly
Polly
2022 years ago

Andrew, I agree Labor hasn’t proposed anything that would have affected interest rates any differently than is occurring. That is why the Liberal campaign was dishonest.

My objection to current negative gearing/capital gains tax is the effective tax transfer created by the depreciation allowance on building costs which automatically transfers wealth to the property owner.

Eg If you claim property depreciation of $10,000 @48.5% you save $4,850 tax. When you sell the property the capital gain is increased by the $10,000 you have claimed as depreciation, however due to the fact you only pay tax on half of the capital gain the tax you will pay on this $10,000 is only $2,450.
You are better off by $2,450 simply due to the shift from income tax to capital gains tax.

Quarantine rules were tried once before however they were a pain to track and unfortunately due to a number of factors at the time caused other problems as well.

IMO a review of the building depreciation allowances and a return to taxing the real capital gain would be a better option.

Alex
Alex
2022 years ago

I second that, Polly. As a refinement, I suggest that capital gains should be able to be added to other income over the period of the investment. Eg, if someone owned a rental property for five years and sold making a $200,000 capital gain, the tax would be assessed by adding $40,000 to their income for the current year and for each of the previous four years (obviously this would require a reassessment for each of those years, but the calculations would be simple). This would avoid people on sub maximum income tax scales from being unfairly penalised by realising a large capital gain in one year, while retaining the essential principle that a capital gain should be treated the same as any other income.

Alex
Alex
2022 years ago

“There’s only so long he’ll (ie Costello) be able to keep blaming Peter Beattie for not subsidising a privatised port”.

Maybe, but I see that the RB is arguing that the reason they were right to raise interest rates is that it is only capacity constraints that are restraining GDP growth.

Polly
Polly
2022 years ago

Alex, the ‘averaging’ system used previously had a similar effect. One problem with reassessing income tax from previous years is that capital gains affect family payments, super surcharge, etc so revisiting previous years payments would result in some families having to repay massive amounts (It is bad enough how much some have to pay back as it is now)

Alex
Alex
2022 years ago

But the amounts they have to pay back would always be considerably less than the capital gain they have just made.

observa
observa
2022 years ago

Polly and Alex,
The logical step would be to treat all real capital gains in exactly the same way. ie as income with similar expense deductions. This would logically apply to the family home also. Naturally enough this sort of proposal could easily be attacked like the candles/birthday cake GST was, but it might be reasonably argued and explained over a long gestation period with the same eventual outcome as the GST.

What most homeowners would fear is copping ‘another bloody tax’ on their home, similar to rates, land tax, special levies, etc. However, if it was explained carefully to them that by the time they were allowed to deduct interest payment costs, rates, etc, insurance and maintenance costs, any real capital gain would be illusory, they may see the light. You would of course have to quarantine all negative gearing for residential property for obvious reasons. The devil would be, that most PAYG taxpayers would have to keep long term records, which they may not have kept already. (Aside:Another good reason to abandon income taxing)

Polly
Polly
2022 years ago

“The logical step would be to treat all real capital gains in exactly the same way. ie as income with similar expense deductions”

Observa – you do get the deductions etc now. The only exemption is the family home. I can’t actually see any need to change the status of the home.

observa
observa
2022 years ago

Polly,
The argument relating to degrees of tax free capital gain, is the same argument for all classes of asset eg RE, paintings, works of art, old coins or perhaps bottles of Grange(as is simply buying any product from a manufacturer or wholesaler and flogging it at a profit) To the extent that any taxpayer can buy and sell any product and make a profit, that income should be taxable on a level playing field. In practice that is clearly not the case. If it were the case then the private home would be treated the same as that for investment purposes. ie The profit from it would include any capital gain plus any rent or imputed rent(actually a fringe benefit in the case of the resident owner), less any interest costs, holding costs(eg insurance, rates) and maintenance costs and depreciation. To the extent that an investor is allowed to negatively gear their PAYG income against such investments then so should ordinary homeowners.If you try to quarantine negative gearing of salaries in this way then trust and company ownership and investment gets the fortunate few around this. If you try to quarantine all interest rate deductions from ‘homes’ you run into problems with motels, hotels, caravan parks, aged care, etc, as well as drying up the availability of rental housing. Every whichway you turn you are snookered by the complexity of defining true income and taxing it on a level playing field, without serious economic distortion.

observa
observa
2022 years ago

Some further elucidation on the nature of the income problem. When you buy a consumer item like a DVD, we expect its value to be headed only one way. That is not true for a Harvey Norman, or if you are astute enough to buy a cheap 2nd hand DVD from a flea market and sell it to someone at a profit. Hence the ATO has special rules to decide whether your activity is an inconsequential hobby, or in reality carrying on a business of some taxable consequence. Murky waters indeed.

trackback
2022 years ago

Up They Go!

And nothing but outright dishonesty from the team that just won an election by convincing the electorate they could prevent this. Auctions for the rest of us…