Coal price crash is bad news for the state budget and future capital investment

Last Friday, John McCarthy at In Queensland reported Budget impacts loom as coal prices plunge to four year lows. Yes, recent falls in the coking coal price to around $US100/t for coking coal must be causing anxiety in Queensland Treasury, which will be trying to wrap up the long overdue 2020-21 state budget that Treasurer Cameron Dick will hand down next Tuesday, 1 December. The fall in the Australian coking coal price since October appears partly related to alleged Chinese restrictions on Australian coal. Coal market analysts expect this can’t continue and indeed Australian coking coal futures prices show prices are expected to recover over the rest of the financial year (see chart below). Last Thursday, The Australian reported (Coal price slump finishes Carabella Resources):

In a client note on Thursday, RBC Capital Markets analyst noted that benchmark metallurgical coal prices had fallen below $US100/t this week for the first time in more than three years, but noted China’s bans on Australian coal were putting pressure on its own steel industry.

As reported by John McCarthy in In Queensland, “RBC Capital Markets has predicted the coal price would rebound to $US140 a tonne this year and $US150 long term.”  By this year, I think they mean this financial year, rather than by the end of 2020, which would be consistent with futures market pricing.

1st position refers to the 1-month ahead futures price, 3rd position to the 3-months ahead futures price, etc.

The (hopefully only temporary) fall in the coking coal price since October should see the Treasury adding a little bit extra to the already large write down ($1.1bn for 2020-21) in coal royalty revenue it revealed in its COVID-update in early September. We’ll see the additional damage the Treasury is expecting in the budget next Tuesday, and we’ll also see just how much debt the Treasury is projecting Queensland will end up with by 2023-24, something which should have been revealed in the COVID-19 Fiscal and Economic Review back in September. Of course, the state government was facing an election in late October and it didn’t want to reveal the obvious blow out in state debt. In a report commissioned by the Australian Institute for Progress, Joe Branigan and I projected general government debt of $72-77bn and total government debt of
$113-118bn by 2023-24. On Queensland’s budget outlook, see e.g. Gov’t claims police boost “fully funded”, but won’t release full budget forward estimates.  

Low coal prices (for coking and thermal coal) are raising doubts about future investment in coal mines. The Financial Review today, in an article on the latest Department of Industry forecasts of resources sector capital investment, referred to
$72 billion of projects unlikely to go ahead and noted:

The department did not name the projects it now deemed to be ”unlikely” to go ahead, but it did disclose that many of them were in the coal sector, which is currently struggling under very low prices and geopolitical uncertainty over China’s reluctance to accept Australian coal.

That said, the Carmichael coal mine is part of the resources sector investment rebound the department is forecasting for 2021, as is Arrow’s $10bn Surat basin gas project. While rebounding a bit, capital investment still won’t be anywhere near what it was in the first half of last decade, of course.

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Women and the Budget – upcoming Griffith-WEN webinar on Thursday 26 November

This Thursday, Griffith Business School and the Women in Economics Network (WEN) are holding a webinar on Women and the Budget, and I’ve agreed to act as Moderator for the webinar. Here’s the event description from the organisers:

The economic impacts of the COVID-19 pandemic have been experienced by men and women in different ways, given the gender patterns in employment and household roles that prevail within Australian society. Despite women shouldering the bulk of jobs lost since the start of the pandemic, the Government’s Budget responses have been largely directed at male-concentrated industries.

This webinar examines the economic data to assess these gender patterns and explores the value of Gender Responsive Budgeting. Our speakers will discuss examples of how to cast a gender lens on economic policy formation, and consider where the barriers and resistance to adopting a gender lens approach stem from. The costs of overlooking a gender lensed approach to economic policy will be explored, not only in terms of costs to women, but in terms of the loss to the wider economy. Participants will have the opportunity to join the discussion through Q&A.

The presenters and panellists are RMIT’s Dr Leonora Risse, ANU’s Sally Moyle (former head of the federal Office for Women), and Griffith’s Dr Tracey West. I’m looking forward to the presentations and the Q&A and discussion following the presentations. If you’re interested and available this Thursday at 1pm (Brisbane time), please consider registering for the webinar via the link above. You can download the flyer with further information on the event and the panellists below.

Should the Treasury present further information on the gender-specific impacts of budget measures in federal budgets? This question and others will be considered in the upcoming Women and the Budget webinar on 26 November.

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Bold claim from Qld Treasurer: more Queenslanders working now than pre-COVID restrictions

Queensland Treasurer Cameron Dick has made a bold claim, which I disagree with, that more Queenslanders are working now than were working pre-COVID. The Treasurer’s claim is based on the October Labour Force data published by the ABS on Thursday, data which we should remember are based on a survey of households and are subject to sampling error. According to the Courier-Mail, Treasurer Cameron Dick has said:

“Queensland is the only state in Australia that has put back on every single job lost since the lockdowns started in March, plus 500 more,” he said.

“That means more people are working in Queensland now than before the start of restrictions.

The Treasurer’s claim is based on the ABS estimate of employed persons (seasonally adjusted) in Queensland for October (2,563,493) being marginally higher than the estimate for March (2,562,979), although it was still lower than the estimate for February (2,568,470). Technically, Treasurer Dick is correct based on the ABS Labour Force Survey data, but they are almost guaranteed not to be perfectly reflecting reality.

Treasurer Dick should recognise the sampling error in the data and the high risk his statement that more Queenslanders are working now than pre-restrictions is incorrect. Consider that the statistical standard error for total employed persons in Queensland in October was 21,000 people, according to the ABS’s Labour Force Methodology publication. So making a strong statement based on employment being 500 people higher in October than in March, as the Treasurer has done, is pretty bold. Before we move on to the more accurate payroll data, I should point out that, in October, full-time employment in Queensland was over 30,000 people lower than in March, based on the ABS Labour Force data the Treasurer is relying on.

I think it’s way too soon for the Treasurer to claim more people are working now than were pre-COVID, particularly since the Treasurer’s statement isn’t supported by the payroll jobs data released by the ABS earlier in the week (see chart below), data which admittedly aren’t seasonally adjusted but which are based on Single Touch Payroll data provided to the ATO by the vast bulk of employers (i.e. a much bigger data set than the Labour Force Survey). According to the payroll data, at the end of October, there were around 2% fewer jobs in Queensland than in mid-March, just before social distancing restrictions were imposed. Total wages were 3.3% lower than in mid-March. Note the seasonality in the data whereby wages paid spiked in late September and early October during the school holiday period.

Finally, I should note the ABS State Accounts data were published yesterday and revealed a 1.8% fall in the nominal dollar value of Queensland’s Gross State Product in 2019-20 (see chart below). Queensland was the only state or territory to experience a nominal decline, which was a result of lower coal and LNG prices. Furthermore, as the ABS, reports, for nominal GSP, this was “the state’s first fall in recorded history” (i.e. since 1990, when the ABS started estimating state GSP).

Queensland also experienced a 1.1% decline in real GSP compared with a 0.3% decline nationwide. As the ABS notes:

Queensland recorded a larger contraction compared to the national result due to larger falls in private investment.

I’ll have a closer look at the State Accounts data in a future post.

Please feel free to comment below and let me know whether you agree or disagree with the Treasurer’s view that “more people are working in Queensland now than before the start of restrictions.” Alternatively you can email comments, suggestions, or hot tips to

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Good news super guarantee hike could be scrapped

The long-awaited retirement income policy review report from former IMF Director and Treasury deputy secretary Mike Callaghan is looking good based on reporting by the Financial Review:

Increasing the compulsory superannuation rate could disadvantage low-income earners and cut workers’ lifetime income by 2 per cent, the much-anticipated retirement income review has concluded, opening the door for the Morrison government to delay or even scrap legislated rises.

This is great news because continuing with the scheduled increases in the super guarantee rate, progressively increasing it to 12% by mid-2025, would be really bad policy. Among other reasons, Grattan Institute modelling suggests it won’t actually provide much of a benefit to many workers, as they’ll just end up with lower age pensions (due to means testing), and it would also be very bad macroeconomic policy to increase savings while the economy remains well below its potential, which could be the case for the next few years at least.

I’ve previously supported scrapping the super hike, on QEW (Imperative to avoid bad policy measures like super increase which would set back recovery) and in an article co-authored with Adept Economics Research Officer Ben Scott (Super Guarantee hike should be scrapped or delayed).

It will be interesting to see what specifically the review says about how “Accessing home equity is an under-utilised opportunity.” It sure is, given all the asset-rich, cash-poor retirees living in Australia’s capital cities, but changing policy settings (e.g. pension assets/means test) would be politically toxic. Look at all the trouble the Opposition’s franking credits and negative gearing policies caused it in the 2019 election, for example. Perhaps the Government will provide some type of incentive to encourage reverse mortgages, although ASIC has previously cautioned against reverse mortgages according to this ABC report because they’re not well understood by people. It’s going to be interesting to see how the government responds to what is sure to be a very important report, one that could justify big changes to our retirement income policies.

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Megaprojects chat with Marion Terrill from Grattan

The Queensland Government’s troubled Cross River Rail project is a good example of a multi-billion-dollar Megaproject at risk of cost blowouts and falling short of projected benefits, as I posted on last week (Cross River Rail scrutinised by Grattan and AiP) following the publication of a new report by the Grattan Institute. On Monday, I recorded a podcast interview with Marion Terrill, Transport & Cities Program Director at Grattan, who was lead author of The rise of megaprojects: counting the costs. The interview is now available as the latest episode of my Economics Explored podcast via iTunes, Spotify, etc. and you can even listen via the player below in this post (on the QEW website rather than in the email version of post).

Issues of discussion include:

  • Why megaproject costs blow out (5:20)
  • Optimism bias (12:00)
  • What Nassim Nicholas Taleb said about megaprojects in Antifragile (17:15)
  • How we can improve infrastructure project selection and management (22:50)

Here’s a sample of some of Marion’s great insights (from 12:45):

…there’s a couple of different stages at which optimism bias can kick in. So when a politician or an official makes the first cost announcement or cost promise, they probably don’t know all the possible complexities, but the margin that they might build in for that is generally nothing like enough. We see that time and time again, that the initial cost announcement is sort of assuming everything’s perfectly simple and goes perfectly smoothly. And the cost estimators are also very hamstrung, I think, in their ability to do good cost estimates, because we don’t collect data on finished projects in any useful format.

And what that means is, for example, in the report, one thing we’ve looked at is business cases that are in the public domain, we looked at the P-50, or the median cost system as compared to the P-90, or the worst case cost estimate if you like. And the typical differences are that a P-90 estimate is about 7% higher than a P-50 estimate. So that is not much more money between what you think is going to happen and the worst-case option. And when we looked in the data for 19 years, what we found is that should be more like 49% higher. That’s massively higher. So, you can see the lack of data supports a process of cost estimation, that makes insufficient provision for what history has told us is quite likely to happen.

And then there’s a final stage to this, which is when this goes to market. A lot of companies have been quite vocal this year and last year about them not making money. When I say to people, well, why is your company bidding for these jobs when you can’t make money? The feeling that comes out is essentially optimism bias. They want the job and they think, oh, we’ll find a way. They’re kind of inclined to see the advantages and to minimise all the things that could go wrong. And that’s perhaps what it takes to get the job. But it’s given rise to a lot of angst in industry.

I hope you enjoy our conversation.

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JobMaker appears poorly targeted – great analysis from ex-Senator John Black

Former Queensland Labor Senator and Executive Chairman of Education Geographics John Black has a great article on his website arguing We told you so…JobMaker misses the real target. Recall that JobMaker is the federal government’s hiring credit for newly engaged workers aged up to 35 who were previously receiving a government benefit payment. Regarding the latest ABS payroll jobs data released yesterday, John writes:

Today’s ABS Single Touch Payroll data confirms that JobMaker has come too late to help younger workers displaced by Covid job lockdowns and it is now missing the real target – older workers in retirement and tourist regions.

Outside of Victoria, Australia’s younger workers are already a lot better off than their parents, when it comes to jobs lost due to Covid lockdowns.

The Jobs Index numbers from today’s ABS release (below) shows workers aged 20-29 years are well ahead of their parents’ generation in the mainland states, with the exception of Victoria.

This is because younger workers tend to lose their more casual jobs in food and retail first during downturns, but then typically lead the recovery. This means, as a policy response, that JobMaker has come about four months too late for all Australian states except Victoria, which was held back by its second wave.

John’s analysis of the data is excellent. Check out my chart below of the percentage changes in jobs on payrolls as reported to the ATO since mid-March, just before all the restrictions began. Note that the big pick up in employment of under 20 year olds since mid-March is likely related to the ordinary pattern of school/VET leavers from the previous year taking up new jobs through the year. These data aren’t seasonally adjusted which is one thing you need to consider when interpreting them.

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Stamp duty to land tax switch has long been argued for by economists

It’s good to see the NSW Government considering a switch from stamp duty on property transactions to a broader land tax, at least for future transactions where it’s possible people could be offered a choice of either an up-front payment of stamp duty or an annual property tax (see Making home ownership more achievable in NSW). Effectively, the annual property tax would be a more broadly applicable land tax, for which various exemptions (e.g. for principal place of residence) are currently available.

Designing the proposal so it applies to future transactions only would allay concerns about asset-rich but cash poor retirees struggling to pay property tax bills. The devil will be in the detail, but in principle it’s a good idea and one the Queensland Treasury should be considering, too.

The NSW 2020-21 Budget (on page 1-15 of Statement 1) nicely summarises the rationale for the switch:

The current tax system is not fit for a modern society. It impedes home ownership and makes it harder for people to move to where they want to live. Rather than moving to a more suitable home, people may stay in a home that is too big or too small for their needs or endure longer commutes than necessary. The tax also acts as a brake on the economy.

Certainly, the NSW Government sees this as a measure which could help stimulate the economy in the short-run by leaving more money in the hands of home buyers rather than sucking it into Consolidated Revenue. It would also improve housing affordability.

Replacing stamp duty with land tax is something economists have long advocated for and is long overdue. I’ve written about the merits of doing so on QEW in years past, and this year my colleague Nick Behrens suggested it on his blog:

Tax reform is the antidote for Australia’s COVID-19 economic crisis

Incidentally, I spoke about how stamp duty should be replaced with land tax in a long-form podcast discussion yesterday with Matt Wong of Discernable:

Among other things, Matt and I spoke about the Queensland election outcome (from 53:54 in the video). I spoke about how Premier Palaszczuk repositioned herself expertly during the election campaign to appeal to regional voters, appearing in high-vis vests and with big trucks at mine sites, for example. The Premier also had a very simple message, that she was Keeping Queenslanders Safe, and objectively the Government had generally done a good job on COVID (except for its harsh policy on borders, in my view). The Keeping Queenslanders Safe message obviously appealed to regional former One Nation voters who shifted to Labor in large numbers. Other factors helping Labor were Jackie Trad’s departure from the Cabinet earlier in the year and Palaszczuk’s promise to keep her out of it if Labor were re-elected, as well as the strong Labor vote among public servants in SEQ who remember the job cuts during the Newman years.

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Qld risks becoming a hermit state if vaccine isn’t safe and effective

Even though Adelaide doesn’t yet meet the Commonwealth’s definition of a COVID hotspot (as pointed out by Andrew Clennell on Sky Australia today), the Queensland Government rushed to declare it one and to impose quarantine requirements on travellers from Adelaide, in stark contrast to the sensible wait-and-see approach of the NSW and Victorian Governments. Sky’s Andrew Clennell was right to call it a “knee-jerk reaction”. Possibly the Queensland Government is worried about its testing and tracing capabilities and its ability to get on top of a coronavirus outbreak if one were to occur. So it’s quick to shut down interstate travel at the first indication there may be any risk of COVID getting into Queensland, no matter how small.

Imposing quarantine requirements on travellers from Adelaide probably won’t matter a great deal to the Queensland economy via direct impacts, but it does reinforce the impression held by many in the business community that the Government is overly risk-averse on borders and doesn’t care much about the adverse impacts its decisions are imposing on industry. Many tourism operators will be worried Queensland won’t fully reopen to interstate travel by Christmas, and they’ll miss out on trade that would help them make up for heavy losses of trade earlier in the year (see my post from last Saturday).

Queensland runs the risk of becoming a hermit state if the COVID vaccine doesn’t end up being as effective or safe as we expect. Furthermore, the actions of our state government are undermining the Federation. We are treating fellow Australians as foreigners. We are inviting residents of other states to treat us as foreigners in the event of an outbreak of COVID here, or the outbreak of another disease sometime in the future.

The near future remains as uncertain as ever. We hope this Adelaide outbreak is contained and our Queensland Premier honours her alleged commitment to PM Scott Morrison to drop border restrictions by Christmas, although of course that decision may not be up to her, but instead up to our Chief Health Officer Jeannette Young. Hence, there’s no guarantee that interstate travel will be free and that families can reunite over Christmas.

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Matt Ridley’s How Innovation Works is recommended reading

This weekend I finished reading Matt Ridley’s excellent How Innovation Works, which makes a compelling case in favour of leaving innovation largely to the free market, rather than having it guided and supported by government.

Ridley is a great storyteller and appears to have a story to illustrate every point. For example, Ridley illustrates the general superiority of private-sector-led innovation by describing the UK Government’s experiment in the 1920s whereby it commissioned both a private sector company and a government ministry to develop an intercontinental airship. The Vickers-built R100 was a well-built airship which flew to Canada and back without incident. In contrast, the R101 was built by the Air Ministry, was afflicted by a range of problems, and tragically crashed in France in October 1930 on its maiden overseas trip, killing 48 of 54 people on board, with the Air Minister Lord Thomson among the dead.

Apparently, the notoriety of the R101 airship is due partly to author Nevil Shute, who wrote about it in his autobiography The Slide Rule. Shute, who spent his last decade in Australia, also wrote On the Beach, the 1959 film adaptation of which incidentally contains some brilliant black-and-white footage of empty Melbourne CBD streets after the fallout cloud eventually reaches the city and kills all the inhabitants. I remembered that scene as I watched the news reports from Melbourne during the stage 4 restrictions to combat the COVID-outbreak.

In How Innovation Works, Ridley brilliantly showcases what may be considered as rather prosaic innovations which turn out to be unlikely heroes, such as corrugated iron, which sits atop many Australian houses. Ridley writes (on p. 161):

By 1885 Australia was the largest market for the stuff in the world, and in the 1970s it was an Australian firm, BHP, that patented Zincalume steel…Recently, corrugated iron’s place in Australian history has made it a trendy material for architects and artists: the opening of the Sydney Olympics included a specially-composed ‘Tin Symphony’ in its honour, while the artist Rosalie Gascoigne used the material in her sculptures.

Ridley’s book contains some other fun facts relevant to Australia. For instance, Ridley discusses the domestication of dogs (and other animals) as an important innovation, and in his discussion of how dogs came from wolves, he observes (on p. 223):

Dogs made it to Australia with one wave of people, probably not the first wave, and re-wilded themselves as dingoes.

Ridley’s breadth of knowledge and research is astounding, and there are plenty of fascinating facts and stories like those I’ve mentioned above sprinkled throughout the book.

How Innovation Works should be read by anyone working on industry and innovation policy. It contains a strong critique of current intellectual property laws and regulations more broadly which are stifling innovation. In his conclusion, Ridley writes (on p. 373):

Somehow we must find a way to reform the regulatory state so that while keeping us safe it does not prevent the simple process of trial and error on which all innovation depends.

Innovation is the child of freedom and the parent of prosperity.

This book gets five stars from me, and if you haven’t read it yet I fully encourage you to do so soon.

Please feel free to comment below. Alternatively you can email comments, suggestions, or hot tips to

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PM thinks he has agreement with Premier on border, but it’s the CHO who makes the decisions

Sky News has reported PM confident Berejiklian- Palaszczuk border battle will end by Christmas, and PM Scott Morrison has said he has an agreement with both Premiers for Queensland to be fully open to NSW, including Greater Sydney, by Christmas. The Premier said she will look closely at the border at the end of the month, but she hasn’t actually committed to reopening fully to NSW, and you may recall the Premier has previously said she doesn’t make the decisions regarding COVID-related restrictions (see Qld’s harsh border policy – a conversation with Joe Branigan). That’s the job of Chief Health Officer Jeannette Young, who has been granted extraordinary and, in my view, unwarranted powers by the Government during the public health emergency which has been declared since late January.

As I’ve written previously, the border restrictions should be assessed much more regularly than every month and we should see all the advice from the CHO justifying the closure (NSW border policy still lacks solid justification). Without certainty very soon on the border, Queensland tourism businesses will miss out on many interstate visitors who may decide travelling to Queensland is all too hard and they’d better plan to go elsewhere (see ABC PM comment on border closure cost – Qld tourism worried about loss of interstate visitors over Christmas season). I’ve heard that upcoming holiday bookings are strong at many popular tourist destinations in Queensland, but if we’re still locking out Sydneysiders and Victorians, activity won’t be as strong as it otherwise would be, and tourism businesses would miss out on vital revenues that would help them make up for the massive losses of trade they’ve experienced so far during the COVID-recession (see chart below).

We need the leaders of the Government to have a sense of urgency on this issue, and not just delegate these hugely consequential decisions to the CHO.

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