RBA review: why it’s necessary and what it should recommend

The RBA is in the spotlight at the moment as there’s a risk its monetary tightening will crash the housing market and broader economy. Arguably, it should have acted earlier to raise rates and to stop its quantitative easing. Even though inflationary pressures were obvious from late 2021, the Bank still insisted the cash rate could remain at 0.1% until 2024 and it continued its QE (i.e. buying government bonds with money created from thin air) until February this year (see the RBA’s Christopher Kent’s speech From QE to QT – The next phase in the Reserve Bank’s Bond Purchase Program | Speeches | RBA). Having let inflation accelerate more than it should have, the RBA now has to tighten much more than it would have otherwise. 

So it makes sense the Albanese government is reviewing the RBA. Peter Tulip, Chief Economist of the Centre for Independent Studies and a former RBA and US Federal Reserve economist, has been one of the loudest and most informed voices calling for changes to the RBA. I had a great discussion with Peter on episode 149 of my Economics Explored Podcast a few weeks ago. You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts and Apple Podcasts.

I’ve cut some clips of the video of my chat with Peter and uploaded them to YouTube. First, here’s Peter explaining why the RBA review is necessary – i.e. among other reasons, other central banks are regularly subject to review and Peter thinks the RBA has made some big monetary policy mistakes in recent years, keeping interest rates too high before the pandemic and costing the economy hundreds of thousands of jobs. 

In the second clip, Peter talks about his main recommendations for the RBA which he hopes the review will pick up.

In Peter’s words:

“Number one, we want more monetary policy experts on the board. 

Number two, we want those members to be individually accountable. That means public votes and public explanations of decisions. 

And third, the bank needs to be more open and transparent. And, in particular, it needs to give clear reasons for its decisions, and why alternatives are not taken.”

Peter also would like an explicit full employment target and clear direction from the government regarding whether the central bank should target financial stability (e.g. where it could have higher interest rates to prevent households accumulating too much debt). Peter thinks the RBA has gone wrong when it was too worried about financial instability, and it should leave that job to APRA. I’m unsure I agree with Peter on this, but I do agree the government should be explicit regarding what it wants the RBA to target.   

Incidentally, the RBA review was the subject of an excellent panel session at the Conference of Economists in Hobart last month, one of the best conferences I’ve ever been to, despite it having been a super-spreader event at which I picked up COVID. Panel member ANU Professor Warwick McKibbin, a former RBA board member and one of the world’s leading macroeconomic modellers, suggested that the monetary policy rules for the RBA will need to accommodate (i.e. look through) any increases in prices coming from greenhouse gas mitigation policies. The prices of many products will need to rise to bring about greenhouse gas mitigation targets. It would not be appropriate for monetary policy to target these price increases, and it would be counterproductive, as it could deter necessary investment in low-emissions technologies in Warwick’s view. This is certainly an issue for the RBA review to consider. 

Of course, we still don’t know exactly what explicit or implicit carbon taxes Australian industry will be facing over coming decades yet. The Parliament has passed a 43% emissions reduction target by 2030. But we don’t know the details of how this will be enacted and to what extent it will be enforced through the so-called Safeguard Mechanism, under which big polluters would need to buy Australian Carbon Credit Units to meet their obligations. This is a way of imposing a carbon price or carbon tax without explicitly imposing one. I pity Chris Bowen, the Minister for Climate Change and Energy, who has to implement the government’s overly ambitious policy, which appears politically suicidal in the long-run to me. It’s not enough to satisfy the Greens but could impose large enough costs that it loses votes in the centre. Bowen was on Katharine Murphy’s Guardian Australian Politics podcast recently and noted he’d be releasing a discussion paper on how they’ll implement the target very soon. Expect the climate war to start up again after that paper is released and the costs to industry and households of greenhouse gas mitigation become clearer.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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Qld Gross State Product was up 22% in dollar terms in 2021-22

Hidden in a note to its economic forecasts table in the state budget was the extraordinary estimate from Queensland Treasury that, in nominal dollar terms, the state economy expanded 22% last financial year, 2021-22 (see the chart below based on estimates prepared when updating my interstate debt comparisons slide deck). Queensland’s Gross State Product was nearly $450 billion in nominal dollar terms in 2021-22, an increase of around $80 billion, largely due to crazily high coal prices. In real or volume terms, adjusting for price increases including coal price increases which have blown out the value of exports in dollar terms, the economy only expanded 3% according to Queensland Treasury’s estimates.

I’ve previously covered on QEW the discrepancy between value and volume measures of exports that is behind the big divergence between nominal and real GSP growth estimates (see Qld & Australia exporting lower volumes but earning more, due to higher coal and iron ore prices). 

A lot of the additional GSP will have gone to mining companies as profits, to be shared among both domestic and foreign shareholders. That said, in 2021-22, the state government received $9 billion in royalty revenue compared with the original forecast of $3 billion, and mining workers would have benefited, too, with reports of higher wages and sign-on bonuses (see the QEW article linked to previously).  

The huge positive boost to Queensland’s economy that we saw in 2021-22 is consistent with Morgans Chief Economist Michael Knox’s view covered by John McCarthy in his recent InQld article Better than the gold rush: How Australia is booming while share prices plunge. Of course, we now need to see how the economy reacts to the RBA hiking interest rates, and we’re expecting a half-percentage-point (0.5%) increase in the overnight cash rate today. As I’ve covered in a previous post, consumer confidence has fallen in recent weeks, probably due to recent interest rate hikes (see Consumer confidence indicators are very concerning).  

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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Qld gaining nearly 1,000 people per week from interstate – new yearly (50k) & quarterly (19k) records

It’s been an extraordinary day of news for Queensland today, with: 

a) record net interstate migration over a twelve-month period of just over 50k, and record quarterly net interstate migration of 19k in December quarter 2021, revealed in the ABS’s latest population report (see chart below*); and

b) the publication of Peter Coaldrake’s hard hitting integrity review, which has confirmed what many of us have suspected for a long time about the inner workings of the Queensland Government – i.e. the excessive influence of lobbyists, a public service manipulated for political purposes, etc. – and has made some excellent recommendations which, to her credit, the Premier has agreed to implement.

With all these new Queenslanders (i.e. approx. 1,000/week if we use the 12 month gain, or nearly 1,500/week if we use the December quarter gain), it’s good we’re finally going to improve government accountability and integrity. Better late than never, of course. One recommendation which blew me away – given I’ve worked as a public servant at both state and federal levels and understand just how radical a measure this is, although apparently it’s been adopted in NZ and is wildly successful – is the presumption that cabinet documents should be made public in a timely fashion. This is the specific recommendation:

Cabinet submissions (and their attachments), agendas, and decisions papers be proactively released and published online within 30 business days of such decisions.   

Well done Peter Coaldrake. Now it’s time for the government to follow through. 

*Note that although we’re breaking records in terms of the number of people, the proportionate contribution of net interstate migration to state population was higher during previous peaks in the 1990s when we nearly got to 50k/year and had a smaller population.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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ASPG-Q prize for essay on a parliamentary topic – my suggestions

If you know of any postgraduate students at a Queensland university who are interested in political science, then please pass on the details of the Australasian Study of Parliament Group – Queensland (ASPG-Q) essay prize:

ASPG-Q Parliamentary Scholarship Prize flyer.pdf

Here’s a note I was sent the other day by the Secretary of the Australasian Study of Parliament Group James Gilchrist regarding the prize:

We’re seeking entries for our prize for parliamentary scholarship, where the winner gets a $1,000 prize…The prize recognises outstanding research or analysis into the institution of parliament. All postgraduate students enrolled at any Queensland-based university can submit an assignment of up to 10,000 words on this theme. 

The assignment must have been written between April 2021 and the closing date of 3 October 2022. Course coordinators, lecturers and supervisors can also submit their students’ essays.

Potential essay topics which come to my mind include:

Looking up toward the balcony outside the chambers of the Queensland Parliament, Queensland Parliament House, corner of Alice and George Streets, Brisbane. The Tower of Power, 1 William St, soars into the sky in the background.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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Qld’s bolshie budget – my latest thoughts

Reading the Courier-Mail’s latest state budget reporting, quoting Cameron Dick as a self-proclaimed Robin Hood Treasurer, it’s clear the state government no longer gives a damn what business thinks. It’s gone full-on economic populist with its royalties hike ($1.2bn over four years) and its payroll tax hike ($1.4bn over four years) masquerading as a Mental Health Levy, as if mental health problems are the fault of business alone. I would argue that, by providing jobs, business overall is making a great positive contribution to mental wellbeing. We know from decades of empirical research that unemployment is a major life stressor and contributor to mental illness.

In fairness, I should note the state government is providing some relief to businesses with payrolls of under $10 million, but overall it’s increasing the burden of payroll tax on Queensland business collectively. Over the forward estimates to 2025-26, the Mental Health Levy will bring in $1.4 billion while its payroll tax relief for smaller businesses is only worth $210 million (see page 25 of Budget Paper 4).

The state Treasurer argues that it’s only fair that big business ($10M+ in payroll by his definition) pays more, given it has done well in recent years, especially with the overly generous JobKeeper. Sure, vertical equity, that those with a greater ability to pay should pay more in tax, is a well-established principle of taxation. But governments need to be mindful they don’t unduly burden business with additional taxes that either: a) reduce their profitability and capacity to invest and expand, costing jobs b) they pass onto consumers by hiking prices, contributing to inflation, and reducing their interstate and international competitiveness, or c) they pay for partly by paying their workforce less than otherwise in the future.  

Tax per capita remains lower in Queensland than in NSW and Victoria, but we lost the Low Tax State label, for the state with the lowest tax burden, over a decade ago, and SA, Tasmania, and NT now have lower tax burdens (see Chart 4.5 on p. 97 of Budget Paper 2). 

Regarding royalties, one point I forgot to mention in yesterday’s post is that Queensland’s royalty regime was already delivering a greater share of the value of our minerals to taxpayers than those in other states, according to Michael West Media estimates produced last year:

“Western Australia, Australia’s largest commodity exporting state, captures just 5% of its commodity export value as royalties.

In comparison, over the past 10 years, Queensland’s royalty scheme has collected double that – 10% of the total commodity export value. In fact, in 2020, royalty payments reached a record 15% of export value.

Queensland is followed by the Northern Territory at 8%, New South Wales at 7% and South Australia at 6%.”

It wasn’t obvious we were missing out and needed higher royalty rates, but the Queensland Government needs to fund its various SEQ-centric vanity projects such as Cross River Rail and Olympics infrastructure, and the miners looked like an easy target. After all, many of them are foreign-owned and they’re contributing to climate change they were probably thinking in 1 William Street. 

Finally, one of my long-time regular readers has asked me:

“My question on the energy generators… Qld Govt is going to reap huge dividends from them but nothing will be passed onto Qld tax payers… why is this so?”

This is well observed (see Chart 1). While the Government is providing a one-off $175 cost of living rebate, as announced last month, it can’t do much more because it needs to fund the aforementioned vanity projects as well as fix up the state hospital system, among other problems. I’d also note that current financial year (i.e. 2021-22) dividends are less than previously forecast last December as the Government is allowing government-owned corporations to retain some of their profits for reinvestment in new assets and refurbishment of existing assets (i.e. to ensure we have working generators and a reliable power grid), as the Government notes on page 160 of Budget Paper 2. 

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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Qld state budget: thanks for the billions coal miners, now pay us even more

As I’ve been forecasting for months now, the Queensland state budget is in much better shape than the state Treasury forecast back in December. Higher royalties, stamp duty, and other taxes helped deliver a $1.9 billion operating surplus in 2021-22 and a much lower deficit of around $1 billion in 2022-23 than forecast last December (see chart 1 comparing current budget estimates in magenta with estimates from the December Mid Year Fiscal and Economic Review, the MYFER, in blue). Total 2021-22 royalty revenue was a stunning $9.1 billion and royalties from coal were $7.3 billion, compared with the estimates made back in December of $6.3 billion and $4.6 billion, respectively. 

The better revenue outlook is due to both the war in Ukraine driving up commodity prices to incredibly high and unsustainable levels, and a better performing economy overall. As I told Kate O’Toole on 612 ABC Brisbane this morning (from 43:30), it’s surprising that even with all the revenue revisions Treasurer Cameron Dick still needs to add new marginal royalty rates on coal so the state government can share in future windfall profits at high coal prices (i.e. a 20% rate from A$175-225/tonne, 30% from A$225-300, and 40% on A$300/tonne and above). This was a much bigger change to royalty rates than I expected, with much higher marginal royalty rates applying at lower value thresholds than I expected. 

While it’s legitimate that the state government should seek the best outcome for taxpayers regarding the use of the mineral resources we own, when I saw the revised royalty rates I became more sympathetic to QRC supremo Ian Macfarlane’s warnings about what this might mean for future investment in the sector. Of course, QRC is going to push back on the royalty rate increase and may be exaggerating the economic impact, but the government’s royalty rate increase is quite extraordinary and doesn’t reflect well on the stability of our policy settings here in Queensland. I’ll aim to come back to this issue in a future post.  

As I suggested to Kate on Brisbane ABC radio, rather that changing coal royalty rates, perhaps the state government could manage its expenses better and think about whether it really needs to be spending so much money getting ready for the Olympics. Couldn’t we do it much more cost-effectively and save a few billion there, so we don’t jeopardise the outlook of such an important industry for our state budget and regional economies?  

While the net operating budget (i.e. revenue less operating expenses) is projected to go into surplus in 2024-25, there are still overall deficits in terms of the fiscal balance (i.e. revenue less operating and capital expenses) in the range of $4-6 billion annually over the forward estimates to 2025-26 (Chart 2). The fiscal deficits are substantially higher in 2023-24 and 2024-25 than forecast back in December, largely due to higher capital expenditures. 

So, despite the substantial upward revisions in revenue, government debt still increases over the forward estimates. The debt of the general government (i.e. the departments of state) is projected to increase to $87 billion in 2025-26, while the total debt of the state government, comprising the general government and the government-owned corporations (collectively referred to inelegantly as the non-financial public sector), will increase to nearly $129 billion (Chart 3).

With growing debt and rising interest rates, the government’s interest bill is rising and this is likely to significantly constrain budget options in future years. By 2025-26, the general government sector will be paying nearly $2.9 billion per year in interest expenses, up from $1.6 billion in 2021-22. This will increase further as the government continues to run fiscal deficits, increasing the debt, and as maturing debt needs to be refinanced at higher interest rates in the future. Cameron Dick has been a lucky Treasurer, but his successors may not be. 

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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Qld hospitality sector has had stronger recovery than NSW and Victorian sectors

Earlier this month, Queensland Airports boss Amelia Evans was reported by the Courier-Mail as saying that travel was bouncing back strongly. Queensland Airports operates the Gold Coast, Townsville, Mount Isa, and Longreach airports, so Ms Evans would have a good idea of what’s happening with travel in Queensland. Certainly the data support Ms Evans’s understanding. When reviewing the March Quarter National Accounts released by the ABS a few weeks ago, I was struck by how consumption spending on hotels, cafes, and restaurants had fully recovered to pre-COVID levels in Queensland, while it was still substantially below those levels in NSW and Victoria, and, as a result, nationally (see chart below). Incredibly, there is more activity occurring in Queensland’s hospitality sector than in Victoria’s, even though Victoria has 6.6 million people compared with our 5.2 million. 

I suspect what has happened is that Queensland has benefited from southerners having travelled here instead of going on an overseas holiday, and this has largely made up for a lack of international tourists coming to Queensland. NSW and Victoria may need to wait for international tourism to return to pre-pandemic levels for their hospitality sectors to fully recover. 

Of course, the aggregate data don’t tell us what’s happening with individual businesses, and there are many Queensland businesses that were very badly affected by the loss of international tourism, and which really need it to return, including Townsville’s Billabong Sanctuary, for example. In mid-February, ABC News reported Queensland tourism operators predict slow recovery as international border reopens. It may seem like slow going, but thankfully international visitors are starting to return and the upward trajectory is encouraging, as this chart downloaded from the ABS website shows.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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Qld & Australia exporting lower volumes but earning more, due to higher coal and iron ore prices

The pandemic and China’s trade restrictions have no doubt had some adverse effects on commodity volumes exported from Queensland, but super high commodity prices, associated partly with the war in Ukraine, have more than offset those impacts when it comes to dollars earned. Compare record total values of quarterly exports from Queensland with constant price estimates from the ABS which show a decline in the volume of exports since the start of the pandemic (Chart 1). 

This means we may see a large boost to incomes and royalties, but not necessarily to employment which is more related to volumes exported. A large part of the boost to incomes would ultimately go to foreign shareholders of mining companies, but some of it would go to domestic shareholders and to employees. Last Thursday, the Courier-Mail reported Six-figure salaries, 10k sign-on bonuses as mining jobs boom hits:

Fat signing bonuses are increasingly being offered across the sector, with  mining services firm Thiess promising a $10,000 sign-on bonus for workers who join the company and a $5000 bonus for a successful referral.

This Tuesday, state budget day, we will learn how many extra billions the state government has received through higher coal prices boosting royalties. As I’ve been posting on for a while now, coal prices have been at record, hitherto inconceivable levels (Chart 2). Of course, while this is boosting government revenue, it is increasing electricity prices domestically, I should note. 

Nationally, we’re also seeing higher export earnings but lower volumes, too (Chart 3). 

Nationally, the iron ore price is very relevant and this has been higher on average than what we saw for several years pre-COVID, too (Chart 4). 

N.B. In chart 4, CFR stands for (shipping) cost and freight. That is, the spot price charted is inclusive of CFR. 

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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Japan is Qld’s top export destination once again, but only by a small margin

Thanks to the Japanese Ambassador for highlighting that Japan has overtaken China to return to being the top destination for Queensland exports, as Japan was for several decades prior to 2013 (see the chart below including data up to April 2022). Over the 12 months to the end of April 2022, Queensland exports to Japan were valued at $16.98 billion compared with Queensland exports to China of $16.83 billion (i.e. a lead of 0.9% ahead of China’s exports).

Glen Norris of the Courier Mail’s City Beat column wrote on Wednesday: 

Japanese ambassador Yamagami Shingo told a lunch hosted by the Queensland Japan Chamber of Commerce and Industry yesterday that Japan was Queensland’s number one export destination in the year to April driven by demand for coal, gas and beef.

No doubt this is related largely to China having banned or imposed punitive tariffs on several Australian commodities, including thermal coal, barley, and beef. Another relevant factor would be the composition of exports to the different countries and how the total values have been affected by recent commodity price increases. In recent months, the value of Queensland’s exports to Japan have increased proportionately much more than those to China, probably due to coal and gas being a greater share of total exports to Japan than to China. 

While Japan is once again Queensland’s top export destination, Japan is not once again Queensland’s major trading partner, if you count imports as well. China remains Queensland’s top two-way trading partner. This is obvious from the chart below of Queensland’s imports from China and Japan, with imports from China ($13.9 billion yearly) well ahead of imports from Japan ($5.1 billion yearly).

Check out Queensland Treasury’s briefing on Queensland’s exports for further information. You’ll see how super-high commodity prices have pushed up the value of Queensland’s total merchandise exports to $99 billion in the twelve months to the end of April 2022, compared with $57 billion over the twelve months to the end of April 2021, a stunning 72% increase.   

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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Qld has outperformed rest of Australia this decade so far

The May Labour Force data released by the ABS yesterday confirmed Queensland has outperformed the rest of Australia over the last couple of years. My view is that this is due to a range of factors including a surge in net interstate migration, a roaring mining sector in this time of high commodity prices, and rebounding tourism spending. Compared with their levels in March 2020, employment is around 8% higher in Queensland than pre-COVID while it’s around 4% higher nationwide (see the chart below).

Of the additional 206k people employed in Queensland since March 2020, 194k are in full-time employment. As Queensland Treasury’s latest labour force briefing shows, Queensland led the nation in terms of the number of new employed persons (124k out of a total 386k nationwide), with Queensland employment growing at 4.7% through-the-year compared with 2.9% nationwide. WA had the highest growth rate (5.6%). No doubt many new jobs were in the public service or in government-supported health and social services – make of that what you will – so I’ll aim to have a closer look at where employment growth is occurring in a future post.

The May data showed a big uptick in employment in Queensland in May but as always I’m cautious about reading too much into month-to-month movements due to the possibility of sampling error or statistical noise so to speak. After the aberrant April numbers, a correction of some kind was likely to occur, so Queensland’s unemployment rate of 4% is now back to being just above the national average of 3.9% (see chart below). Of course, as I explained in yesterday’s post, we now have to wait and see how consumers and the economy overall respond to the interest rate hikes from the RBA. Early signs are not encouraging, alas.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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