Interview with 4BC’s Scott Emerson on the federal budget

This afternoon, on his 4BC Drive program, former Queensland Government Transport Minister Scott Emerson and I shared our astonishment regarding the Morrison Government’s Go for Growth, Keynesian federal budget which Treasurer Josh Frydenberg handed down last night. You can listen to our conversation via this link:

Drive with Scott Emerson, 12 May 21, from 48:30

Former PM John Howard and former Treasurer Peter Costello, responsible for ten Australian Government budget surpluses, must also be astonished that a Liberal Government would deliver a budget that no Labor Government ever could, because it would be pilloried all across Australia for its fiscal profligacy. This is another Nixon-goes-to-China-type Budget.

I remember clearly, largely because it made things difficult for some of us in Treasury, how then Opposition Leader Malcolm Turnbull and his colleagues opposed the Rudd Government’s proposed increase in the debt limit to $200 billion in February 2009 following the release of the Nation Building and Jobs Plan, the second stimulus package during the GFC. To some of us, this seemed akin to blocking supply, something which has been considered forbidden since the contentious dismissal of the Whitlam Government in 1975. But Turnbull could at least argue he was standing up for principles of sound public finance. From now on, it will be extremely difficult for the conservative side of politics to criticise Labor for debt and deficits. This could be very costly to the conservatives’ political appeal in future years.

Finally, the Treasury’s medium-term budget projections (pages 97-98) suggest a baked-in structural federal deficit of at least 1 percent of GDP out to which a future Government will need to address, particularly if and when interest rates escalate in the future and the interest bill weighs heavily on the budget. The pandemic will continue to cost us long after it’s over.

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Qld and WA leading Australia in business conditions, based on NAB Survey

It’s federal budget day and, at this stage, I’m due to appear on Steve Austin’s 612 ABC Brisbane Drive program after 6pm to talk about how the federal budget is developed, so please tune in if you’re interested.

Tonight we’ll learn just how much Australia’s extraordinary economic recovery has improved the budget bottom line from previous forecasts. The Australian is reporting:

The Australian understands the budget deficit for 2020-21 to be unveiled on Tuesday night will be $161bn compared with the $213.7bn forecast in the October 6 budget. This is a $52.7bn improvement and also accounts for a third stage stimulus spending program ahead of the next election.

The economy is doing much better than anyone expected (see chart below). NAB Chief Economist Alan Oster was right to describe the latest business survey data for April from his bank as “simply stunning”, as reported by Matthew Cranston in today’s Financial Review (Business conditions ‘simply stunning’ as confidence hits record high).

In terms of business conditions, which are at historical highs, Queensland is leading Australia in the NAB’s seasonally adjusted estimates (see chart below), but is a little below WA on the NAB’s trend estimates (see the NAB Monthly Business Survey April 2021). Are Queensland and WA doing so well because they’re the mining states, (noting the record high iron ore price which is of great relevance to WA)? Possibly. Here, I should note the high degree of sampling error at the state level in the NAB data. Also, I wonder whether COVID has so disrupted our sense of what is normal that we’re over-estimating just how good current conditions are. It’s implausible to me that business conditions are at record highs, although I do acknowledge there is a lot of positivity out there. Certainly the residential building industry, a big employer, is booming and households are spending money decking out new houses and apartments.

In the data, we may be seeing the lagged impacts of JobKeeper and the Coronavirus Supplement still operating on the economy (i.e. as households and businesses spend money they saved in previous months), but these programs have now been turned off. I also remain concerned about the potential for a COVID outbreak in Winter, sending capitals into lockdowns. Time will tell.

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Decarbonising the Economy – my latest podcast episode

The latest episode of my Economics Explored podcast is on the topic of decarbonising the economy. My monologue is based on a talk I gave last Tuesday to the First Tuesday Club forum hosted by the Brisbane Dialogues group at C’est Bon, Woolloongabba. My role was to give an overview of how decarbonisation will affect Queensland, in the lead up to an event on climate change the Brisbane Dialogues group intends to hold at the Tivoli in late July, assuming we’re not locked down at the time. The Brisbane Dialogues group has recognised that many people, the young in particular, are incredibly worried about climate change, and it has decided that the group, which is comprised of several prominent Brisbane business identities, needs to start a non-partisan, non-ideological discussion on decarbonisation. This is a worthwhile thing to do.

Climate change is certainly a big challenge, although it’s highly unlikely to result in the imminent extinction of humanity as many activists claim. On this point, check out the excellent new book Unsettled: What Climate Science Tells Us, What It Doesn’t, and Why It Matters, by former Obama administration energy policy adviser Steven Koonin. Humanity does need to reduce greenhouse gas emissions, but fortunately we have several decades to do so.

Clearly, the decarbonisation that scientists say needs to occur by 2050 will have a larger impact on Queensland than the rest of Australia, given all our coal mines and our big power hungry aluminium smelter at Boyne Island near Gladstone. That said, there is a large degree of uncertainty over just how aggressively major economies will actually decarbonise and what that will mean for global coal demand (e.g. check out A Study of Long-term Global Coal Demand by Queensland Treasury).

Whatever happens, as I note in my remarks, we really need to be thinking about the future structural changes which may occur in our regional economies and what structural adjustment policies (e.g. retraining, investments in regional infrastructure) may be necessary. On structural adjustment policies, check out Structural Adjustment Policies Becoming Increasingly Important).

Among other issues, in the podcast episode I touch on the need to fix up our electricity market so that we can successfully reduce emissions without compromising reliability. Currently, it’s arguable that we’re integrating intermittent renewable energy capacity too quickly, without sufficient back-up or storage capacity (e.g. grid-scale batteries, pumped hydro, etc.).

I also discuss what William Nordhaus’s Integrated Assessment Models of climate change, which he won the Nobel Prize in Economics for, tell us about climate change policy responses – i.e. a carbon price which gradually increases over time would be the most cost-effective way to reduce emissions, and it should apply across all sectors and across all economies. Nordhaus’s new book The Spirit of Green is highly recommended reading.

Finally, although the challenge of decarbonisation is huge, there are reasons to be hopeful. Ross Garnaut often writes about the Superpower opportunity Australia has to use abundant sources of renewable energy to power much greater minerals processing than we do currently. And Bill Gates tells amazing stories about all the R&D going into new emissions reduction technologies in his latest book How to Avoid a Climate Disaster. So I’m increasingly confident Queensland and Australia will be able to adjust successfully to a decarbonising world.

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People fleeing Victoria, staying put in Qld

Back in the middle of last decade I often commented on how Queensland was experiencing a brain drain of talented people to Victoria, with vibrant and cosmopolitan Melbourne attracting our best and brightest. That is no longer the case, and for a while now Queensland has been gaining people at Victoria’s expense, a phenomenon that was amplified in 2020. As has been widely reported (e.g. by the Brisbane Times in ‘We haven’t looked back’: Qld’s biggest population boom in 16 years), net interstate migration to Queensland surged in 2020 (up from 22,900 in 2019 to 30,000 in 2020), while Victoria had negative net interstate migration (-12,700 people in 2020 compared with +10,600 in 2019) for the first time since 2008.

I’ll focus on the Queensland-Victoria comparison in this post, because it’s in those states where the big changes have occurred. While NSW’s loss of people interstate remains greater than Victoria’s, NSW’s loss actually fell in 2020, so it can’t explain Queensland’s surge in net interstate migration. It’s the change in Victoria that matters most for Queensland (e.g. see my post A closer look at the surge in net interstate migration to Qld in September quarter 2020, and note I’ll aim to reproduce this analysis in a future post).

Queensland has no doubt received many escapees from Victoria, but the major explanation for the surge in net interstate migration to over 30,000 in 2020 was that Queenslanders stayed in Queensland (i.e. many of those who otherwise would have moved to other states stayed in Queensland instead). Interstate departures from Queensland plummeted, from 83,700 in 2019 to 71,200 in 2020 (see chart above). Everything is relative, and Queensland has looked a lot better than Victoria which experienced the hotel quarantine debacle and the harshest lockdown in the western world.

Finally, I should note both SEQ and regional Queensland are gaining people via internal migration. Check out Pete Faulkner’s post:

Queensland regions attracting large numbers of internal migrants through 2020

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Solving school enrolment and on-street parking problems with economics

As an economist, it’s frustrating to see the same issues recur because our decision makers fail to recognise and adopt the straightforward solutions suggested by economics, solutions which take advantage of the so-called price mechanism or market forces. 

First, consider the latest school enrolments story involving popular, academically high-performing state high schools such as Brisbane (“State High”) and MacGregor: Qld’s most-crowded schools enrol hundreds of kids from outside catchment. As I argued in my 2018 post on the Dutton Park high-rise high school, the state government should consider charging a reasonable fee for out-of-catchment enrolments (offering some exemptions for the academically or athletically gifted). Here’s a sample of what I wrote in 2018:

Having a large number of students wanting to attend State High shouldn’t be viewed as a problem, but as an opportunity. The state education department is missing out on an opportunity to raise revenue and to manage demand for places at the school at the same time. I expect it could raise parental contributions to State High to levels similar to private schools (e.g. $20K+ p.a. for Brisbane Grammar) for many families no longer living in the catchment… Imposing additional fees on out-of-catchment students would help manage demand and could help finance the augmentation and refurbishment of infrastructure at the school.

The second story which has annoyed me recently is the story in yesterday’s Sunday Mail regarding on-street parking in Eight Mile Plain: Eight Mile Plains parking: Cr Steven Huang threatened. The Sunday Mail article noted:

Residents on Brisbane’s southside – fined for parking in their own streets – are furious while the local councillor is being targeted with threats of violence. Police are now involved as the suburb threatens to erupt…

…the installation of the [no parking between 7-10am on weekdays] signs were necessitated by clients, staff and visitors of the nearby Brisbane Technology and Garden City Office parks using the residential streets as free parking during the week, choking the narrow thoroughfares…

Although the restrictions appear targeted at commuters, they are upsetting locals who now can’t park their cars overnight on the street (unless they leave for work by 7am).

This story is a good illustration of the high cost of free parking which was identified by US economist Donald Shoup, and which I’ve written about on QEW before – e.g. in BCC residential parking permit zone in West End & Highgate Hill is bad policy. Economics provides a simple solution: simply charge for parking in the neighbourhood and let whoever values the car parks the most pay for the right to park in the spots. While the council does need to consider impacts on the flow of traffic, I expect the optimal amount of on-street parking in the neighbourhood during 7-10am on weekdays isn’t zero. Local residents would complain about having to pay to park on the streets in their own neighbourhoods, but they should recognise the streets outside their houses are owned by the whole community rather than themselves alone.

Finally, I should note that, while these solutions are obvious to economists and will lead to much more economically efficient and rational outcomes, some people benefitting from current arrangements would be worse off, and the solutions may be at odds with notions of fairness held by many in the community. As with many policy questions, value judgments come into play. But our decision makers should at least consider using the magic of the market to solve these perennial problems.

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Queenslanders, sign up for Brisbane Holiday Dollars lottery

The Brisbane Holiday Dollars voucher program is a tiny stimulus from a macroeconomic perspective, representing only $3 million of state government funding at the most, but businesses dependent on tourism need all the help they can get given all the COVID-related travel restrictions and the ever-present threat of snap lockdowns.

Normally, I’d be highly critical of this type of measure as a waste of money, but these are not ordinary times. Indeed, I spoke approvingly of targeted state government assistance to tourism-dependent businesses in my remarks to the Queensland Parliamentary Inquiry into the state’s economic response to COVID last year. Note also that Griffith Professor Fabrizio Carmignani noted vouchers can deliver better bang-for-buck than other types of stimulus measures when I interviewed him for my Economics Explored podcast earlier this year (check out Fiscal Stimulus with Fabrizio Carmignani).

Credit to the state government for making it easy to register for the lottery for the $100 vouchers. The vouchers are intended to cover half the costs of eligible activities (e.g. Story Bridge climb or staying in a local hotel). If you’re a Queenslander, make sure you sign up for the draw via the link above. You have until just before midday this Friday to register. A Whitsunday Holiday Dollars program will be open for registrations from 4 May, and the government has already provided vouchers for travel to Cairns.

CityCat on the Brisbane River with 1 William St, the Queensland Government Tower of Power, in the background on the north bank of the river. Photo by Jennifer Tunny.

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Online retail falling away from 2020 highs

The big news on the Australian sharemarket yesterday was the 14% drop in the Kogan share price after a market update revealed a drop in earnings for the online retailer (see chart below).

This probably should not have been such a surprise to the market. Online retail has been falling away from its mid-2020 highs when the economy was stimulated by the super-generous JobKeeper and Coronavirus Supplement and people were in lockdown or working from home in large numbers (see chart below which includes ABS estimates up to February 2021). That said, the level of online retail turnover is still over 30% higher than it was pre-COVID.

As I discussed in a post last month (Big test ahead for economy & will we regret all the lockdowns?), we should probably expected total retail trade (see chart below) to move back towards its trend growth path now that JobKeeper and the Coronavirus Supplement are finished. That said, given we’re not travelling overseas, retail turnover will probably remain a bit higher than otherwise for the time being. Furthermore, consumer and business confidence are high, with the former supported partly by the resurgent property market (see my posts The indicators look great, but the recovery is very uneven across the economy and More action, less talk needed on vaccines).

As someone who usually sees the glass as half empty, I should note the risk of further COVID outbreaks and lockdowns across Australia, particularly when we move into Winter. The current Perth lockdown reminds us that it doesn’t take much for our state governments to lock us down again, regardless of the adverse impacts on economic activity and business confidence.

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Economics and religion podcast chat with Darren Brady Nelson

In 2017, the Huffington Post published an article asserting Jesus was a Socialist. In my latest Economics Explored podcast episode on economics and religion, I asked returning guest Darren Brady Nelson, Chief Economist of LibertyWorks and a policy advisor to the Heartland Institute, whether Jesus was indeed a socialist (and also whether the question even makes sense given Jesus lived 1700-1800 years before the industrial revolution). Among other points, Darren noted:

The weight of biblical evidence certainly suggests that he wasn’t a socialist, not that he was a capitalist, but there’s certainly more overlap. And one of the key points would be socialism is involuntary…so any redistribution…it’s by government fiat, by government force. That’s at great odds with the Bible and what Jesus taught…Jesus expected people to follow him voluntarily. He expected them to be generous voluntarily. And, obviously, the free market is all about things being voluntary.

Darren and I had a wide-ranging discussion considering, among other issues, the impacts of religion on economic growth and whether the rich can get into heaven, given you cannot serve both God and Mammon. Please check it out and let us know what you think.

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Qld Audit Office should have recommended council amalgamations

The Queensland Audit Office’s Local government 2020 Audit Report has identified that 25 Queensland local governments, around one-third of the total, “are at a high risk of not being financially sustainable.” As the QAO hints on pages 21 to 22, the underlying problem is that Queensland has too many small councils with inadequate revenue-raising capabilities (i.e. low total values of properties they can levy rates on). These councils are heavily reliant on state and federal grants. Here’s what the QAO writes:

Councils with smaller populations and smaller local economies are more dependent on government grants to provide basic services, and build and maintain essential community assets (such as roads). These councils receive grants from both the state and federal governments for supplementing their day-to-day operations (for example, through financial assistance grants) and for building and maintaining community assets (also known as capital grants). However, these grants typically provide funding for a single year with little certainty whether the funding will continue in subsequent years.

Such uncertainty makes it difficult for councils that are highly reliant on grants to make longer-term plans to create jobs in the community and attract residents.

The major recommendation the QAO makes to the state government (on p. 6) is to “Provide greater certainty over long-term funding”. It’s a shame the QAO didn’t recommend that the state government address the underlying problem by amalgamating many of our financially stricken, small regional councils with a view to bringing in improved management, boosting revenue-raising capabilities, and achieving economies of scale. This is what I suggested to Steve Austin on 612 ABC Brisbane back in April 2019. The audio is no longer available, alas, but here’s a chart I posted at the time which illustrates how Queensland has many more small (and arguably financially unviable) councils than NSW and Victoria.

A scatter plot of the populations of Queensland, NSW, and Victorian Local Government Areas by rank order.

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Missing Middle Housing podcast chat with Natalie Rayment of Wolter Consulting

Brisbane City Council’s worst piece of policy making in recent years was the townhouse ban affecting much of Brisbane (see Townhouse Ban in Effect and my 27 August 2019 post). Around the world, progressive cities such as Portland, Oregon are encouraging the development of so-called Missing Middle Housing, but BCC decided to discourage it. Earlier this week, I spoke with Natalie Rayment, Executive Director at Wolter Consulting Group and co-founder of YIMBY Qld, about Missing Middle Housing and other urban planning issues, and our conversation has been published as EP83 of my Economics Explored podcast.

Among other great points she made in the episode, here’s what Natalie said about Brisbane’s townhouse ban:

…what we’ve got in Brisbane is an exclusionary housing policy. So two thirds of Brisbane can only have single family dwellings. And this at the very time where other cities around the world are starting to realise that having these blanket areas of only single family dwellings is not providing housing choices, not providing affordability. And they’re starting to ban areas of only single family dwellings. Were doing the opposite. We’re banning everything other than single family dwellings in these neighbourhoods.

As Natalie and I discuss, this is bad policy from BCC.

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Coat of arms of Brisbane City Council, which has banned townhouse developments in much of the city, even though progressive cities around the world are now encouraging them.
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