What is the fiscal impulse from the Australian Budget?

The Australian Government is moving in the right direction, but not fast enough, with fiscal policy if it wants to fight inflation. It appears too reliant on the expected cessation of pandemic-related stimulated measures to support its claim that the Budget is contractionary. And arguably it should be running a bigger surplus in 2022-23 and a surplus rather than a deficit in 2023-24, if it wants to make a substantial contribution to the fight against inflation. This is clear from Treasury estimates presented in the 2023-24 Budget, as explained in this article.

In defending his Budget, Treasurer Jim Chalmers observed “Our budget is contractionary when inflation is at its highest”, as quoted in The Australian. Is it true the Budget is contractionary? Critics have argued the federal government isn’t being fiscally responsible because spending is increasing. This is true, but the size of the economy and government revenue are also increasing. What matters is how spending and revenue changes compare with what they would be in a fiscally-neutral scenario. How should we judge the government’s fiscal impact or impulse with respect to the economy, or whether its aggregate spending and revenue choices make sense given the state of the economy? 

According to IMF economists Garry Schinasi and Mark Lutz in the 1991 Working Paper Fiscal Impulse:

“The IMF measure of the fiscal impulse is the change in the fiscal stance, which is an estimate of the initial amount of expansionary or contractionary pressures placed by the budget on aggregate demand. This measure of fiscal impulse attempts to remove changes in the actual budget balance that are transitory in a cyclical sense.”

The fiscal stance can be considered as an estimate of what the budget balance would be if cyclical influences (i.e. the state of the economy relative to its trend) were removed. The fiscal impulse is the change in the fiscal stance, and it tells us whether the government budget will add more or less to aggregate demand in one budget year than in a previous year. 

There is no perfect way of estimating the fiscal stance, and hence the fiscal stimulus, but various organisations such as the IMF and Treasury have tried doing so. While the Treasury doesn’t explicitly indicate the fiscal impulse of the budget, it does provide measures that help us determine whether the Government Budget can be considered expansionary or contractionary. The Treasury gives us an indication of the fiscal stance of the Government in the Fiscal Strategy and Budget Outlook chapter of Budget Paper 1, with the important chart reproduced below (Figure 1).

Figure 1. Structural budget balance estimates presented in 2023-24 Australian Government Budget

First, consider the evolution of the budget balance between 2022-23 and 2023-24, the budget year for the Budget handed down by Treasurer Jim Chalmers on 9 May. To gauge the fiscal impulse, we need to compare the deterioration in the budget balance, labelled underlying cash balance (UCB), the black line, with the reduction in the positive contribution of cyclical factors, the blue columns. The Budget forecasts the UCB deteriorates 0.7 percentage points, from 0.2% of GDP in 2022-23 to -0.5% of GDP in 2023-24. Eyeballing the chart above, however, we see that cyclical factors (i.e. higher commodity prices, stronger-than-usual economy) make a much smaller positive contribution to the UCB in 2023-24 than in 2022-23, falling from around 2% of GDP to what looks like around 0.7-0.8% of GDP. The reduction in positive cyclical influences appears greater than 1% of GDP.

This means that we could say that, in 2023-24, the government is expected to reduce the impact of its Budget on the macroeconomy. You could say it is tightening the fiscal stance. Given what is happening with cyclical factors (i.e. a slowing economy), the UCB should deteriorate by more than it is actually expected to deteriorate. It does not deteriorate by over one percentage point (i.e. the reduction in the positive boost from cyclical factors) because, at the same time, over 2023-24, temporary fiscal measures are being reduced (i.e. the shrinking green columns). Of course, that was always going to happen so the Government probably doesn’t deserve much if any credit for that. 

The structural budget balance, an indication of the state of the budget in normal times, is forecast to deteriorate slightly in 2023-24. This is consistent with the Government’s policy decisions since the Budget in October which will worsen the UCB by $12 billion in 2023-24, with an additional $13.8 billion in payments offset by only an additional $1.8 billion of receipts induced by new policy measures (see Table 3.2 in Budget Paper 1). In its discretionary measures, the Government is not undertaking contractionary fiscal policy it appears.

On my calculations, the fiscal impulse of the Budget in 2023-24 is estimated to be around -½ percentage point of GDP. This is the difference between the change in the contribution of cyclical factors to the Budget (around -1¼ percentage points) and the change in the UCB (-0.7 percentage points). Incidentally, using the same logic, we could estimate a fiscal impulse of around -1¼ percentage points in 2022-23 as temporary fiscal measures associated with the pandemic were withdrawn. Again, the Government probably doesn’t deserve much credit for that.

The blue columns in Figure 1 from Treasury tell us what the UCB would be if there was no structural budget deficit and if there were no temporary fiscal measures (i.e. stimulus measures, most recently during the pandemic). This could be considered as an estimate of a neutral budget balance. It tells us that the UCB could have been 2% of GDP in 2022-23 and around 0.7% of GDP (based on eyeballing Figure 1) in 2023-24, if there was no structural budget deficit and if there were no temporary fiscal measures.

Certaintly, temporary fiscal measures now seem rather inappropriate given the COVID-recession is well behind us. Arguably, given the strong recovery post-COVID and high commodity prices, the Government could have done more to tighten the Budget so it wasn’t adding as much to aggregate demand and very likely contributing to the higher-than-usual inflation we’ve been experiencing. From a macroeconomic perspective, it would likely be desirable for the federal government to run a larger surplus in 2022-23 and a surplus rather than a deficit in 2023-24 to reduce aggregate demand and put downward pressure on inflation. 

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 economic outlook talk at Phil Di Bella’s Coffee Commune this Friday 19 May

The big economic question for 2023 is how much the Australian economy will slow down in response to interest rate increases, regarding which we should expect more to come. Queensland’s economy will benefit from a high-performing mining sector, but there’s little doubt we’ll slow down, too.  

The federal budget forecasts GDP growth in 2023-24 of 1.5%, down from 3.25% in 2022-23. Australia’s population is forecast to grow 1.7% in 2023-24, which implies a slight fall in per capita GDP. Behind the slowdown is a reduction in dwelling construction (-3.5% change) – off the recent peak associated with pandemic-related stimulus – and a reduction in consumer spending growth to 1.5% in 2023-24, down from 5.75% in 2022-23. If the slowdown is worse than expected, it will be because the Treasury, and the RBA for that matter, have underestimated the impact of rate rises on consumer spending. 

We know retail turnover in real terms is falling as households cut back on purchases of durable goods. This is likely due to a combination of rising prices, interest rate increases, and Australians returning to overseas holidaying. Queensland experienced the largest fall in the March quarter with real retail turnover falling 2.2% compared with a national average decline of 0.6% (Figure 1). 

Queensland’s larger proportionate fall is likely related to domestic overnight tourism spending starting to fall from very high levels as Australians returned to holidaying overseas (see Pete Faulkner’s recent tweet below), rather than to Queenslanders being disproportionately affected by interest rate increases. 

 Both nationally and in Queensland we’ve seen two consecutive quarterly falls in real retail turnover. We should have expected some falls as inflation reduced the real value of money balances held by households. To an extent, this needed to happen to unwind the excessive monetary stimulus the RBA undertook during the pandemic. Incidentally, my friend and former Treasury colleague Rob Ewing, who is now a senior official at the ABS had an excellent LinkedIn post on whether we’re in a consumer recession at the moment, arguing it’s too soon to tell given retail turnover excludes a lot of services spending. 

One sign of optimism is that the jobs market has been robust so far this year, according to vacancies data which are available up to April. Job vacancies remain at high levels (Figure 2). In Queensland, the number of job vacancies is around twice the average in the years before the pandemic. 

A lot depends on how many more interest rate increases from the RBA we need to endure. This is a great unknown. Christopher Joye made a strong case for further increases in the Financial Review last week, based on our central bank policy rate being lower than that of the US Fed and our inflation being higher. Still-accelerating services inflation, at its highest rate since 2001 according to the ABS, is definitely a concern. The Australian economist with the highest year-end RBA cash rate forecast is also one of Australia’s top economic forecasters, Morgans’ Michael Knox, who may well be correct that we end up with a cash rate of 4.85% at year’s end. That is, Michael expects the RBA will hike four more times this year, one full percentage point of interest rate increases up from the current 3.85% cash rate. If it’s forced to do that, the landing may not be soft after all. You can check out Michael’s analysis via this link:

AUS_ESQ_230502 Why the RBA raised rates.pdf 

So expect interest rates to continue rising and household consumption spending to slow down even further, possibly to a significantly lower growth rate than the Treasury’s forecast of 1.5% in 2023-24. The interest bill faced by households has been sharply rising, and more increases are to come, particularly as more-and-more fixed rate housing loans move onto variable rates over the rest of 2023 (Figure 3).

Queensland’s strong resources sector will help support Queensland’s economy, and along with faster population growth, we should experience a milder downturn than other states. In four weeks’ time, Cameron Dick, probably Queensland’s luckiest-ever Treasurer, will hand down the latest state budget and reveal just how much coal royalties have contributed to the budget. QRC estimates it could be $13 billion this financial year due to the very high coal prices we’ve had since Russia invaded Ukraine (Figure 4).  

That said, investment in new coal mines is being stifled by government regulations (see Two proposed Qld coal mines axed by federal government). More broadly, even though they’re hiring because business conditions have been strong, Queensland businesses are concerned about the economic outlook and may have some reluctance to make capital investments (Figure 5). The net balance of confidence is the difference between the percentage of businesses that are confident in the future and the percentage which are not confident. In Queensland, that balance is negative, with more businesses not confident than confident, according to NAB survey data. 

A fall in business capital investment will likely be a major contributor to any future recession. At the moment, Treasury is forecasting growing business investment nationally in 2023-24, with 2.5% growth overall. Mining investment is forecast to grow by 2%, and non-mining investment is forecast to grow by 2.5%. If economic conditions deteriorate substantially toward the end of 2023, as they possibly will do as more households come off fixed interest rates, business investment could begin plummeting. This is a big unknown and one of the most challenging things to forecast. Overall, we need to wait and see how households cope with higher interest rates over the rest of the year. Treasury and the RBA are hoping households will have sufficient savings that they will not have to cut back their spending too much.  

I’ll be thinking more about the economic outlook in preparation for a talk I’m giving on Friday. If you’re in Brisbane, please consider getting a ticket to the long lunch at Phil DiBella’s Coffee Commune I’m speaking at. Ticket sales close Wednesday morning at 10am.

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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Size and structure of the Qld economy: today vs 1939-40 using Colin Clark’s estimates

Back in the nineties, a history-conscious Queensland Treasury official saved a 1944 chart on “Post-war Employment Planning” from the rubbish bin during an office cleanout (Figure 1). On his retirement from the public service, that official gave me the chart. Notably, the chart includes Queensland state income estimates for 1939-40. These estimates were prepared by the late great Colin Clark, during his time as an economic adviser to the Queensland Government. 

Figure 1. Chart on Queensland Government post-war employment planning

Zooming in on Clark’s gross national (i.e. state) income estimates for Queensland, we see the greater importance of agriculture in the State’s economy in 1939-40 than today (Figure 2).

Figure 2. Close up of Colin Clark’s Queensland state income estimates for 1939-40

In 1939-40, at the outbreak of World War II, agriculture (i.e. agricultural production & pastoral production) accounted for over 20% of the Queensland economy (Table 1). As in other economies, economic development has been associated with greater on-farm efficiency and people moving from the country to cities, generally to higher productivity jobs. The services sector was much smaller than today, as was the government, represented by public works, public administration, and railways in the table. Mining would be lumped in with forestry and fishing in Clark’s “other primary production” category, which accounted for around 10% of the Queensland economy in 1939-40.  

Table 1. Composition of Queensland gross state income, 1939-40, Colin Clark’s estimates

Millions of Pounds% of total% (net of indirect taxes)
Indirect taxes15.69.5%
Domestic, professional & personal service10.76.5%7.2%
Rents – occupied housing12.17.4%8.2%
Private buildings3.11.9%2.1%
Public works6.33.9%4.3%
Public administration8.35.1%5.6%
Other transport & distribution29.818.2%20.1%
Other primary production15.59.5%10.5%
Pastoral production19.612.0%13.2%
Agricultural production13.68.3%9.2%

If we look at the composition of Queensland’s GSP in 2021-22, we see agriculture accounting for around 4% of the Queensland economy (Table 2). 

Table 2. Contributions to Queensland Gross State Product, 2021-22, current prices, ABS estimates 

$ million% of GSP% of total factor income (i.e. GSP excl. indirect taxes & stat. discrepancy)
Agriculture, forestry & fishing16,3783.7%4.0%
Electricity, gas, water & waste services10,1352.3%2.5%
Wholesale trade12,8982.9%3.2%
Retail trade17,1163.8%4.2%
Accommodation & food services8,9982.0%2.2%
Transport, postal & warehousing19,1524.3%4.7%
Info. media & telecommunications5,0851.1%1.2%
Financial & insurance services20,5504.6%5.0%
Rental, hiring & real estate services10,4322.3%2.6%
Prof., scientific & tech. services27,0186.0%6.6%
Admin. & support services12,6322.8%3.1%
Public admin. & safety21,8104.9%5.3%
Education & training20,4164.6%5.0%
Health care & social assistance35,3327.9%8.6%
Arts & recreation services2,9710.7%0.7%
Other services7,5921.7%1.9%
Ownership of dwellings31,3187.0%7.7%
Indirect taxes less subsidies39,5648.8%
Statistical discrepancy-890-0.2%

Mining is now much more significant as an income generator than agriculture, although I should note the 2021-22 share for mining is elevated because of high coal prices. That said, mining has been a bigger income generator than agriculture for several decades (Figure 3). 

Figure 3. Contributions to Queensland’s Total Factor Income, agriculture vs mining, ABS estimates, 1989-90 to 2021-22

Clark estimated the Queensland economy generated 163.6 million pounds of income in 1939-40. In today’s dollars, that would be around $20 billion, using historical inflation data from Matt Butlin’s database. Given the Queensland population was approximately 1 million in 1939-40, that’s a Gross State Product of around $20,000 per capita in today’s dollars. Today, Queensland’s GSP is $400-450 billion and with 5.4 million people our GSP per capita is around $80,000.* That’s a big increase in living standards over eight decades, although part of that increase has been due to higher labour utilisation, with female labour force participation increasing substantially in the seventies and eighties. I’ll aim to do more analysis of these longer-term trends in the future.

*It’s hard to be more precise about what a good comparative figure would be today given recent data have been distorted by super-high coal prices.

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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White Elephant Stampede – podcast chat w/ Scott Prasser

Queensland has had more than its fair share of white elephant projects, including the Toowooomba Wellcamp quarantine facility and the Gold Coast desalination plant. The economics and politics of white elephants are considered in a new book from Connor Court Publishing, White Elephant Stampede: Case Studies in Policy and Project Management Failures. One of the book’s editors, well-known local public policy commenator Scott Prasser, is the latest guest on my Economics Explored podcast. You can listen to my conversation with Scott about white elephant projects on podcasting apps including Apple Podcasts and Google Podcasts.

White elephant projects are part of the broader problem of governments managing public funds poorly in many circumstances. A recent example of that is the revelation of $2.8 billion of previously “unforseen expenditure” across Queensland Government departments in 2021-22, as reported by the Courier-Mail earlier this week. Of course, we’ve just lived through a challenging period and some unforseen spending was probably unavoidable. But it does raise the question of whether the state Treasurer and his department are paying close enough attention to the operations of state government agencies. I’ll aim to have a closer look at the budget blowout in a future post.

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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Regional economic divergence – podcast chat w/ Rob Sobyra, Construction Skills Qld

I’ve reported on how the economic recovery has seen large falls in unemployment rates across Queensland, including in most regions (see Remarkable turnarounds for Townsville, Mackay, and Cairns). But I need to acknowledge that employment growth is still overwhelmingly in the South East* as it has been for several decades now (Figure 1). Jobs and people are becoming more concentrated in the South East, and the pandemic doesn’t appear to have stopped that trend. Robert Sobyra of Construction Skills Queensland CSQ) has done some great research on this phenomena (see Why Regions Are Falling Behind – And What To Do About It), and I spoke with him about his research, which covers the whole of Australia, on the latest episode of my Economics Explored podcast. You can listen on major podcasting apps including Apple Podcasts and Google Podcasts. A lightly edited AI-generated transcript of the conversation is available on the Economics Explored website.

Rob presents evidence that the long-run regional divergence is largely a reflection of our post-industrial economy, in which knowledge economy jobs tend to concentrate in big cities. Here’s how Rob explains the divergence:

My research suggests the single biggest cause of regional divergence is that our economy is creating a lot more high-skilled than middle-skill jobs these days, and the vast majority of them are located in big cities.

For example, mining giants like Rio Tinto and BHP are rolling out fleets of autonomous trucks that are run out of cutting-edge remote operations centres. Whereas old-fashioned truck drivers would be located in towns near mines, these new centres are invariably set-up in major cities.

What does this mean for the regions in the long-term, particularly if we shift away from coal and lose all those tens of thousands of jobs supported by coal mining in the regions? Are the regions doomed to fall ever further behind SEQ? Or will the huge level of capital investment in renewables and storage (e.g. pumped hydro) required to decarbonise the economy generate a lot of regional jobs? Check out the conversation for Rob’s thoughts on this issue, and let me know what you think.

Consider that CSIRO research for CSQ (see Queensland’s Renewable Future), which Rob alerted me to in our conversation, suggests Queensland needs a 50X increase in renewable energy assets by 2050. Whether this is feasible, both technically and economically, is an open question. Incidentally, I’ll aim to cover the state government’s energy plan in the future, as there is much skepticism regarding just how achievable it is (e.g. see Graham Young’s comments).

*i.e. Brisbane metro, hinterland, Gold Coast and Sunshine Coast but excluding Toowoomba.

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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National Electricity Market malfunction of June 2022: my latest podcast episode

One of the biggest challenges facing advanced economies is maintaining reliable and reasonably priced electricity as we decarbonise to combat climate change. This year we’ve seen some ominous signs that this may not go well. The war in Ukraine has reminded us we’re still highly dependent on fossil fuels, and disruptions to supply are very costly. European electricity prices are now soaring as Russian gas supply is restricted and it’s looking like a bleak Winter for Europe, something I identified as a downside risk to the global economic outlook in a generally positive Queensland economic update I gave at the Brisbane Club last Tuesday. You can download my slides via the link below. The scary European electricity prices chart is on the last slide. 

Qld economic update September 22.pdf 

In Australia, our National Electricity Market (NEM) had a near death experience in June and was temporarily suspended by the Australian Energy Market Operator (AEMO), which had to assume command and control, central-planning style, to keep the lights on. In the latest episode of my Economics Explored podcast, I speak with local energy expert Andrew Murdoch of Arche Energy about what happened in June and whether it could happen again. Are renewables coming into the system too quickly? What’s happening with batteries? Will Australia be able to cope with the retirement of coal-fired power stations? And what about all the EVs that will need charging? These and other questions are tackled in a frank and fearless conversation.  

You can listen to the episode on Apple Podcasts, Google Podcasts, or other podcasting apps. Additionally, on the web version of this post, you can listen via the embedded player below.

Andrew is generally optimistic about our ability to manage the transition to greater renewable energy, but he certainly does appear to appreciate the risks, as this observation of his (at around 47:10 of the episode) illustrates:

“Looking forward, we’ve got 8.3 gigawatts of coal plant scheduled to be taken out of the market between now and 2029. It’s 2022 now. So that’s a lot of firming capacity that needs to be developed in that timeframe. If I look at the various different committed projects that are in the system at present…that only adds to 1.32 gigawatts of dispatchable generation required to cover that 8.3 gigawatts of retiring capacity. So there is a bit of a deficit there in terms of project firming projects that are available.”

That looks like a big challenge to me. The reliability and cost of electricity will very likely remain one of the top economic and political issues for the rest of the decade. 

Please have a listen to my conversation with Andrew and let me know what you think. 

Callide power station, near Biloela, Queensland.

Note: I changed the podcast episode title and the title of this post after publishing both. On reflection, meltdown wasn’t a good way to describe what occured in June.

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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Remarkable turnarounds for Townsville, Mackay, and Cairns

In my upcoming Brisbane Club presentation on Tuesday, one chart I’ll show is of selected Queensland regional unemployment rates, highlighting how the economic recovery generally and a booming mining sector have translated into some extraordinarily low unemployment rates in some regions. Regions such as Townsville, Cairns, and Mackay are experiencing rates of unemployment far below highs experienced last decade (see the chart below). The improvement in my hometown of Townsville is particularly remarkable.* The ABS’s estimate of the 12-month moving average unemployment rate for Townsville in July was 2.9%. Compare that with unemployment rates of 11-12% five years ago. 

In a small number of regions, unemployment rates remain high, most notably Logan-Beaudesert and Queensland Outback, and Wide Bay (see chart below). I suspect this is partly related to the disproportionate numbers of disadvantaged people living in these regions, including Indigenous and low-skilled, long-term unemployed people. Structural change, including a declining manufacturing sector and mechanisation in agriculture reducing the need for on-farm labour, are also probably relevant. You can find the data behind this chart in the Queensland Government Statistician’s Office’s handy Regional Labour Force briefing

One thing to keep in mind is that, while the numbers make sense in terms of what we know has been happening in state and regional economies, there is a large degree of uncertainty regarding the figures or point estimates to use the jargon. The estimates are derived from the Labour Force Survey and the ABS would only be surveying, at most, a few hundred households in many of the regions for which data are presented. I’ll aim to examine the size of the sampling errors in a future post.

Finally, if you’d like to attend the Brisbane Club Economics in Conversation event on Tuesday 6 September from 5pm I’m speaking at, alongside former state government finance minister Rachel Nolan and current shadow Treasurer David Janetzki, then please let me know and I can arrange it with the Club. Tickets are $65, but there will be plenty of drinks and finger food, as well as some great speakers, of course.  

*Hat tip to JCU Adjunct Professor Colin Dwyer for alerting me to what the most recent labour force data have been showing for Townsville. 

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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Why the National Accounts matter: podcast chat with Brendan Markey-Towler

This century’s great trends in the Australian economy are evident in the National Accounts data (Chart 1): 

  • a halving of the relative economic contribution of domestic manufacturing, partly due to the car industry shutdown; 
  • the periodic resources booms which have propelled the mining sector to a higher average share, but one which is volatile and dependent on commodity prices; and
  • the continued growth of the post-industrial economy and services sectors, with ever-growing health care and social assistance (e.g. NDIS) and professional services industries.  

On his Substack Australian Economy Tracker, fellow Queensland economist Brendan Markey-Towler has commented regarding the Australian economy over the last decade as follows:

“To put it somewhat tritely: Australia is less and less a country that derives its wealth from making and building things, still a country that makes its wealth by digging stuff out of the ground and renting houses, and more and more a country that consults and cares.”

I spoke with Brendan about his Substack article earlier this week and our conversation is now available as my latest Economics Explored podcast episode “GDP & the National Accounts: What they are and why they matter”, available on all good podcasting apps, including Google Podcasts and Apple Podcasts. Please give it a listen and let me know what you think about the conversation.

Among other things, we talked about the contribution to the development of GDP and the National Accounts made by Colin Clark, whose UK National Accounts estimates were used by John Maynard Keynes in his General Theory. Clark spent the 1980s as a research fellow at UQ and earlier was a Queensland public service mandarin in the 1940s.

I was very impressed by Brendan’s enthusiasm for the National Accounts. He reminded me just what an outstanding intellectual achievement they are and how important they are to understanding our short-run economic performance and longer-term trends. 

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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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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