Opening remarks to Qld Parliamentary Inquiry on economic response to COVID-19

Yesterday I was part of a panel of economic experts consulted by the Queensland Parliamentary Inquiry into the state government’s economic response to COVID-19. The notes I used for my opening remarks are reproduced below. The proceedings were broadcast via Parliament TV and you can watch a recording here (the panel starts at around 2:27:00). GT

Austan Goolsbee, who was chair of President Obama’s Council of Economic Advisers, said that, in a time of pandemic, the best thing you can do for the economy has nothing to do with the economy. 

The public health response is critical to ensuring the economy can safely re-open and can return to some semblance of normality as soon as possible. On the public health response, the government deserves credit.

It may be that in future years, after we’ve had a detailed look at evidence from across the world, we learn a different public health response may have had less of a short-run economic cost. But, at the moment, we’re not 100 percent sure of the optimal public health response, and decision makers need to exercise their judgement.  

Regarding the economic response, it should be well-targeted and avoid waste, to minimise additional borrowings and future interest payments which are a direct drain from the budget. And we should rigorously assess any grand infrastructure schemes to get the economy moving again, as they could end up being costly white elephants into the future. 

It needs to be recognised the state government has much less capacity to respond than the federal government, which has superior financial resources and borrowing capacity. State government responses can’t be generally available measures such as JobKeeper, but they need to be targeted to those most in need, and they need to be well-administered.

The state government is better positioned than the federal government to identify state-specific industry and regional needs and should address its assistance in such a way. The sectors and regions in most need should be obvious to the committee, such as tourism and hospitality, and those regions most dependent on them, such as Far North Queensland. I recognise that the state government has provided assistance to tourism businesses, as well as to businesses in other sectors.    

There is a clear need to improve state government program administration, to minimise the burden on and the frustration experienced by small business owners. There have been the reported administrative failures regarding the COVID-19 Jobs Support Loans and Adaption Grants programs. The first-come-first-served nature of these programs has led to frustration and, arguably, to assistance not going to those small business owners most in need. The state government needs to ensure its programs are well-designed and administered by competent and experienced public servants.

On the state budget, the deficit will naturally blow out by several billion dollars, and I expect total state debt to approach and possibly exceed $100 billion over the forward estimates. 

I accept the Government’s point that it is not possible to present a full budget at this time, but I would suggest that it could publish internal estimates of the state budget position and debt which I expect the Treasury is regularly updating. It could publish these with all the necessary caveats about their accuracy in this time of radical uncertainty. 

While the Treasurer is right to reject austerity, as it is imperative to avoid perverse fiscal policy, the government needs to present a long-term plan for constraining the growth of spending and stabilising the debt. Its announcements regarding a prudent public service freeze and savings of $3 billion over the forward estimates appear sensible, but we need to see if those plans are ultimately realised. 

Finally, we need to capture the lessons regarding the economic response, alongside an assessment of the pros and cons of public health measures, in a comprehensive report and incorporate those lessons in the state government’s pandemic playbook for the future. 

One of the important lessons is that government can relax regulations quickly when it needs to, such as regulations around liquor sales. The government should undertake a comprehensive review of the full suite of regulations which are affecting businesses, and remove those which don’t pass a cost-benefit test.

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Parliament House from the entrance to QUT on George St, with 1 William St, the Tower of Power in the background. Photo by Jennifer Tunny.

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What’s going on with the Aussie dollar – my latest video

Morgans Chief Economist Michael Knox wrote a great note a couple of weeks ago on Why is the Australian dollar so strong. It’s a nice, clear description of what’s been happening to the Australian dollar in recent months. Michael concluded his note:

The rally in the Australian dollar between March and June 2020, demonstrates that sometimes things in economics can work exactly the same as they do in theory. The aggressive cuts in the Fed funds rate by the US Federal Reserve have led to a situation where US bond yields fell dramatically, relative to Australian bond yields.

This yield advantage then caused the rapid recovery in the Australian dollar which has occurred since March.

Check out my new video in which I discuss the points Michael made in the note and illustrate them with the relevant data:

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Australian coverage of my upcoming Qld Parliamentary Inquiry appearance

Thanks to Sarah Elks for her story in The Australian today regarding my upcoming appearance at the Queensland Parliamentary Inquiry into the state government’s economic response to the pandemic:

Coronavirus: Queensland’s small-business grants ‘are a waste of money’

First, I should note the COVID-19 Adaption Grants that Sarah quotes me on in the article may not be a complete waste of money, as I know many businesses are struggling. My big concern is that the design of the program meant much of the money would go to the quickest and best-resourced, rather than to those most in need. Here are some choice quotes from Sarah’s article, but please subscribe to the Australian if you don’t already do so:

The Queensland government’s $200m coronavirus-recovery small business grants are “poorly designed, pretty embarrassing and largely a waste of money”, according to an economist regarded as an expert by the Palaszczuk administration…

…Former Commonwealth Treasury economist Gene Tunny, director of Adept Economics, said he was concerned the speedy grants approval process meant the neediest businesses could miss out.

Sarah quotes from my article last week Qld Gov’t COVID-19 Adaption Grants program poorly designed. At the Parliamentary Inquiry on Monday, I will comment on this program and also on the $3 billion of savings measures announced by Treasurer Cameron Dick yesterday, although with very limited detail. The savings measures are intended to partially plug a $7 billion budget hole, as also reported by Sarah in The Australian today (Spending cuts and debt to plug a $7bn hole in Queensland).

For further information on the upcoming inquiry, check out:

Upcoming Qld Parliamentary COVID-19 Inquiry appearance

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Queensland Parliament House, Brisbane. Photo by Jennifer Tunny.

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Dynamic pricing economics & ethics podcast discussion

My latest podcast episode is on the economics and ethics of dynamic pricing, as used by Uber and airlines among other businesses. I spoke yesterday with Ben Scott, Research Officer at my business Adept Economics, and you can listen to our conversation here. The conversation was inspired by the Vickrey Turnstile which FT columnist Tim Harford describes in his excellent new book, a sequel equally as good and possibly better than the original, The Next Fifty Things that Made the Modern Economy.

Other resources mentioned in the conversation include:

Uber and airline dynamic pricing models can be viewed as both fair and predatory

QPAC/QTIX to trial Uber-style surge pricing to boost revenue

Matching and Dynamic Pricing in Ride-Hailing Platforms

He has 17,700 Bottles of Hand Sanitizer and Nowhere to Sell Them

Dynamic pricing: Retailers using artificial intelligence to predict top price you’ll pay

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Last September, I reported QPAC/QTIX were investigating dynamic pricing with a view to increasing revenue (link to QEW post above).

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Upcoming Qld Parliamentary COVID-19 Inquiry appearance

Next Monday I’ll be appearing, via Zoom, at a public hearing of the Queensland Parliament’s Inquiry into the Queensland Government’s economic response to COVID-19. I’m a member of a Panel of Economic Experts which also includes UQ Professor John Quiggin, Griffith Professor Tony Makin, and Richard Denniss, Chief Economist of the Australia Institute. We’re appearing from 11.10am and the proceedings will be live-streamed via Parliament TV. Check out the program and link to Parliament TV here:

Program for public hearing on Monday 13 July

Previous QEW posts relevant to the remarks I’m planning on making include:

Qld Gov’t COVID-19 Adaption Grants program poorly designed

Picking winners – industry policy podcast chat with Craig Lawrence

Catch up with CCIQ Chief Economist on dreadful business conditions & huge budget deficits

Best coronavirus response advice offered by Austan Goolsbee & Dr Norman Swan

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Queensland Parliament House, corner of Alice St and George St, Brisbane.
Photo by Jennifer Tunny.

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Deloitte highlights trade tensions with China and lower commodity prices as risks to Qld recovery

According to today’s Courier-Mail, Deloitte’s new Business Outlook report highlights the risks to Queensland’s economic recovery from lower commodity prices and trade tensions with China affecting our commodity, tourism, and education exports. Deloitte also rightly mentions the risk to the national economic recovery from the Melbourne coronavirus outbreak.

Lower coal prices in particular are a risk to Queensland mining jobs, and also to jobs in the supply chain, as reported by the ABC last month (Hundreds of coal jobs lost as low coal prices, coronavirus impacts mining). Lower coal prices will also mean less revenue through royalties for the Queensland Government, but we need to wait until September for a budget update to learn the full extent of the impact.

The majority of Queensland’s coal exports are coking coal and here is what has been happening to the coking coal price (illustrated by the one month ahead futures price).

Coking coal

And here is the thermal coal price, which also shows a large fall over 2020.

Thermal coal

Deloitte also mentions the higher than expected retail trade numbers seen in Australia recently (see my latest video). I should emphasise that the peculiarly high May retail trade numbers don’t necessarily signal a strong economic recovery as they are likely to reflect a combination of pent-up demand from April, the impact of JobSeeker and JobKeeper, and additional spending on goods complementary with leisure (e.g. bikes, audio and video gear, etc.) which would otherwise have gone into parts of the economy not covered by retail trade data (e.g. services, accommodation). Economists expect that the June quarter GDP result is going to be very bad indeed.

Finally, regarding the domestic economic impact of China’s beef and barley retaliatory measures, check out this article prepared by Ben Scott, Research Officer at my business Adept Economics:

Beef & Barley Bust

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Retail rebound in Australia – latest video

My latest video is about the retail rebound revealed by the May Retail Trade data published by the ABS yesterday (Retail turnover rises 16.9 per cent in May). You may also be interested in the Queensland Treasury Retail Trade brief I mention in the video.

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Individual public servants blamed while politicisation of Qld public service goes unaddressed

In incidental remarks in its report An investigation into allegations relating to the appointment of a school principal, the Crime and Corruption Commission identifies what many see as the big problem with the Queensland Government: the politicisation of the public service. Regrettably, as the Commission notes in paragraph 576:

A discussion of the politicisation of the public service is outside the scope of this report.

This isn’t the CCC’s fault. Its job is to investigate corrupt conduct, and I should note former Deputy Premier-Treasurer Jackie Trad has been cleared of that. But we should question the status quo in which successive governments have stacked the public service with loyalists and even non-partisan public servants get the message that maximising the government of the day’s re-election prospects is the number one priority. The CCC makes this comment in paragraph 585:

…in some cases public servants may feel pressure to be “over-responsive”. The conduct uncovered here demonstrates the real danger of public servants being “overresponsive” or “over-sensitive” to the perceived wishes of their political masters.

But is this the fault of the public servants or their political masters, who after all are really in charge and have Ministerial Responsibility? Regardless, public servants are left carrying the can for this fiasco. A Deputy Director-General of Education receives a real bollocking in paragraphs 626 to 631:

The DDG bypassed his own portfolio accountability structures (reporting through the DG to Minister Grace) and was liaising directly with the Deputy Premier and effectively granting her a role in a process she did not have and, beyond wanting the position to be an Executive Principal, granting her a role she had not sought…

…Moreover, it is difficult to avoid the conclusion that the DDG was over-responsive and allowed either his perception of the Deputy Premier’s view, or his desire to achieve an outcome that he believed would please her, to influence his decision-making.

Anyone familiar with corporate governance will know the term “tone at the top.” It’s a real concern a public servant would behave in the fashion identified by the CCC. Was he a rogue operator, or was such behaviour inevitable given the “tone at the top”?

This is such a bizarre incident which should be the catalyst for real reform of our system of governance in Queensland, possibly including the re-introduction of an upper house to provide additional scrutiny of the government of the day (see my 2018 book Beautiful One Day Broke the Next for further commentary on Queensland’s abolished upper house).

The weirdness of this episode is nicely illustrated by the Brisbane Times reporting yesterday that a journalist asked Jackie Trad “if she felt used by department officials” and Trad responded, “I guess it’s hard not to feel that way.” Frankly, I’m stunned our formidable former Deputy Premier-Treasurer may have been “used” by bureaucrats from the Education Department.

But let us accept the findings of the CCC report, and not forget the bigger issue of concern is the ongoing politicisation of the public service, which the CCC has drawn attention to in its valuable report, even if it notes the issue was outside its scope.

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I discuss the need for greater scrutiny of Queensland Governments, including possibly by the re-establishment of an upper house, in my 2018 book Beautiful One Day, Broke the Next, published by Connor Court. 

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Unfreezing discount rates with Marion Terrill from Grattan – latest podcast episode

Building Queensland and Infrastructure Australia require the use of a 7% discount rate in cost-benefit analyses of public infrastructure projects, but is a 7% discount rate applied to the future benefits of public infrastructure projects too high? Marion Terrill of the Grattan Institute argues discount rates should not be frozen where they were in the 1980s, given that real interest rates paid on borrowings by governments have fallen substantially since then. I’m grateful Marion agreed to be interviewed for my podcast. Our conversation is now available as Economics Explained EP42 Unfreezing Discount Rates.

A 7% discount rate means that $100 of benefits in fifty years’ time are worth only $3 today, in present value terms, compared with $18 (i.e. 6X higher) for a 3.5% discount rate. A higher discount rate means we are less likely to favour projects with high upfront capital costs but which deliver benefits to current and future generations which grow over time. Arguably, a project like Cross River Rail falls into that category, although I’ve always been sceptical about the projected benefits.

Here is a link to Marion’s 2018 report on discount rates co-authored with Hugh Batrouney:

Unfreezing discount rates: transport infrastructure for tomorrow

The Resources for the Future Working Paper I quote from in my introductory remarks is Discounting for Public Cost–Benefit Analysis

Economics Explained Logo

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Premier’s border decision helps, but it’s still early days in any recovery from virus recession

The Queensland Premier’s decision to reopen the border to non-Victorian interstate travellers and to bring forward the relaxation of a range of restrictions will no doubt provide a bit of a boost to the economy (e.g. the Courier-Mail is reporting $520m a month, 50k jobs to flow from eased restrictions). But, at best, it’s still early days in the recovery from the virus recession, and there’s always the possibility the recovery could stall and the economy settles into an extended slump, particularly with all the financial damage being done to businesses.

There is legitimate concern about what happens when the JobKeeper lifeline is withdrawn from many businesses at the end of September. Fairfax economics correspondent Shane Wright wrote yesterday, in his article RBA warns ending stimulus will be ‘a problem’ as jobs recovery slows:

A sudden halt to government stimulus to support the economy through the coronavirus recession would be a problem, the Reserve Bank has conceded, with signs the jobs market is failing to bounce back from pandemic-related shutdowns.

It’s obvious the federal government will need to extend the stimulus in some way, such as via a more targeted JobKeeper and bumping up the standard rate of JobSeeker (i.e. excluding the coronavirus supplement). This is because the drop in government support to the economy at the end of September will be huge and may lead to any recovery stalling in December quarter, when we will likely see many of the so-called zombie firms shutting up for good.

On the ABC 730 program the other day, Grattan’s Danielle Wood said that federal support equal to 15% of GDP in quarterly terms will be “turned off at the end of September” (Gov’t will not reveal plan for future of JobKeeper for weeks). That’s an enormous adverse shock for the economy to adjust to over the rest of 2020.

Regarding “signs the jobs market is failing to bounce back”, Wright is referring to the latest payroll jobs data released by the ABS yesterday (see chart below).

payroll_national

With the possibility international travel won’t be back to normal until 2022, our economy, to which international tourism and international education made substantial contributions, certainly won’t be able to regain any semblance of normality for a while yet.

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