My Weekend Australian comments on Qld Future Fund

The mid-year Queensland budget update Deputy Premier-Treasurer Jackie Trad released on Thursday was one of the most interesting in a long time, and I was called on a few times for media commentary. For instance, I’m quoted in the Weekend Australian by Sarah Elks and Michael McKenna (Queensland Treasurer’s $5bn super grab a budget gimmick):

A former federal Treasury economist has labelled Queensland Treasurer Jackie Trad’s debt reduction plan a “gimmick” as latest figures show borrowings now equate to more than $15,000 for each resident of the state.

I note that “It’s a political solution, not an economic solution.” The Government appears to believe its so-called Future Fund, which is just a relabelling of funds it already has, will help convince ratings agencies the Government has a plan to eventually pay down its debt. It’s possible but not very likely this will be the case, in my view. Check out the paper for more commentary.

As anticipated (e.g. in my post from Monday last week), big falls in coal prices since 1 July (e.g. see chart below) have led to a write-down in expected revenue of hundreds of millions of dollars, a reduction of $643 million in coal royalties in 2019-20 alone. If it weren’t for the extraordinary $715 million in budget savings identified by the $10 million PwC razor gang, the operating budget would have gone into deficit. (Incidentally, that would be a 70X ROI from the razor gang, so we should ask why the Government didn’t have a thorough efficiency review earlier?)

I’m keen to see more details of the razor-gang-identified savings to see how solid they really are, and I’d also like to see what the final budget outcome is next year before getting too excited about this. The state government hasn’t had a great record of sticking to its expenses forecasts and keeping its expenses under control in recent years, as I discuss in chapter 7 of my book Beautiful One Day, Broke the Next.

Have a great weekend and I’ll be back next week with some more analysis of the budget and economic update.

Coking coal price

The big fall in coal prices since 1 July has slashed $643 million from Qld government revenue this financial year.

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The Gender Pay Gap with Dr Leonora Risse – latest Economics Explained episode

My latest Economics Explained episode on the Gender Pay Gap is now available. My guest this episode is Dr Leonora Risse, who is currently a fellow in the Women and Public Policy program at the Harvard Kennedy School. Prior to taking up her Kennedy School fellowship this year, Leonora was a Vice-Chancellor’s Postdoctoral Research Fellow at RMIT University in Melbourne, Australia.

Use these timestamps to jump right into my conversation with Leonora:

  • 1:53 – size of the gender pay gap
  • 4:41 – gender pay gap partly due to women and men being concentrated in different industries, but partly to do with women not progressing up the career ladder as quickly as men do
  • 8:47 – how some policy settings (e.g. means-testing of child care benefits) can create high effective marginal tax rates for women and discourage them from returning to the workforce or working more hours
  • 12:16 – men get rewarded for being confident and ambitious, but women don’t – what does this mean regarding all those self-help books by Sheryl Sandberg, Marie Forleo, etc.?
  • 17:57 – women won’t go for a new job unless they feel they meet 100% of the criteria while men will if they think they meet 60%
  • 26:58 – impact of big 5 personality traits (e.g. agreeableness, conscientiousness, etc.) on gender pay gap
  • 40:59 – whether there are barriers to women moving into male-dominated industries (e.g. mining, economics & finance)
  • 43:07 – I ask Leonora whether gender pay gap will naturally close over time due to higher tertiary enrolments among women than men and Leonora responds “…even though a higher share of women compared to men to achieve these educational qualifications, they still tend to be concentrated in fields of study that are associated with lower pay.”
  • 48:36 – what the Australian Women in Economics Network (WEN) has been up to, and why we should try to avoid “manels”, all male panels of speakers

Leonora has kindly provided the following supplementary information on her gender pay gap research to help listeners understand her findings:

Supplementary analysis of gender pay gap

Earlier this year, Leonora recorded a podcast interview on the gender pay gap for the Economic Society of Australia (Victoria):

Does confidence advance women’s careers?

Also, you may be interested in Leonora’s Mandarin article:

Rewarding competence not confidence offers a step toward equality

And if you’re interested in what the Australian Women in Economics Network has been doing to promote a career in economics to women, check out this video:

https://www.youtube.com/watch?v=AtOU-DAVch0

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Qld private sector spending has been falling while government has continued to grow

In Queensland, our over-reliance on the public sector continues, according to the September quarter National Accounts figures from the ABS, which have reinforced concerns about the strength of the national economy and various state economies, including Queensland’s. The National Accounts revealed a Queensland economy in which domestic sources (i.e. excluding exports) are barely contributing to growth (see my QEW post on the new data). State Final Demand grew by only 0.1% in September quarter.

In his analysis of the latest National Accounts data at his Conus blog, Pete Faulkner has made a striking observation, which I’ve illustrated in Figure 1:

“Growth in the domestic QLD economy is almost exclusively from the public sector with the private sector as a whole now declining. Indeed, the total private sector has seen (slight) declines in all of the past 5 quarters and is now 0.7% below the level seen in the second quarter of 2018.”

Fig_1_private_demand

Pete goes on to note “The Public sector, over the same period, has increased by 6.5%”, which I’ve illustrated in Figure 2, but please note the different y-axis scales on the two charts. Queensland Treasury in its National Accounts State Details briefing has observed “Public final demand continues to be the main driver of SFD [State Final Demand] growth”.

Fig_2_public_demand

In Queensland, the end of the apartment building boom has meant that private dwelling investment continued to subtract from State Final Demand in the September quarter (Figure 3). Government capital investment has been adding to demand, but this was partly offset in September quarter by a fall in general government consumption expenditure (i.e. non-capital expenses including on employees), due to a 2.7% fall in State and Local expenditure, related to extra-high expenditures earlier in the year due to flood remediation works (see the ABS commentary).

Fig_3contributions

While it was once a major contributor to growth in the Queensland economy, during those mining investment boom years in the first half of the decade, private sector engineering construction activity has been falling and continued to do so in September quarter (Figure 4).

Fig_4_private_capex

Queensland businesses aren’t investing at the levels we need for a healthy economy and consumers aren’t confident and spending money either. We’ve seen growth in household consumption expenditure fall to such a low quarterly growth rate that it rounds to 0.0% in the seasonally adjusted data (Figure 5).

Fig_5_cons

At a national level, exports contributed positively to growth, but that appears to have been a result of strong growth in exports out of WA. According to the balance of payments data published the day before the National Accounts, credits for goods and services exports out of Queensland were 2.5% lower in real terms in September quarter than June quarter, using the seasonally adjusted data. So don’t expect exports to have saved the Queensland economy in September quarter. I should note that debits for imports of goods and services fell, too, and by slightly more than exports, so net exports (i.e. exports minus imports) might end up boosting Queensland’s September quarter GSP growth rate marginally above the extremely weak 0.1% estimate for State Final Demand growth.

Queensland’s labour market appears a lot better than the National Accounts would suggest, with employment still growing, albeit modesty according to ABS Trend estimates reported by Queensland Treasury in its Labour Force briefing. It’s likely the impacts on the labour market will show up with a lag, as empirical data suggest they do, so we need to watch how the labour market begins 2020. The National Accounts data and recent ANZ job ads data suggest it won’t be a great start to the new year.

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Panama papers & multinational tax avoidance Economics Explained episode with QUT’s Prof. Raimondos

In the latest episode of my Economics Explained podcast, I chat with QUT Head of School of Economics and Finance Professor Pascalis Raimondos about international taxation issues, particularly multinational and personal tax avoidance and evasion. As Pascalis notes in the interview, tax avoidance has become topical again lately with the release on Netflix of Steven Soderbergh’s The Laundromat about the Panama Papers.

Use these timestamps to jump right into our conversation:

  • 1:45 – are tax avoidance and tax evasion a major concern?
  • 3:40 – thin capitalisation as a way multinationals can minimise tax
  • 5:00 – transfer pricing as another way
  • 10:25 – having a lot of intangible capital (e.g. Apple, Starbucks) can assist in tax minimisation
  • 14:20 – need for international cooperation e.g. formula(ry) apportionment
  • 21:35 – Panama papers, shell companies, The Laundromat on Netflix
  • 27:40 – following Piketty, do we need inheritance/wealth taxes?
  • 31:25 – economic benefits of Trump corporate tax cut in US
  • 34:40 – Pascalis recommends a cash flow tax, which I note was suggested by the tax review led by Australian Treasury Secretary Ken Henry (see the 2010 Final Report)

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Overly optimistic reactions to discouraging GDP data

The RBA and the Government must be happy the media is accepting the Bank’s “gentle turning point” view of the Australian economy (e.g. see the AFR’s ‘Back on track’: GDP lifts to 1.7pc), but I can’t see how the September Quarter National Accounts published by the ABS today support it. In September quarter, the Australian economy grew 0.4%, compared with 0.6% in June quarter, so the period of relatively weak growth in the economy is continuing.

Sure, the through-the-year growth rate has improved slightly from 1.6% to 1.7% but, as Pete Wargent suggested last week, that’s occurred because a past poor quarterly result has now dropped out of the calculation (see his CapEx outlook fizzles). The new quarterly data instead support the view that the economy is continuing to slow down.

In Queensland, domestic sources* added very little to the growth of the state economy, and State Final Demand grew only 0.1% in September quarter (see chart below). NSW’s and Victoria’s levels of State Final Demand grew at an unimpressive 0.3% and 0.4% respectively, while WA’s fell by 0.2%. Queensland’s and WA’s GSP growth rates should look better once exports are accounted for, but there is no denying these are discouraging figures.

SFD_quarterly_upscaled_image_x4

* i.e. household consumption, dwelling investment, government spending, business investment, but excluding (net) exports which aren’t available on a comparable state-by-state basis.

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Sluggish economy & lower coal prices could put Qld gov’t in operating deficit

The mid-year budget update from the Queensland Government later this month will no doubt contain economic and fiscal forecasts with substantial downward revisions, owing to a weaker national economy and lower coal prices.

The state budget forecast a hard coking coal price of $US 179/tonne averaged over 2019-20 (see p. 212 of Budget Paper 2). But the current (premium) hard coking coal price appears to be around $US 135/tonne, according to Metal Bulletin. The lower coal price alone could lower expected revenues by several hundreds of millions of dollars, putting the 2019-20 operating balance at risk of going into deficit, given it was estimated to be only $189 million when the budget was handed down in June.

From the budget (p. 213 of Budget Paper 2), we know a 1% variation in the average coal price results in a revenue change of approximately $54 million. Depending on where the average coal price ends up over 2019-20, the budget could lose $0.5 billion to $1 billion. Such a loss would more than wipe out the Palaszczuk Government’s thin operating surplus.

The weak national economy could also compromise state government revenues. Pete Wargent has nicely summarised expectations for September quarter GDP growth, to be revealed this Wednesday (CapEx outlook fizzles):

“The early partials for GDP growth in the third quarter look to be weak, with declines in dwelling construction, a negative contribution from retail sales, and now another weak…partial from the CapEx figures.”

The ABS’s September quarter private new capital expenditure data (released last Thursday) showed Queensland doing better than all other states and territories (a 2.3% increase in September quarter compared with a 0.2% decline nationwide), with WA the only other state/territory to record an increase in capital expenditure (see chart below).

capex_states

The positive result for September quarter for Queensland was likely due to the mining industry, which has experienced a recovery in capital investment over the last few years (see chart below). That said, mining investment is much lower than what it was at the peak of the mining investment boom in the first half of this decade, and it won’t be enough to promote a thriving Queensland economy in 2020.

capex_ind

The Queensland Government appears well aware of the weaker economic and fiscal outlook and hence will hand down the 2020-21 Budget in late-April instead of mid-June next year. The government is aiming to stimulate both the economy and its re-election prospects (of course) with additional public spending in 2020, regardless of what that means for the budget deficit and the stock of debt, currently on its way to $90 billion.

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The media & digital disruption – podcast interview with Rebecca Archer

More so than most other industries, the media industry has been subject to digital disruption since the emergence of the internet in the mid-nineties. Indeed, we learned yesterday that Channel 7 in Brisbane is axing three local programs, including Queensland Weekender. Digital disruption has had profound consequences for the financial viability of traditional media and for the job prospects of journalists. Google, Facebook, and other sites are attracting advertising revenues which once flowed to TV networks and newspapers, which now always seem to be laying off staff. No longer is the nightly TV news compulsory viewing, nor is everyone on the morning train reading the local newspaper anymore. They’re scrolling through their Facebook or Twitter feeds on their smart phones instead.

In my latest Economics Explained episode, I discuss the media in our age of digital disruption with Rebecca Archer, Director of Connect Media Training, who has worked as a journalist at the ABC in Australia and the BBC in the UK. Australian listeners may know Rebecca as Rebecca Hyam, a former ABC finance reporter. Rebecca still works on a casual basis at ABC Brisbane in addition to running her media training company. Of course, views expressed in this podcast are Rebecca’s personal views, and should not necessarily be attributed to the ABC.

Use these timestamps to jump right into Gene and Rebecca’s conversation:

  • 2:15 – how the media industry has changed over the last 20 years
  • 4:45 – entry of the New York Times and the Guardian into the Australian market, as well as the rise of citizen journalists and bloggers
  • 6:20 – while only twenty years ago Rebecca was lugging around a Marantz tape recorder, she can now use an iPhone to record interviews
  • 9:50 – how the internet and social media have undermined the traditional business models of media organisations, and how Twitter is where breaking news now occurs (e.g. important updates from emergency services)
  • 12:25 – Nine-Fairfax merger as response to how difficult it is to make money in traditional media these days, followed by observation people are able to bypass traditional media and get news directly from sources via Twitter or Facebook
  • 15:05 – I refer to a Centre for Media Transition report for the ACCC which discusses news as a public good
  • 20:00 – how newspapers have lost the “rivers of gold” which were classifieds advertising revenues, and how some media organisations have taken strong ideological positions to attract an audience
  • 23:00 – how media organisations can thrive: create content people can relate to, don’t be highbrow, and use social media to add value (e.g. Facebook Live discussion regarding a 60 Minutes story)
  • 29:00 – whether quality journalism has been compromised by digital disruption
  • 32:10 – polarisation and filter bubbles
  • 38:20 – whether journalism remains a good career
  • 41.30 – journalists as story tellers (I mention Cal Fussman’s outstanding podcast Big Questions)
  • 45:10 – the role of public broadcasters such as the ABC and BBC in this age of digital disruption

Our conversation was recorded on 26 November 2019 in the Adept Economics office at the Johnson, Spring Hill, Brisbane, using a Zoom H4n Pro digital recorder and Shure SM58 microphones.

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