Why is it so? Regional Qld airfares 2-3 times higher than in the city – guest post by Craig Wilson

I am delighted to publish this guest post from my former colleague Craig Wilson, who is now Managing Director of DeltaPearl Partners. Craig will be well known to many readers as a result of his former senior executive position in the Queensland Department of Premier and Cabinet. His guest post is based on recent work he has undertaken for Mount Isa City Council. The post contains Craig’s views, and they should not necessarily be attributed to me. I am sure Craig would very much welcome comments on this guest post. GT

Why is it so?  Regional Queensland airfares 2-3 times higher than in the city

by Craig Wilson

Toward the end of 2017 the Australian Senate announced an inquiry into the operation, regulation and funding of air services into rural, regional and remote in Australia. Among other things the inquiry will consider air fare pricing, competition, regulation and service quality as well as the socio-economic impacts of these things on communities and the economy. The announcement of such an inquiry is not surprising – the issue of high air fares and poor service quality on flights in and out of regional centres has been a hot button issue for communities across the country for some time.

Let’s take Mount Isa, for example, whose City Council has prepared a detailed submission to the Senate inquiry investigating regional air services.

Mount Isa is a significant regional centre in northern Australia and lies at the heart of the North-West Minerals Province, the largest zone of mineralisation of its kind in the world. The Mount Isa economy generates around $2.4 billion annually in value-added output and $1 billion annually in tax revenues for the state and federal treasuries.

Despite this significant economic contribution, regional centres such as Mount Isa feel second class because of the price and quality of air services they receive and, as a consequence, communities and local governments are becoming increasingly vocal in their demands for a better deal. At a headline level, the analysis in the Mount Isa submission has found that, on a per kilometre basis, Mount Isa travellers are paying two to three times more in air fares than passengers flying out of Australia’s major metropolitan centres on comparable journeys (Table 1).

cw_table1.png

Mount Isa residents state that it is often cheaper to fly overseas than to fly to Brisbane. To compound the disparity, service standards are typically lower with older aircraft and fewer onboard services such as food and entertainment.

Excessively high air fare prices impede the growth of business, especially small business, and isolates residents and lessens their quality of life. Local residents argue that this is a bitter pill to swallow when they see high subsidies for public transport in south-east Queensland, and high subsidies going to under-utilised passenger rail services in regional Queensland. They do not understand why they are exposed to the high price of market failure and/or monopoly pricing, and they believe the second-round economic effects of this policy failure are adverse.

It is also difficult for young families to move to, and remain in, Mount Isa as it is so expensive to fly and to keep in contact with family and friends outside Mount Isa. For example, a family of four thinking about flying to Brisbane will save over $2,000 by driving 900 km to Townsville to catch a flight. In cases of unplanned travel such as a medical emergency, residents can expect to be hit with one-way fares of more than $1,000.

Since the aviation reforms of the 1990s, passenger numbers on most major Australian aviation routes have boomed off the back of lower airfares and greater choice of carriers (Figure 1).

Figure 1: Index of real airfares, 1992 to 2017

CW_Figure1

Source: BITRE, 2017, Domestic air fares indexes.

However, in preparing its submission, the Mount Isa City Council found that the benefits of these reforms have largely by-passed Mount Isa and other similar centres. The submission concludes that discounted air fares are rare and passenger numbers through the local airport have barely changed in 30 years (Figure 2).

Figure 2: Index of domestic passengers, 1985-86 to 2016-17

CW_Figure2

Source:  BITRE 2017, Airport Traffic Data.

A range of factors contrive to generate these untenable high cost and low-quality air services in regional centres. These factors include lack of competition, exposure to monopoly-owned asset operations (i.e. regional airports), government policy restrictions, high taxes and charges, and lack of transparency on costs.

Analysis has shown that Queensland Government transport subsidies in south-east Queensland are not replicated for transport services for communities in regional Queensland. An examination of Queensland Government expenditure on public transport shows that it is concentrated in south-east Queensland, especially on the city rail network. The result is that the state government supports public transport to the extent of $568 per person per annum in the south east. This is almost two times (85%) more than the $308 per person the Queensland Government spends on public transport in the remainder of Queensland.

Meanwhile, federal government support is limited to modest subsidies for tiny rural airports servicing communities of less than 200 people. Known as the Remote Airstrip Upgrade Program, this subsidy provides funds to improve runway surfaces, storm water drainage and navigational aids. For example, in 2015 $11.8 million was provided for upgrades at 52 aerodromes and a further $11.6 million was committed for 2017.

It is defensible to say that the Mount Isa City Council submission reflects a commonality of issues facing other comparable regional centres. The Mount Isa City Council has, consequently, developed a set of hard-hitting recommendations, arguing that a half-hearted response won’t suffice.

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ABC Brisbane radio interview on CommSec & Deloitte economic reports

I had an enjoyable chat yesterday afternoon with Steve Austin on the 612 ABC Brisbane Drive program regarding the latest CommSec and Deloitte economic reports which had generated political debate during the day. While state Treasurer Jackie Trad highlighted that Deloitte was forecasting Queensland would lead the nation in economic growth, the Opposition was critical of Queensland’s sixth place in CommSec’s State of the States ranking. Steve asked me about the respective merits of both reports, and you can hear what I had to say at this link at around 2:02:30:

Steve Austin’s Drive program, Monday 29 January 2018

In the interview, I expanded on the comments I made regarding the reliability of economic forecasting in my post from yesterday:

Comments on Deloitte’s latest economic outlook for Qld

I also criticised the CommSec State of the States Report. To illustrate the point I made to Steve about the problem with the CommSec methodology, which ranks states according to how their current indicators deviate from decade averages, see the chart below of one of the indicators used: construction work done. In Queensland, in September quarter last year construction work done was nearly 18% below the average of the ten years to that quarter. This was unsurprising given the huge and unprecedented construction boom associated with the construction of the LNG plants at Curtis Island, and also because of the large amount of construction activity associated with state government responses to the water crisis and natural disasters, among other things. Queensland really shouldn’t be penalised for now falling below the decade average in a comparison across states, as occurs in the CommSec State of the States report.

Commsec_methodology_construction

Also see my previous comments on the State of the States Report from CommSec:

CommSec State of States report misleading on population growth

CommSec’s State of the States misleading on Qld’s economic performance

Ask a silly question, get a silly answer

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Comments on Deloitte’s latest economic outlook for Qld

The latest economic reports from Deloitte and CommSec are out and, no doubt to the disappointment of their respective media officers, are both covered in the same Courier-Mail report this morning by John McCarthy:

QUEENSLAND appears to be stuck near the bottom rung of the economic performance of states, but reports released at the weekend claim the “storm clouds continue to clear’’ for the Sunshine State.

A Deloitte Access Economics report said Queensland had returned to its status as a preferred destination for Australians on the move.

I agree the “storm clouds continue to clear”, as I have been noting on this blog for over a year now, including in my recent posts Qld’s economic outlook for 2018 and Surge in Qld youth employment over 2017. And Deloitte is correct that Queensland has returned to the lead over other states and territories in net interstate migration, but the lead over second-placed Victoria is very small, only around 240 people in 2016-17 (see chart below). Furthermore, net interstate migration remains well below historical highs.

Interstate_migration_Qld_leading

Apparently, Deloitte is forecasting Queensland economic growth of 3.5% p.a. and higher for the next four years, which is significantly higher than Queensland Treasury’s forecasts of 2.75% in 2017-18 and 3% in 2018-19. Of course, the reliability of precise forecasts several years out is very low. So it is courageous for Treasurer Trad to predict Queensland will lead the other states in economic growth “in each of the next four years”, as reported by the Courier-Mail.

Consider that, in December 2015, Deloitte was forecasting Queensland economic growth in 2016-17 of around 3.75%, with Queensland expected to grow faster than all the other states and territories except for WA and NT (see p. 6 of Deloitte’s Business Outlook from December 2015). But, according to the ABS State Accounts, Queensland ended up with the third lowest rate of economic growth in 2016-17 (1.8%) and WA ended up contracting 2.7%! For 2015-16, Deloitte forecast that Queensland would have the highest economic growth rate in Australia, but we ended up in only fourth place. Alas, economies are inherently difficult to forecast and, in my view, the utility of forecasts beyond the next six to twelve months is extremely low.

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Has Qld dropped the ball on the GST Carve-Up Review? Guest post from Nick Behrens

I am delighted to publish this guest post from my colleague Nick Behrens from QEAS on the GST redistribution inquiry currently being undertaken by the Productivity Commission. Views expressed are Nick’s, and are not necessarily shared by me. That said, I find it regrettable the PC’s draft inquiry report advances options that forgive WA for its poor public financial management during the term of the Barnett Government, to the detriment of all other states and territories. Queensland certainly needs to exert influence on the PC inquiry before it finalises its report later this year, as Nick argues below. GT

Has Queensland dropped the ball on the GST Carve-Up Review?

by Nick Behrens, Director, QEAS 

Many readers will no doubt be aware that the Productivity Commission is currently undertaking an inquiry into Australia’s system of horizontal fiscal equalisation (HFE), which underpins the distribution of GST revenue, and has been an issue of hot contention among States and Territories for decades. The Inquiry is considering the influence the current system of HFE has on productivity, efficiency and economic growth and whether there may be preferable alternatives.

I have previously asked is this Inquiry a threat or an opportunity for Queensland given that in 2017-18 as a State we will receive close to $15 billion in GST or 24 per cent of all money available despite having only 20 per cent of Australia’s population.  My view is it is undoubtedly a threat.

The proposal with the most profound implications for Queensland is that HFE should no longer aim to raise the fiscal capacity of each state to same as the highest state (currently WA), but instead to the average or to the second highest State (currently NSW). If actioned, Queensland will continue to be a net beneficiary of GST distribution. However, the extent of our benefit would be reduced by $729 million each year if HFE is to the second highest state or by $1.6 billion if it is to the average. These numbers would change from year-to-year, as the extent of HFE in Queensland’s favour varies from year-to-year, and has at times resulted in a re-distribution away from Queensland (when we were penalised for high royalty revenue). However Queensland has generally been a beneficiary of HFE, and the PC’s proposals are expected to be adverse for the State over the long-term.

My fear is that Queensland is being outgunned in the war among States in advancing their interests. It appears we may be more reliant on political rhetoric to progress our case as opposed to the substance of good representation underpinned and advanced through evidence and statistical research. While there are some very good and well reasoned arguments advanced in the Queensland Government’s submissions, I think we can do considerably better. Our arguments are articulated in theory and words and lack research and statistics to underpin them, which is surprising given the high calibre of Queensland Treasury individuals.

Page count is a crude metric by anyone’s measure, but a quick analysis of submissions to the process by each State Government reveals Queensland has the lowest page count among all the State submissions.

State Government Submission Page Counts

Initial Submission Post Draft Report Submission Total
NSW 64 44 108
VIC 26 30 56
QLD 16 14 30
WA 122 47 & 15 184
SA 26 19 45
TAS 50 42 92
ACT 92 78 170
NT 44 32 76

Those States that are cross-subsidising the most (like Western Australia) spent the most amount of effort arguing for how the current system is eroding their capacity to deliver services. Oppositely, those States and Territories that receive the highest level of equalisation like Northern Territory and Tasmania also spent significant effort in putting their submissions together.

In its follow-up 14 page submission to the inquiry, Queensland has diligently highlighted the impact that changes would have on the capacity to provide services. At the same time Queensland highlighted that, in its view, the case for change due to erosion of national productivity and growth had not been made by the other States.  Queensland Treasury states:

“Queensland continues to remain unaware of any evidence that this is a factor for governments in the setting of expenditure and revenue policies.

Where potential HFE impacts are considered in the policy decision making process, they are at best fourth or fifth order considerations. This means that many of the incentives or disincentives that are identified in the literature, and mentioned above, exist in theory but not to any material degree in practice.

Additionally, as Queensland set out in its initial submission, the most immediate benefit brought about by the current system of HFE is arguably in the services it allows States to provide. Any change proposed to HFE on the grounds that it will reduce disincentives to pursue economic growth must be balanced against the social costs of any potential reduction in services in some parts of the country – and the important role those services play in the long-term health of the economy.”

This is unfortunately and literally the extent to which Queensland is trying to counter the call for change and it is not enough. To be fair the post draft submission stage of the process was smack bang in the middle of our State Election with Queensland Treasury in caretaker mode.

However, if Queensland wants to maximise the likelihood that detrimental change does not occur then we need to better debunk the Commission’s proposals and highlight how they will affect our productivity and economic growth going forward. Queensland will lose to the greater good of lifting national productivity and economic growth if we are not proactive in countering states like Western Australia when they cite they are deliberately baulking on key reforms that drive economic activity because they are penalised GST payments in doing so.

By not countering the draft proposals with evidence and by not highlighting examples on how the Inquiry’s proposals would impact on our productivity and threaten our economic growth we run the risk of losing. Fortunately, it is not too late with a public hearing in Brisbane on the 5th of February.

Incidentally, the Victorian Government’s submission does an excellent job taking apart the Productivity Commission’s Report. Reading their submission, it becomes clear a major question is whether we radically change the HFE system to benefit Western Australia, noting that if we do we’re essentially forgiving them for poor budget management in the past and not saving for the future. Queensland and Victoria could and should work together in countering the Commission’s proposals as our interests (i.e. lost revenue) are generally aligned (see chart below).

Queensland can’t rely solely on a passionate State Treasurer appearing before the media throwing barbs at the federal government to advance our interests. We need the evidence and arguments to back up our opposition to change. If we don’t represent our interests in this manner we really only have ourselves to blame.

hfe_chart

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Surge in Qld youth employment over 2017

You have probably seen the media coverage of the strong jobs growth over 2017 for Australia. Queensland played a large part in this, with the highest employment growth rate among states and territories (4.6 percent through-the-year) and an increase in employed persons of 108,800. The monthly data for December, though, were a bit disappointing for Queensland, as covered by Pete Faulkner (Strong jobs numbers (again) but QLD disappoints (again)):

Unfortunately, despite a nation leading employment growth rate of 4.6% y/y, the picture in Queensland is less rosy. Employment rose just 3,600 in December which is the weakest growth since Nov 2016 and the Trend unemployment rate remains at 5.9% (after Nov was revised up from 5.8%).

The volatile seasonally-adjusted Queensland unemployment rate increased from 5.9 percent to 6.0 percent in December. Of course, as I’ve noted many times previously, we shouldn’t get too concerned or excited about month-to-month changes and we should consider movements in the data over longer periods.

Generally, I think recent labour market data are encouraging for Queensland, and I am especially encouraged by the surge in employment among young people aged 15 to 24 over 2017 (see chart below). With 431,000 young people employed in Queensland in December 2017, the level of employment was 42,500 people higher than in December 2016, with the increase split almost equally between full-time and part-time positions. I expect many of these additional jobs are in tourism and hospitality, and also in junior positions in health and aged care.

LF_Dec17_chart1

The strong employment growth over 2017 for young Queenslanders has resulted in a  decline in the youth unemployment rate (see chart below).

LF_Dec17_chart2

This is welcome news, as it has been difficult for young people to find employment, particularly full-time, in Queensland in recent years. I remain hopeful that the momentum in Queensland’s economy will continue through 2018, as discussed in my previous post:

Qld’s economic outlook for 2018

Also, see Queensland Treasury’s handy Labour Force brief summarising all the latest data. And note that, while Queensland had the highest employment growth rate, NSW created the most jobs in absolute terms, as noted by Pete Wargent: NSW jobs growth on steroids.

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Qld’s economic outlook for 2018

CCIQ’s Joseph Kelly has published a nice note titled Business 2018 examining the outlook for Queensland business in 2018, in which he suggests “2018 has all the elements to be the year for business.” Factors that will boost Queensland’s economy in 2018 include the Commonwealth Games in April and the resurgence in the resources sector. But energy costs will continue to weigh on businesses. Mr Kelly notes that overall “Queensland’s economy goes into 2018 with momentum”. My own view is that this momentum should continue through 2018. Queensland’s economic conditions will most likely remain “sound”, as the Queensland Treasury described them in the Mid Year Fiscal and Economic Review (MYFER) published in mid-December. Expect health, aged care and education to continue to perform well in 2018, as well as new mining and renewable energy investments to provide a boost in regional areas across Queensland (e.g. see this Townsville Bulletin report and this Queensland Government media release from last October).

Based on data published so far this year, such as the retail trade data for November, which were boosted by iPhone X sales but still show weaker growth in Queensland than for NSW and Victoria (see chart below), I wouldn’t yet adjust the MYFER forecasts Queensland Treasury made for Queensland economic growth: 2.75% in 2017-18 and 3% in 2018-19. Growth will continue to be respectable, but not extraordinary, so don’t get too excited about the Queensland economy just yet. The resources sector may be expanding its exports and boosting growth, but some other sectors (e.g. manufacturing, retail) remain lacklustre.

outlook_2018_chart1

The ABS job vacancies estimates for November released by the ABS on Wednesday showed a reasonable level of vacancies for Queensland, but I was disappointed the upward trend in vacancies has stopped and that vacancies have not continued to surge as in NSW and Victoria (see chart below and Pete Wargent’s post NSW jobs are absolutely booming).

outlook_2018_chart2

As such, the number of unemployed people per job vacancy has not fallen in Queensland by much over the last year compared with the falls in NSW and Victoria. In NSW, in November there were 2.2 unemployed people for every vacancy, compared with 3.9 unemployed people per vacancy in Queensland (Hat tip to Pete Wargent whose chart on the national unemployed to vacancies ratio prompted me to look at what has happened in Queensland).

outlook_2018_chart3

Unemployment is still a major issue in some regions, such as the Queensland outback and Wide Bay-Burnett (see chart below), but the labour markets in Townsville and Cairns especially have improved greatly over the last twelve months, as noted by Pete Faulkner in a recent post Regional Labour Force and Industry Jobs data (NB my chart below uses Queensland Treasury’s 12 month moving average estimates of regional unemployment rates, while Pete generates his own trend estimates using a seasonal adjustment routine).

Qld_Map

I would be more excited about Queensland’s economic outlook in 2018 were it not for the outlook for the building industry which is fair at best. Building approvals have settled down to more reasonable levels after the apartment construction boom of the last few years (chart below), and non-residential building approvals are suggesting only modest growth in non-residential building in 2018. Over the twelve months to November 2017, the value of non-residential building approvals was only 3.1 percent higher (in nominal dollar terms) than in the twelve months to November 2016.

outlook_2018_chart4

Upcoming events on the economic outlook

Finally, you may be interested in some events covering the economic outlook for Queensland and Australia in Brisbane in February:

Posted in Macroeconomy, Uncategorized | Tagged , , , , , , , , , , , | 1 Comment

Holiday reading – Till Time’s Last Sand: A History of the Bank of England 1694-2013

Kynaston book cover

Over the Christmas and New Year break, I finishing reading Till Time’s Last Sand, British historian David Kynaston’s masterful history of the Bank of England, covering its first 320 years since its establishment in 1694, when incidentally it became the second central bank in the world, as Sweden’s was established over two decades earlier. Hat tip to Nicholas Gruen who tweeted on central banks recently: https://twitter.com/NGruen1/status/947352667512119296.

The book covers the bank’s origin as the banker to the British Government and its evolution into “a great engine of state”, as Adam Smith described it. During its long history, the bank has helped the British Government finance its budget in peace and wartime, and it also helped finance colonial development, including that of Queensland’s in the 19th century. The book tells the story of, among other pivotal events, the bank’s nationalisation in 1946, its experiments with monetarism in the 1970s and 1980s, its eventual independence to fight inflation on its on terms, and its controversial response to the financial crisis. It is a comprehensive history, with a wealth of fascinating information including, for example, the attempted shooting in 1903 of Bank Secretary Kenneth Grahame, who later wrote The Wind in the Willows.

The book contains a brief but interesting reference to Queensland. In the 19th century the Bank of England managed the Queensland Government’s borrowings from the London market, and in the late 1880s it became very concerned about Queensland’s rapidly growing public debt, which it was finding increasingly difficult to market. In 1888, the bank’s Governor Sir Mark Collett told the Queensland Government representative in London that he should advise the state government it needed to reduce its borrowing requirement. Certainly, Queensland’s public finances were in a parlous state at the time. In his biography of Sir Thomas McIlwraith, The Queensland Caesar, former Queensland Attorney-General Denver Beanland noted that, by 1890, Queensland had the highest public debt in the British Empire, at around £70 per capita, compared with Canada’s £12 per capita, for example.

The book contains many interesting stories about the bank’s employees, their day-to-day work, and how they came into the bank. For much of its history, the old boys network and family connections were relevant, and apparently proficiency in cricket was highly desirable. Kynaston is excellent when it comes to the human dimension, if not the economic dimension, which I’ll come to below. His description of the bank’s legendary governor of the first half of the twentieth century, Montagu Norman, is excellent. Norman is presented warts and all. With Norman, the facts speak for themselves. Norman’s extraordinarily poor judgment was demonstrated by his advocacy for Britain’s disastrous return to the gold standard in 1925, his unauthorised visit to Nazi Germany in early 1939, and the bank’s transfer of gold belonging to the Czechoslovak National Bank to the Reichsbank, after Nazi Germany’s invasion of Czechoslovakia in March 1939, just six months before the start of the war (see this BBC report).

As noted in a highly critical Guardian review of the book (Till Time’s Last Sand review – a bloodless history of the Bank of England), Kynaston tends not to include much of his own emotion or opinion in the book. This is most apparent in his discussion of recent bank history, and he could be accused of going soft on former Governor Mervyn King, who incidentally had requested the author to write the history. You may recall King was heavily criticised for the bank’s role prior to and in the early days of the financial crisis from many commentators, including a former member of the bank’s own Monetary Policy Committee David Blanchflower (see this BBC Report for example). The bank King led was accused of failing to understand the full magnitude of the risks to the financial system and the wider economy that started appearing in the second half of 2007. Kynaston notes the criticism that was made of King at the time, but his own opinion is unclear.

Perhaps Kyanston felt unqualified to offer opinions on economic issues, not being an economist. Robert Skidelsky made a similar comment in his review of Kynaston’s book. While I would have liked the book to discuss important contemporary issues in central banking, such as the debate over inflation versus nominal GDP targeting or the implications of cryptocurrencies such as Bitcoin, I can understand the author was not well placed to provide this commentary. Overall, this is an outstanding history of an incredibly important institution, and I can highly recommend it to readers interested in economics, banking or British history.

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