Qld Gov’t going for broke in COVID response

As well as confirming Australia is in a deep recession, with a 7% fall in GDP in June quarter, the National Accounts published by the ABS earlier today revealed Queensland state and local governments (mostly the state government) are spending big in their COVID responses.  In the chart below, check out the 7.5% growth in Queensland state and local general government consumption spending, which includes employee expenses, in June quarter, the highest growth rate in Australia.

We’ll learn more about what’s been happening when the Queensland Government publishes its budget update next Monday. So far the Government has only disclosed part of the story, such as estimated net operating balances (see the Treasurer’s 23 July update and this briefing from Nick Behrens). Expect lots of red ink, with a deterioration of up to $20 billion in fiscal balances (the budget balance including net capital spending) over 2019-20 to 2023-24, as taxes, royalties, and GOC earnings have plunged and spending has surged, including $6 billion in stimulus/emergency measures. We will probably see fiscal deficits of around $10 billion in 2019-20 and $14-15 billion in 2020-21 with total state debt climbing to $105-110 billion by mid-2024. General government debt will approach $70 billion and the interest bill will climb toward $2 billion a year.  

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Deep recession to be quantified in June qtr National Accounts released tomorrow

Age/SMH Senior Economics Correspondent Shane Wright has written a great summary of the business indicators data released yesterday by the ABS: An economy like 2016 as sales and wages collapse. The business indicators data are pieces of the jigsaw puzzle that is the National Accounts, which reports the nation’s GDP and its components. The June quarter National Accounts will be published by the ABS tomorrow. Perversely, company profits were up 15% in June quarter, largely due to JobKeeper and other subsidies, but income from sales and wages collapsed, as expected, in June quarter, according to the business indicators data (see chart below).

Queensland experienced the largest drop in total wages paid, although that’s not what we would have expected based on the single touch payroll data published by the ABS. It’s possible sampling error has led to Queensland having the worst result across Australia. In any case, the economic hit has been massive.

Overall, it’s expected that the Australian economy contracted by around 7% in June quarter, over three times the previous record for a quarterly contraction recorded in the mid-seventies. And, because of the Victorian outbreak, we shouldn’t expect a rebound in the September quarter we’re currently in. Check out this post from my colleague at Adept Economics Taylor-Rose Hull:

How bad was the second quarter GDP contraction?

Unfortunately, we will likely be in the economic crisis for many months yet. I told Scott Emerson on 4BC yesterday afternoon that I’m very worried about the economic outlook, with the looming fiscal cliff, default cliff, and insolvency tsunami that will eventuate from the end of September.

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The Triumvirate’s Stratagem cannot stand – guest post by Joe Branigan

Thanks to my old friend and former Treasury colleague Joe Branigan for this guest post on the Queensland Government’s response to COVID-19. Views expressed are Joe’s and should not necessarily be attributed to me. GT

The Triumvirate’s Stratagem cannot stand

by Joe Branigan

The Queensland Premier thinks she can’t lose. On the one hand, the enormous fiscal costs of lessening the catastrophic economic and social impacts of her COVID policy overreach are borne by the Federal Government (via JobSeeker and JobKeeper payments). On the other hand, the benefits of scaring the living daylights out of Queenslanders accrue solely to her government’s re-election chances.

The real trouble with Palaszczuk’s approach is that she’s relinquished her role as head of government and cabinet chair. The Premier, and her deputy, hide behind the political full-face shield that is the Chief Health Officer of Queensland Dr Jeanette Young. A Triumvirate, but effectively of one.

The Palaszczuk Government must be held accountable for the breathtakingly consequential decisions it says are based on Dr Young’s advice. From the ubiquitous use of the singular first-person pronoun by Dr Young in the Triumvirate’s daily press conferences, it appears as if the Government is uncritically and reflexively following Dr Young’s advice, giving her unprecedented power, by default.

But this is grossly inappropriate given that Dr Young is an unelected official. This is not to criticise Dr Young personally. She is doing her job and providing advice consistent with what she believes the very narrowly-based evidence on COVID19 tells her, although even here there are questions about the academic evidence she is relying on, much of it modelled rather than based on actual empirical experience – but that is a tale for another day. The point is that the Palaszczuk Government should not be solely deferring to the opinion of the CHO unreservedly.

Media outlets, including The Courier Mail, have thus far refused to be critical of the Government’s approach, preferring to be “united against COVID” no matter what the economic and social cost of the Government’s social distancing and other measures to Queensland. While the Queensland Media blindingly cheer on the Triumvirate, in the absence of critical journalistic scrutiny it will be up to Queenslanders themselves to seriously question the ‘official advice’. This scrutiny is even more important in Queensland, which unfortunately retains a powerful executive government aided and abetted by a unicameral parliament and now 4-year fixed terms between politician’s performance appraisals.

The CHO derives her authority from a newly written Section 362 of the Public Health Act 2005, which confers unchecked powers that exceed any other elected official, and more akin to the ancient royal prerogative than the delegated powers of a modern liberal democracy (see extract from the Public Health Act below).

Yet, the stated object of the Public Health Act is to “…protect and promote the health of the Queensland public.” Presumably Parliament was referring to the overall health and wellbeing of the entire citizenry, not just eliminating the risk of catching a single virus.

This unprecedented power bestowed upon a narrowly-focussed public health official, even in public emergencies, should be always curbed by deliberative cabinet processes that properly consider the multitude of factors involved in balancing society’s endless economic, health, social and cultural requirements with limited resources.

Cabinets and their subcommittees are often called on to make life and death decisions, whether explicitly or implicitly, when allocating scarce public resources between competing needs, especially in health. There are limits to how much we (the community) can sacrifice to save or extend a life, especially the lives of those very elderly and frail citizens who require significant resources to stay alive an extra day let alone live with some independence and dignity. Health departments allocate resources based on metrics that favour younger and healthier citizens with more tomorrows than yesterdays. And Australia’s Pharmaceutical Benefits Advisory Committee often rejects clinically effective cancer treatments based on cost.

As confronting as all that sounds, those decisions are rooted in a public policy goal that has served Queenslanders well for decades, which is essentially to achieve the greatest good for the greatest number and consequently to seek an efficient and fair allocation of public resources as determined (ultimately) by the Queensland Parliament.

But now we have moved to rule-by-diktat based on a new moral imperative. The 11th Commandment: ‘Thou Shalt have no other policy goal but me (being COVID)’. In effect, the whole of public policy in Queensland has been reduced to a single stratagem.

Given her powerful position, Dr Young should be completely transparent about the information she is relying on to make her decisions, what the objective of her decisions are, and the value judgements underlying those decisions. Is it really true that her sole focus is the complete elimination of community transmission in Queensland no matter what the economic and social cost? Why does she think that an extreme ‘corner solution’ objective is in the best interests of the Queensland community? We need to debate these issues and, preferably, the value judgments supporting those decisions should be determined by elected officials who are accountable to the public.

Meanwhile, the academic work is piling up against the complete elimination stratagem. Dozens of new studies in recent weeks have provided evidence of the short-run and long-term economic and social costs of the elimination stratagem relative to a counter-factual situation of managed suppression, from increased domestic violence, loneliness and despair to collapses in productivity and school learning, not to mention mass unemployment.

Importantly, it has long been established that the total welfare loss from catastrophic economic shocks is far greater than the contemporaneous loss in measured GDP. In other words, the policy reactions of governments to COVID will be felt for years, and possibly decades, to come.

And the latest epidemiological studies indicate that the true infection fatality rate is likely to be closer to 0.1-0.3% rather than the 1.0% originally feared, especially in a relatively young and healthy country with lower rates of morbidity and with an excellent health care system such as Australia, meaning the benefits of avoided deaths are a magnitude lower than first assumed.

This reckless form of government cannot go on for the next 12 months. Professor Whitty, the UK CMO, recently warned: “I think it is unlikely we will have a vaccine that is highly effective and ready to deploy at scale this (northern hemisphere) winter. I think there is a reasonable chance that we will have vaccines, not a certainty, in the period before the following northern hemisphere winter of 2021-22.”

Will public sentiment turn harshly against the Triumvirate before the 31 October election? Even with focus-group driven parochialism masquerading as mature political leadership it is hard to see their stratagem holding up for another 70 days.

Joe Branigan is an economist and co-author of the recent report COVID19: Getting Australia Safely Back to Work.

The Queensland Parliament has granted “unprecedented power” to the Chief Health Officer during the COVID-crisis.

Extract from the Public Health Act 2005

Division 2 Chief health officer

362B Power to give directions

(1) This section applies if the chief health officer reasonably believes it is necessary to give a direction under this section (a public health direction) to assist in containing, or to respond to, the spread of COVID-19 within the community.

(2) The chief health officer may, by notice published on the department’s website or in the gazette, give any of the following public health directions—

(a) a direction restricting the movement of persons;

(b) a direction requiring persons to stay at or in a stated place;

(c) a direction requiring persons not to enter or stay at or in a stated place;

(d) a direction restricting contact between persons;

(e) any other direction the chief health officer considers necessary to protect public health.

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Mining & Ag have partly shielded several Qld regions from COVID shock

As shown in my post on the latest payroll jobs data from the ABS, the regions which have fared the best in Queensland since the COVID-related economic crisis began in March are Toowoomba and Central Queensland, likely due to the importance of the primary industries, agriculture and mining, and their supply chains to the economies of these regions (see chart below of top 20 out of 87 regions in Australia).

Queensland thankfully doesn’t have any regions in the bottom 20 across Australia, a sub-set which is dominated by Victorian regions for obvious reasons (see chart below).

Overall, in terms of total employment, Queensland has been more resilient than most other states and territories (see chart below), which I suspect is partly related to primary industries making a larger contribution to our economy than they do in most other states and territories.

I should note that, despite Queensland’s apparent better performance regarding jobs than the rest of Australia, Queensland had the highest unemployment rate in Australia in July according to the ABS Labour Force Survey. This would be partly related to the fact we had an unemployment rate over half a percentage point higher than the national average pre-COVID, and it also probably reflects sampling error in the ABS Labour Force Survey. Right now, it’s pretty clear Victoria is the worst performing economy in Australia.

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Thoughts on the New Normal – latest podcast episode

Regarding a new normal in a post-COVID world, in the June 2020 issue of Monocle magazine, the Editor Tyler Brule wrote:

We don’t want a heavy handed ‘new normal.’ We want people to act responsibly but we also want families, businesses and countries to thrive. And we want to shake hands, hug, strip off and dive into life…

 So what is the new normal going to look like? This is a question I’ve been thinking about quite a bit lately, so I’ve decided to record some of my thoughts and present them as an episode of my podcast:

New Normal Post-COVID

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Gold Coast and Inner Brisbane the worst affected Qld regions in employment terms

According to the latest regional payroll jobs data released by the ABS today, in early August employment on the Gold Coast was still 6% below the level it was mid-March, before all the major COVID-related restrictions began (see chart below). Among the Queensland Statistical Area level 4 (SA4) regions, the Gold Coast and Brisbane Inner City are the furthest from the levels of employment they had in mid-March, no doubt due to the over-representation of hospitality and tourism jobs among residents of the two regions.

As I’ve discussed in previous posts, the prospect of a V-shaped recovery has vanished, and many regions have seen employment declines after initial rebounds when restrictions were relaxed in May and June (see plots below).

For more on what’s been happening in the regions, check out my interview with Pete Faulkner last month:

Qld’s regional economies & COVID-19 – video chat with Pete Faulkner

Also check out Pete’s latest post on today’s regional payroll data:

Payrolls data suggests there should be some improvement coming for Cairns

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Imperative to avoid bad policy measures like super increase which would set back recovery

Prime Minister Scott Morrison is right to consider delaying the legislated increase in the 9.5% superannuation guarantee rate, which is scheduled to start increasing by half a percentage point each year from 1 July 2021 until it gets to 12%. It’s becoming increasingly clear that our economy will be well below normal levels of activity for an extended period which will probably include most of 2021, depending on the availability of a vaccine. The possibility of a V-shaped recovery has vanished.

Increasing the super guarantee in a still depressed economy would be counter-productive, as various commentators such as the Grattan Institute have noted. It would reduce disposable incomes, either by costing employees wage increases or subtracting from employer profits, and would reduce consumption spending. In the short-run, such a policy would have an adverse economic impact.  

So the PM is right to consider delaying the legislated increase, and indeed the Government should consider whether we need a more fundamental redesign of the retirement income system, given it doesn’t appear to be doing a great job in terms of reducing reliance on the aged pension. Coalition Senator Andrew Bragg has advanced some interesting ideas for super in his new book Bad Egg: How to Fix Super, which he discussed with the CIS’s Simon Cowan in a recent interview (see How to fix super).

Another bad policy measure which would hinder recovery, although to a much lesser extent than the super increase, is the proposed amendment to the Brisbane City Plan reported in today’s Courier-Mail:

Developers would be barred from bulldozing “tin and timber homes” to build townhouses and apartments in Brisbane’s east under a first-time amendment to the City Plan.

Brisbane City Council will recommend a first-time rezoning amendment to the City Plan in order to protect the “character” of Camp Hill from developers’ wrecking balls, pending the results of a community consultation period that begins on Monday.

Why the Council would be doing this when the outlook for the building industry is so dire is beyond me. Sure, it would be popular with many existing residents in these suburbs, but it is bad policy for a range of reasons nicely summarised by Brad Rogers in his 2013 guest post Old Queenslanders in a New City.

It is imperative we avoid bad policy measures like these if we are to recover as quickly as possible from the deep recession we are now in.

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On the record high Gold price in Aug 2020 – podcast discussion with Darren Brady Nelson

In my latest podcast episode on Gold, I discuss the record high gold price of over 2,000 USD/oz. seen in August 2020 with Darren Brady Nelson, Chief Economist of LibertyWorks and a policy advisor at the Heartland Institute. 

Note that the gold price is highly volatile, and is now back down below 2,000 USD/ounce (see Gold price drops, down 3% on the day after Fed minutes push back on yield curve control program).

Links related to the conversation include:

Darren’s Mises Institute article How Fear and Uncertainty Drives Demand for Gold

Sudden Media Infatuation With Keynes’ “Barbaric Relic” – Gold

Keynes vs Hayek rap battle

Milton Friedman on the gold standard – Excerpt: The Man Who Knew

Historical gold price data at measuringworth.com

Note: includes data up to 18 August 2020.

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National leadership needed on interstate borders

Unless we get a COVID-19 vaccine soon, we’re most likely facing years of profound economic and social pain. Every day brings more news of businesses that will never re-open and jobs lost (e.g. earlier this year Arc Dining closed permanently and now the “ongoing viability” of Howard Smith Wharves is under threat, as reported Monday by the Courier-Mail). And we expect an avalanche of insolvencies as JobKeeper is reduced and eventually wound up.

Sure, restrictions have been necessary to control the spread of the virus, to flatten the curve, but, as my old friend and former Treasury colleague Joe Branigan has emphasised in our discussions (e.g. our interview in July), somewhere along the way we changed the objective from suppression, which is realistic, to elimination, which the NZ experience is now showing is unrealistic and extremely costly.

We are now re-imposing or ramping up restrictions based solely on fear and ignoring evidence and logic. The re-imposition of the hard border with NSW, which is causing a lot of pain in border communities, as well as in tourism-dependent regions across the state, is a good example of that. In the words of Currumbin Fair news agent owner, Barrie Parmenter, quoted in today’s Courier-Mail, it’s “bloody overkill.”

Former Premier Campbell Newman told Alan Jones earlier this week that, while restrictions are politically popular in the short-term, they will ultimately be unpopular as the bulk of the population realises the economic damage done (from 5:00):

Qld Chief Health Officer ‘thinks she is the Premier’: Alan Jones

Newman called for the PM to show leadership on border issues, and certainly we do need more national leadership to prevent future poor policy decisions from our state governments.

I cannot recommend the paper Joe Branigan co-authored with Henry Ergas, Getting Australia Safely Back to Work, highly enough. In July, the authors wrote (on p. 7):

In the Australian Federation the closing down of state borders is one of the most dramatic policy measures imaginable. Its economic and social costs are extremely high, and in some cases, are made even higher by the existence of towns and even cities that span state borders. While reopening will need to be sensitive to local conditions, a national set of criteria should be defined, so that the process of reopening borders that are now shut can be transparent and predictable.

The Premier has suggested the interstate border won’t re-open until there is zero community spread in southern states. So it’s possible the border won’t re-open until Christmas or later, which must be massively depressing to tourism operators and their workers. Is this strategy sensible? Is it proportionate? I doubt it. Again, I’d like to know what normative premise Dr Jeannette Young is using in developing her recommendations to the Premier.

Finally, a big shout out to the Queensland Productivity Commission for its excellent report earlier this week Building Economic Resilience in Queensland. It confirmed what I’ve been saying on this blog for a while now, that pre-COVID the Queensland economy was under-performing. It also contains some great analysis of how the Queensland economy and its regional economies have been affected by the pandemic, e.g.:

… the largest adverse employment impacts have been felt in tourism-dominated areas, with the worst affected areas being Port Douglas-Daintree, Surfers Paradise, Maroochy, Noosa and Broadbeach-Burleigh. Cairns and Brisbane’s Inner East have also been heavily affected.

With its decision to reimpose the hard interstate border, the Queensland Government has imposed more and arguably unnecessary pain on those tourism-dominated areas.

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Chief Medical Officers should make their value judgements clear and Premiers shouldn’t just defer to them

The Australian Institute for Progress ran an excellent webinar last night, on the economic response to the pandemic, featuring prominent Australian businesswoman and former ACT Chief Minister Kate Carnell and Griffith University Economics Professor Tony Makin. It’s certainly a good time for public discussion of the response to the pandemic.

In Australia, we see the unpredictable and increasingly draconian public health response is ruining businesses, crashing confidence (see the chart below and this ABC News report), condemning people to long-term unemployment, and risking a prolongation of the deep recession we’re currently in, with 1.6 million unemployed and a private sector on life support from JobKeeper.

Furthermore, the situation in New Zealand is terrifying and should be forcing us to reconsider our public health response. How confident can businesses be if they are worried that any future cases of COVID-19, no matter how few, will lead to a re-imposition or ramping up of restrictions?

It is time to ask our political leaders harder questions about why particular restrictions are being imposed. Kate Carnell gave a great answer when I asked her whether Premiers should be deferring to Chief Medical Officers and accepting their advice on restrictions uncritically. Carnell replied that we’re not very good at nuanced arguments. The politically simple (and strangely popular) thing to do is to accept the advice from the CMOs and to lock down our economies and close borders. But this comes at a huge economic cost, with associated adverse social and health outcomes.

As Henry Ergas and Joe Branigan argued in their recent Menzies Research Centre paper (e.g. check out Catch up on COVID-19 with Joe Branigan), we need to find a balance, where we can control the spread of virus without destroying the economy and breaking the spirit of the population.

I’m not a public health expert, so I have to concede it’s possible the CMOs are recommending the right approach. That said, I’d like to see them explain the normative or ethical premises that take them from there ‘is’ statements to ‘ought’ statements. How do they solve David Hume’s is-ought problem?

Economists mostly do this by adopting the normative premise articulated by Jeremy Bentham, that our governments should act to achieve the greatest good or happiness for the greatest number.

But how do our public health officials solve the is-ought problem? It can’t be that they’re abiding by the Hippocratic oath, to above all do no harm, because the restrictions they’re recommending to control COVID-19 are certainly harming many in the community who are subject to curfews, job losses, or business failures. And CMOs don’t appear to be Benthamite utilitarians, as they appear to be over-reacting to any new cases of COVID-19 and reimposing restrictions without regard for the adverse economic and social consequences.

It’s time for our CMOs to be clear on the normative premises and value judgements underlying their recommendations, and for our politicians not to simply defer to the CMOs, avoiding responsibility for the adverse impacts of the ongoing restrictions.

Business confidence is on the way down again.

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