Upcoming celebration of bicentenary of Ricardo’s Principles of Political Economy and Taxation on Wednesday 19 April

Wednesday next week, the 19th of April, will be the bicentenary of the publication of the hugely influential Principles of Political Economy and Taxation by the English classical economist and stockbroker David Ricardo (1772-1823). It was a book that revolutionised the world’s understanding of the benefits of trade. Since then, it has provided the intellectual support for the liberalisation of trade and reductions in tariffs worldwide. It is a book that is still relevant in a world that is debating once more the merits of free trade, as seen in the 2016 US election campaign, for example.

The Economic Society of Australia (Qld), of which I’m the Secretary, will be celebrating the bicentenary with a function in the Manhattan room at the GPO Hotel, Fortitude Valley from 6pm on Wednesday 19 April. From the ESA (Qld) website:

Published April 19th 1817, David Ricardo’s theory of comparative advantage underpins economic analysis of the merits of free trade, and has been influential in the push for free trade worldwide.

Ricardo’s work is a timely reminder of the power of economic thought for the betterment of humanity.

Professor Pascalis Raimondos, Head of Economic and Finance School at QUT, will share a presentation on the current state of Globalisation and the impact Ricardo’s work has had on the modern economic environment.

Further details are available on the ESA (Qld) website:

Bicentennial Celebration for Ricardo’s On the Principles of Political Economy and Taxation – Speaker: Pascalis Raimondos

NPG L241; David Ricardo by Thomas Phillips

Portrait of David Ricardo by Thomas Phillips, National Portrait Gallery

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Debbie hits Qld Budget, but QIC may help out Government by investing in Cross River Rail

Cyclone Debbie and the floods that followed have tragically resulted in the loss of at least five lives and have done billions of dollars’ worth of damage in Queensland and NSW. And through lower coal royalties (largely associated with an important rail line being out of action) and a hefty repair bill (a large part of which will be met by the Commonwealth, though), Cyclone Debbie will also adversely affect the Queensland State Budget, complicating the preparation of what will be the last State Budget before the next election. The magnitude of the impact on the Budget is difficult to gauge, given all the moving parts. One consideration, identified by Bill O’Chee yesterday, is the insurance the State Government has taken out on State assets since 2011, although at the time Premier Bligh suggested it would only cover a small part of the total cost of a natural disaster (see this ABC News report from 2011).  In the Courier-Mail yesterday, former CCIQ Director of Advocacy Nick Behrens was quoted on the possible Budget impact:

Economist Nick Behrens said the royalties income would still be “well ahead’’ of the original estimate last June, but the weather disaster would shave up to $200 million from the revised figure. “However the damages bill I suspect will be far higher than the $2.748b sugar hit from coal royalties and additional GST receipts (of $889m). “So the State Government may actually find themselves in net terms behind.”

I agree Debbie will be a setback to the Budget. But nonetheless I expect the Government will pull a rabbit out of the hat sometime later this year, if not at Budget time, and set itself up for the election, with a major announcement on the $5-10 billion Cross River Rail (CRR) project. The Government needs to show real progress on CRR so it can defend itself against the Opposition’s criticism that it is a “do nothing government”. I expect the Queensland Investment Corporation (QIC), which looks after more than $20 billion set aside to meet the State Goverment’s superannuation liabilities, will commit to a major investment in CRR infrastructure, particularly the tunnels and subway stations, as its CEO suggested it may do last month (as reported in the Courier-Mail on 28 March).

We will need to look carefully at how the CRR project is structured to determine its impact on the Budget. We now have a CRR Delivery Authority that I expect will set up various companies to deliver different aspects of the project, and QIC will invest what may have to be billions into these companies. This should keep a lot of the expenditure for CRR off the State Budget, but the Government will no doubt have to commit to large ongoing subsidies, particularly of rail fares, to ensure the project’s commercial viability, given the project would not be commercially viable if it relied on fare revenue and other private income sources alone. The Government may be able to link some of this subsidy to value capture, but the project will undoubtedly be a net drain on the Government’s operating budget. CRR is not a commercially viable project on its own, and will require ongoing public subsidy of some kind.

This points to one of the major problems I see with QIC investing in CRR, in addition to risking the perception of QIC’s independence if it were to invest in one of the current Government’s priority projects. As noted above, the Government would need to subsidise CRR services so investors, including QIC, earn a return on the project. QIC would report a positive return on government funds invested in the project, because those returns are being guaranteed out of the current Budget. These returns would support the payment of the Government’s defined benefits superannuation payments. This would be a bit of smoke and mirrors, and would be rather fiendishly clever, but highly undesirable. My friend and former Treasury colleague, Joe Branigan, now an associate of Cadence Economics and Senior Research Fellow at the SMART Infrastructure Facility University of Wollongong, described it this way to me:

“When QIC invests in infrastructure that won’t by itself provide a commercial return, the lost earnings (from not investing in an alternative commercial asset) is not borne by Queensland’s defined benefit members (whose return is guaranteed) but, rather, by the Queensland taxpayer. In this sense, the returns paid to defined benefit members is a ‘fake return’, subsidised by the Queensland taxpayer.”

This is why it is very important that QIC ignores political considerations when it is making investment decisions. QIC should be investing the State’s superannuation money in commercial projects or investments outside of the State Government sector to avoid the risks I have described. While QIC proclaims it makes its decisions independently of the Queensland Government, it must be very challenging for the organisation when its owner, the Government, comes to it with an investment proposition.

Previously, in line with the recommendations of the 2013 and 1996 Commissions of Audit, I have recommended that QIC be privatised to avoid political interference and risks to the State’s balance sheet:

Selling QIC highly desirable and would avoid allegations of political interference regarding mega mine infrastructure

We will also need to look out for any borrowings associated with the project by Queensland Treasury Corporation that attach to entities classified as public non-financial corporations and which hence add to the State’s total debt reported in the Budget, currently projected to reach nearly $78 billion in 2019-20.

Let us hope the Government does not need to rely on QIC for CRR funding, due to the risks I have outlined above. I must say that I have been impressed with the Government’s response to the Cyclone and flooding to date, particular the focus on rapid economic recovery after the disasters.

CRR_map

CRR from Boggo Rd to RNA showgrounds

Posted in Budget, Cyclones, Transport, Uncategorized | Tagged , , , , , , , | 2 Comments

Still lots of room to boost population density in Brisbane

The vexed issue of heritage protection is in the news again, with controversy over the development of two apartment blocks behind the 1886 Clayfield heritage home Mundumburrah”, which will be raised and brought forward on its lot to accommodate the development, as reported in today’s Courier-Mail. I cannot see the problem with this, but it has upset local residents who are questioning whether the Council is committed to protecting Brisbane’s heritage.

The Council’s decision regarding this particular property appears sensible within the current guidelines. Redeveloping those inner city suburbs with character housing, and increasing the population density of those suburbs, is a major way we can accommodate a growing population and house people closer to where they work and play. Consider that there is a lot of scope to boost population density in Brisbane, as ABS data reveal that the population densities of our inner city suburbs are well below those in Sydney and Melbourne (see the chart below).

population_density

As has been pointed out on this blog several times before, such as in Brad Rogers’s guest post Old Queenslanders in a New City, the protection of heritage can come at a high economic cost. We should respect our heritage, of course, but there are more sensible ways to do that than ruling out the re-development of every old house in Brisbane.

Posted in Housing, Uncategorized | Tagged , , , , , , , , | 5 Comments

Weekend reading: CIS Policy mag featuring my article on film industry subsidies, available at good newsagents

Policy_Autumn_17

If you’re looking for something to read this weekend, you could try the latest issue of the Centre for Independent Studies’ magazine Policy, which includes some excellent feature articles. These include an article on the worrying levels of public debt we are seeing worldwide from former IMF Fiscal Affairs Director Vito Tanzi, as well as an article from me, “Special rates for special mates.” This is an expanded version of the article I posted earlier this year on the outrageous subsidy Australian taxpayers are providing to the Aquaman film production on the Gold Coast:

Should the Aquaman film production on the Gold Coast get a $22M tax break?

The magazine also features an interview of UK Conservative Member of the European Parliament Daniel Hannan, one of the architects of Brexit, by Tom Switzer, and articles by William Coleman, Stephen Kirchner and Wolgang Kasper, among others. Highly recommended.

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Qld economy should be resilient to Cyclone Debbie

While we are still to learn the full extent of the damage and economic disruption of Cyclone Debbie, we should be reasonably confident that any adverse economic impact, such as through lost crops, tourism, or disruption to coal mining and exports (see this ABC News report), is temporary, and the State economy will likely recover quickly from it, as it has from previous natural disasters. Indeed, it is expected that capital works during the reconstruction effort will provide a temporary stimulus to affected regional economies. This is what happened in particular after the 2010-11 natural disasters: the floods and Cyclone Yasi (see chart below).

QldGSPgrowth_qtrly

Keep in mind that the State economy is frequently subjected to a wide range of shocks, such as changes in the exchange rate which affect tourism and exports, and changes to global commodity prices which affect mining investment and operational decisions. Natural disasters are another type of shock, which can have a large negative impact on gross state product (GSP) growth in one quarter, but typically do not have a long-lasting adverse impact on the economy. See my 2011 post on Recovery from natural disasters, which quotes John Stuart Mill on the long-observed phenomenon of rapid recovery from natural disasters.

The State Budget will no doubt take a significant hit from Cyclone Debbie, as coal production and royalties may be temporarily lower and as the Government needs to undertake emergency disaster relief measures. I expect our hard-working Queensland Treasury officials, already in the middle of State Budget preparations, will be spending even longer hours in the “Tower of Power” at 1 William St, working out the impact of Debbie on the Budget bottom line.

Posted in Cyclones, Macroeconomy, North Queensland, Uncategorized | Tagged , , , , , , , , , , , | 4 Comments

Selling QIC highly desirable and would avoid allegations of political interference regarding mega mine infrastructure

First, my thoughts and prayers are with the people of North Queensland as they wake up to the devastation from Cyclone Debbie.

In his extraordinary eulogy for Marie Antoinette, the Anglo-Irish statesman Edmund Burke lamented that the French Queen had not been adequately defended: “I thought ten thousand swords must have leaped from their scabbards, to avenge even a look that threatened her with insult.” Luckily for the government-owned Queensland Investment Corporation (QIC), the Courier-Mail was quick to pull its sword from its scabbard to defend QIC from the threat of insult. In an editorial  yesterday, the paper implored QIC critics to “Leave QIC alone over Adani.” The editorial followed on from a story earlier in the paper that QIC may consider investing in infrastructure associated with the Adani Carmichael mega mine, such as the rail line needed to connect the mine with the existing network (see QIC eyes investment in Adani Carmichael megamine infrastructure).

While I have no reason to doubt that QIC is acting independently of the Government and is maintaining the highest of standards, the paper surely must admit that the optics of any QIC investment in Carmichael mine infrastructure would be terrible. Environmental groups, and possibly some market commentators sceptical of the mega mine’s viability, would, rightly or wrongly, allege the Government has used its influence over QIC to invest in a project that may not otherwise secure finance and proceed.

Due to the hundreds of millions of dollars of coal royalties per annum the mega mine would inject into consolidated revenue, and the thousands of jobs it would support in regional Queensland, the Government is keen for the project to proceed. Indeed, the current Government deserves credit for the strong effort it has made to progress the mine’s development. But if QIC invests in the mine, and especially if it uses any funds invested in it by the Government, then the Government will be exposed to the allegation of political interference in QIC, due to its very strong interest in the project proceeding. Given the potential for financial mischief by QIC, which manages a huge pot of money on behalf of the Government so it can meet its super liabilities, it is very important that QIC is independent from Government. But the involvement of QIC in a controversial government-supported project would put the perception of QIC’s independence at risk.

The Government could avoid this exposure to criticism by divesting itself of QIC, which incidentally could raise many hundreds of millions of dollars, possibly up to $1 billion. QIC is highly profitable (around $90M per annum of pre-tax profit) but to earn that profit it takes risks that ultimately are borne by the Queensland taxpayers who own the business. As I have argued several times before, the Queensland Government should not be in the funds management business. There are plenty of private sector operators out there, and a government-owned funds manager, with an implicit government guarantee, has an unfair competitive advantage over private sector funds managers. See my previous post:

Government ownership of QIC becoming less appropriate every day

The 2013 Queensland Commission of Audit rightly recommended the sale of QIC. And, as I discovered in my research for the book I’m currently writing on the history of Queensland’s public finances over the last few decades, the 1996 Commission of Audit, led by highly respected economist Vince Fitzgerald, recommended the Government consider QIC for privatisation (see chapter 16 of the Fitzgerald CoA report vol 2). Alas, the wheels of government can turn slowly.

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Qld’s lacklustre population and jobs growth have gone hand in hand over the current decade

Queensland’s population, now at around 4.9 million, increased 1.4% in the year to 30 September 2016, a growth rate slightly below the national growth rate of 1.5%, but significantly below Victoria’s stand-out growth rate of 2.1% (Chart 1 based on the latest ABS data). Victoria has performed strongly in terms of both population growth and employment growth in recent years. Victoria’s economy has no doubt benefited from the feedback between jobs growth and population growth, as jobs growth attracts new migrants, increasing the population, which in turn supports further jobs growth, and so on. For Queensland, in recent years, the story has been much different, with below average population and jobs growth.

Pop_Sep16_chart1

The number of employed persons in Queensland has increased by only around 6% since February 2009 (a date chosen because it was around then that our population growth rate started to fall) compared with an increase in employment in Victoria of around 17% (Chart 2).

Pop_Sep16_chart2

The Sunshine State’s middle-of-the-pack population growth rate is much lower than it has been historically (Chart 3) when Queensland, at times, ranked as the number one State for population growth (Chart 4).

Pop_Sep16_chart3

Pop_Sep16_chart4

Queensland’s relative decline in population growth since the mid-to-late 2000s is due to falls in both net overseas migration and net interstate migration (Chart 5). In the current decade, it has been the fall in net overseas migration that has been most substantial. Consider that, at its peak in calendar year 2008, net overseas migration to Queensland was almost 63,000 people, but, in the year to 30 September 2016, it was only around 21,500 people. A decade ago, net overseas migration to Queensland accounted for around 20% of the total for Australia, but that has subsequently almost halved to the 11% share Queensland receives now.

Pop_Sep16_chart5

While net interstate migration has recovered somewhat from its trough in 2013-14 (Chart 6), at around 13,000 people in the 12 months to 30 September 2016, it remains well below levels experienced during the early 2000s and 1990s. In the early 2000s, Queensland experienced yearly net interstate migration figures of around 30,000 to 35,000 people. In the early 1990s, yearly net interstate migration peaked at around 50,000 people.

Pop_Sep16_chart6

I have previously commented on the net loss of people Queensland has experienced to Victoria in recent quarters (see my post on the previous data release). Thankfully, net migration from Victoria has finally turned positive, albeit only to a net gain of 38 people, after fifteen consecutive negative quarters (Chart 7). This may have something to do with the improvement in economic conditions Queensland experienced over the second half of 2016, but let us wait and see how long it lasts before getting too excited.

Pop_Sep16_chart7

Posted in Labour market, Population, Uncategorized | Tagged , , , , , , , , , , , , , | 1 Comment