Other economics
That surplus
On Monday we were treated to a smiling Treasurer, boasting about the government – a Labor government – having delivered two back-to-back budget surpluses. You can hear Chalmers on Radio National telling us it was coming (13 minutes). Then after it was announced, he made a shorter statement, claiming:
These two surpluses are an important demonstration of the responsible economic management which is a defining feature of our Albanese Labor government.
Politically that’s a legitimate claim, because successive Coalition governments, supported by the Murdoch press, have repeatedly given the simple message “surplus good, deficit bad”. Even though Coalition governments have usually fallen short of realizing these objectives, it’s all part of their story that the Coalition are better economic managers than Labor. “If you tell a lie big enough and keep repeating it …”.
But imagine that you’re the treasurer of a club which has been gathering more in membership fees than it has been paying for services, and is simply building a bigger bank balance. The members may be feeling rather annoyed, particularly if the quality of services has been falling. That’s another way of looking at a surplus.
On that second Radio National clip, linked above, Jackie Lambie made just that point: if the government has a surplus, they should give some of it back.
The financial rules of running a government are a little more complex than those applying to a club, but they aren’t much more complex. In general a cash deficit to fund productive public investment is sound management: that’s particularly important in a country like Australia with a growing population. A cash deficit to fund current consumption is usually poor management.
That logic applies to households, clubs, and over the longer terms to governments. But governments also have a responsibility to stabilize the economy – if the economy is overheating, a surplus is a way to ease demand, and if the economy is in a slump, spending more than comes in is the way the government re-vitalizes the economy. In this regard no one would legitimately criticize the Coalition government for its big deficits – 4.8 and 6.5 percent of GDP – during the pandemic years. (But imagine how the Coalition and its mates in the Murdoch media would have reacted if Labor had been in office.)
If the political bullshit were to be stripped out of our public debate, that $15.8 billion surplus, up from a budget estimate of $9.3 billion, would probably be in an obscure article on Page 48 of the Financial Review. It takes the surplus up from 0.3 percent of GDP to 0.6 percent of GDP. That’s essentially a balanced cash budget, which is probably a sensible policy in an economy coming out of a recession but which is facing headwinds from developments in the rest of the world.
If we go to the Treasury statement Final Budget Outcome, released on Monday, we see that the additional surplus has come about, even though revenue is down, because spending is down further than was forecast. Much of that reduction in spending is because of various delays in what are known as “National Partnership Programs” – a fancy name for tied Commonwealth payments to the states for providing agreed services. It appears that negotiations with the states have taken a little longer than the government had expected. Nothing out of the ordinary there.
In view of the Reserve Bank’s deluded idea that our economy is going through some superheated expansion due to loose fiscal management, that outcome is fortuitous for the Commonwealth, and it gives Treasurer Chalmers some much needed bragging rights, even if the achievement is trivial. He doesn’t get much credit for areas of economic policy where the government is making sound progress – reforming industrial relations, dealing with climate change and bringing down the inflation it inherited from the Coalition.
The IMF’s advice to Australia
The IMF regularly sends its staff to member countries to ensure we are all behaving ourselves according to the rules of the international financial system.
On Wednesday the IMF issued its Staff Concluding Statement of the 2024 Mission, an assessment of Australia’s economy and policies.
The visiting staff must have been treated well when they visited the Reserve Bank. They assess that “The current restrictive monetary policy stance is essential to address risks of prolonged inflation”. There is no acknowledgement of the idea that we may be ready for a cut in interest rates – a view expressed by many economists in our finance sector.
Its general advice is pure IMF:
Fiscal policy should support disinflation as the economy continues to grapple with supply capacity constraints. Additionally, macroprudential policies should maintain a stringent stance to mitigate the risk of excessive vulnerabilities in household balance sheets, particularly in the context of rising house prices. Should disinflation stall, monetary policy may need to be further tightened, supported by tighter fiscal policy while nurturing growth, and preserving targeted support to vulnerable households amid rising living costs.
They leave it to the reader to work out just what they mean by “tighter fiscal policy while nurturing growth”. In fact their whole approach seems to be having two bob each way. They acknowledge risks faced by the Australian economy, including commodity dependence, and they acknowledge that economic and employment growth may be weaker than forecast, but the general theme is about the need for tight fiscal and monetary policy.
They emphasize the problem of housing affordability, stating that “a holistic policy package is needed to address housing affordability”. They summarize their advice:
To address these issues, a comprehensive strategy is essential, focusing on increasing construction worker supply, relaxing zoning and planning restrictions, supporting the built-to-rent sector, expanding public and affordable housing, and re-evaluating property taxes (including tax concessions to property investors) and stamp duty to promote efficient land use.
The right-wing press will probably miss that advice on tax concessions for property investors. They will note that the IMF is urging our government to exercise tight fiscal policy, but they may fail to notice that the IMF advice is focussed not on cutting expenditure (the Coalition priority), but on raising revenue:
Tax breaks, including from capital gains tax discount and superannuation concessions, could be phased out to generate a more equitable and efficient tax system.
The right-wing press and the opposition may be expected to quote the following on renewable energy:
The domestic and global transition toward renewable energy would likely impact jobs, exports, and revenues, particularly given Australia's status as a leading coal exporter.
But the context of that recommendation is that the IMF is urging us to “foster resilience” to deal with those challenges, and to exploit our “opportunities in green metals, green hydrogen and critical minerals”. And it urges us to consider “economy-wide carbon price or targeted sectoral policies”.
In a swipe at the Coalition and the Greens, who have blocked reforms to the Reserve Bank, it states:
The establishment of a new Monetary Policy Board and strengthened governance arrangements and decision-making processes, in line with international best practices, would bolster central bank operational autonomy and enhance monetary-fiscal policy synergies.
Slavery in Australia
One of the last initiatives of the Morrison Government was to implement the Pacific Islands Mobility “PALM” scheme. To quote from the government website, “the scheme allows eligible Australian businesses to hire workers from 9 Pacific islands and Timor-Leste when there are not enough local workers available”. To quote further “all participating workers have the same rights and protections as Australian workers”. Those rights include award wages.
That’s all fine, but it’s not what ABC investigative journalist Adele Ferguson found when she investigated how the scheme is actually operating. In her Radio National interview Modern slavery in Australia, she describes cases of gross underpayment of wages, debt bondage, sexual exploitation and unreasonably high deductions for accommodation (usually crowded bunk rooms) and health insurance. (7 minutes).
PALM workers seem to be employed almost entirely in the agricultural, horticultural and meat processing industries, away from capital cities, making supervision of employers difficult. In fact the website suggests strongly that the program is specifically designed for these industries.
Last year the government announced that it was making changes to PALM, including access to Medicare, but the provision that bonds employees to particular employers remains. If they find their conditions are not satisfied, they are not free to seek further employment.
Problems with the scheme have been reported by the New South Wales Anti-slavery Commissioner, who last month released a report Be our guests: addressing urgent modern slavery risks for temporary migrant workers in rural and regional New South Wales, making the same findings as Adele Ferguson.
As a state body the Anti-Slavery Commission has limited powers to investigate compliance with the scheme’s provisions: that should be up to the Commonwealth. Most action by the Commonwealth, however, has been by officers from the Department of Home Affairs, pursuing and issuing deportation notices to people who have walked away from their employers.
Check along the supply chain for slavery
The Fair Work Ombudsman has identified disturbing practices by a labour-hire firm employing PALM workers. Fines have been imposed on workers for behaviour deemed to be unacceptable by the employer – almost certainly illegal and brutally paternalistic. The practices described in a short Radio National report by Bronwyn Herbert, with excerpts from the Fair Work Ombudsman and social justice advocate Mark Zirnsac of the Uniting Church, come across as something reminiscent of slavery in America’s antebellum south.
State governments have been left to pick up the pieces when PALM arrangements fail. The New South Wales report, and a short account by Adele Ferguson – Modern slavery report uncovers dark side to PALM visa scheme leaving vulnerable workers homeless and destitute – tell about PALM workers who have left their employers, wandering around New South Wales country towns destitute, homeless, and lacking the means to return to their own countries.
We can blame the Morrison government for bad design of the PALM scheme, but the government we elected in 2022 is responsible for fixing it. Nor should we let supermarkets off the hook if they are paying too little attention to behaviour along their supply chains.
DIY electricity – why do we leave money on the table?
Crispin Hull, grappling with the question of whether to install panels and a battery on his house, has an eye-catching headline on his website A Peter Dutton Idea Applied.
No, he isn’t going to build a small-scale nuclear reactor, but he wonders if the Coalition’s idea of letting people draw on their super to fund contingencies could apply to funding batteries and panels. That would at least be something useful to do with such drawings.
His article is tongue-in-cheek, but he does raise the question about whether it makes sense for households to invest in batteries, now that the feed-in tariffs paid by electricity companies are so miserably low.
A sound investment more secure than an investment property
So I took Crispin’s figures – $10 000 for a battery, mains electricity costing 30 cents per kWh – and adding a few additional assumptions I knocked together a standard financial model to see if it would be worthwhile for Crispin to make the investment. I added $5 000 for panels, assumed they would have a life of 30 years, and I assumed that the batteries would have to be replaced after 15 years. I plugged in daily consumption of 20 KWh. Even though Crispin may have the means to outlay $15 000, I assumed he could borrow that money at 6.5 percent, about the interest charged for mortgage re-draw.
Using these assumptions the model reveals that it would be worth about $22 000 to Crispin to go ahead with installing panels and a battery. That is the value, converted to today’s terms, of all those savings of $6 a day not spent on mains electricity, after taking into account the cost of borrowing. In fact he could push that interest rate up to 18 percent, nearly credit-card rates, and still be ahead.
The saving would be like a regular dividend from a share portfolio, but as a bonus it would be free of income tax. And it would relieve him of having to deal with those commission agents calling themselves electricity “retailers”, who bamboozle us with confusing tariff structures (although he may not risk going off-grid entirely).
The model is in an Excel spreadsheet, linked. You can plug in your own figures, and provided you have the sort of premises that can accommodate an array of panels and a battery, you will probably come out ahead. (The same model is relevant for small businesses, many of which are paying even higher tariffs than are paid by households.)
This exercise raises the question why people, including many with means, hesitate to invest in panels and batteries. Perhaps they use unreal decision heuristics, such as seeking a payback within two years. Perhaps figures such as $10 000 look scarier than the regular high charges on quarterly electricity bills: that perception is consistent with the findings of behavioural economics research. Perhaps people aren’t familiar with standard investment analysis: the model on the spreadsheet is the time-honoured method known as discounted cash flow analysis. It uses simple mathematics, but it isn’t taught in high schools.
Or perhaps there are some people (Crispin certainly isn’t one of them), who refuse to invest in green stuff, and are content to go on paying 30 cents for electricity, because every bill they receive reminds them how this terrible Labor government is making them pay so much for electricity.
Dutton’s supporters may talk about self-reliance – it’s one of the Liberal Party’s core beliefs – but practising it is a bit of a challenge.