Turnbull soars then crashes

I have just listened to Australian opposition leader Turnbull's response to the latest Rudd Government budget. I insisted youngest listen with me. She is not a coalition supporter. 

The first half of Mr Turnbull's speech  was frankly magnificent. Sharp, incisive, some new ideas combined with critical analysis. Youngest was saying that this was the best speech by a politician she had seen. She also commented in the growing discomfort in the body language of ALP members. Then he (Mr Turnbull) lost it.

The dividing line came in Mr Turnbull's remarks on the medicare levy.

The proposal to oppose the Government's change in the rebate and instead compensate by increasing taxes on cigarettes may or may be right. After all, I am a smoker. But what was meant to be an example of an alternative view became instead the end of substance. From this point, rhetoric ruled.

What a missed opportunity. If Mr Turnbull had continued with the same analytical approach mixed with human example, he would have carried the day. In some ways, it would not have mattered what he said. If he had announced cuts, explained problems, presented choices, people may have disagreed , but they would have respected him. And in the lead up to the next election, that's really what counts.

Instead, this all vanished. He let the Government off the hook. He became another polly. I have never seen such a clear case of defeat snatched from the mouth of victory.     

Australian Budget 2009

Last night I listened to the Australian Treasurer's budget speech and to the initial commentary. At the end I was not much clearer than I was at the beginning.

When I first started listening to budget speeches they were on radio and ran for several hours. The speech itself contained the information you need to understand the budget. This is no longer the case. The information content is now very low, packaged for TV. You have to wait for the analysis from those in the budget lock-up or those who have time who have time to download and read the full papers. Alternatively, you can try to access the budget papers on-line once the speech is finished.

Those who are interested can find all the budget papers here. So many people wanted to access them last night that it was almost impossible to get through. One just had to sit and wait. I finally gave up and went to bed. 

It is now quite early. Traffic is less. I can get onto the site, but I don't have a lot of time.

The first point to note in the midst of all the hype is that it is projected revenues, not actual revenues, that have declined so sharply. Revenue is projected to decline from 303.7 billion in 07-08 to 290.6 billion in 09-10. That's a substantial decline, but nowhere as scary as the headline numbers based on previously projected revenue.

On the expenditure side, expenditure is projected to rise from 280.1 billion in 07-06 (24.8% of GDP) to $375 billion in 12-13 (27% of GDP), with a fiscal (accrual) deficit in that year of 30.3 billion.  Now this actually is a bit scary. By then, the economy is going to be expanding quite rapidly, so the policy focus will have to shift in the opposite direction towards reducing the budget stimulus effects.

I have written quite often about the difficulties most Governments face in quickly expanding capital spending because of the nature of the lags involved. Because of the nature of those lags, I suggested that capital spend in many countries was likely to be slower than projected and then to bunch together at a time economies had in fact begun to turn up. The risk as I saw it was that this plus washing liquidity might then force contractionary measures including rising interest rates.

From a purely Australian perspective, I have argued that our export mix meant that we were likely to see upturn in advance of a number of developed economies. This needed to be taken into account in planning. In simple terms, the window we had to take advantage of expansionary measures was likely to be less.

I haven't looked yet at the economic assumptions underlying the budget. The reporting I have heard suggests sharp downturn, followed by sharp upturn.

My view all along, and I have had to grit my teeth on this one, is that the Australian downturn was likely to be more moderate than allowed for by the Government and many commentators, including some comments from Access Economics.

This remains my view. If I am in any way right, the big economic policy challenge in the not too far distant future is going to be the management of current spend to accommodate rising capital spend at a time when the economy is once again growing quite rapidly.

I will comment in more detail once I have time to read the budget papers properly.

Economic Outlook - Early May 2009

Another long delay in posting. I have just been too busy, but I do need to post because this blog is partly my journal of record.

In a short post yesterday on my personal blog, Mr Rudd's budget deficit, I expressed some concern about the forecast size of the Australian budget deficit, setting this in the context of some of my previous views. In this post, I want to stand back a little and just muse about future economic directions.

My main reading time - I call it train reading - is travelling to or from work. Just at present much of this has been focused on local history. I am trying to make real progress on my long held dream of writing a full history of Australia's New England.  This has been a personal target for a very long time, and I am beginning to feel that if I don't complete it now I never will.

In the midst of my local history I took a break to read Robert L Heilbroners' The Worldly Philosophers:The Lives, Times and Ideas of Great Economic Thinkers (Touchstone, New York, revised seventh edition, 1999). I enjoyed this book. He really writes well. But it also reminded me how much economics is a creature of its time.

One of my key points in thinking about Australian economic policy is a simple one. Australia is too small to affect the global economy in any real way. We can only mange our response to global changes. I am wondering a little if the Australian Government has this sufficiently in mind.

During the week an Australian economist, I think it was Barry Hughes but only saw the reference in passing, made the very sensible point that we should not conflate output and sales.

The savage downturn in global production means that inventories, stocks, have been falling. This could only go so far before production started to turn up to meet base demand. I think that this is now happening, hence the many references to green shoots. However, this does not mean that sales are or will increase. We may, and this is the link to Helbroner, simply move to a lower equilibrium level.

The various global stimulation measures are intended not just to ease the downturn, but also to prevent the lower equilibrium by increasing sales, thus starting a real recovery. Frankly, I am coming to fear that we would have been better off letting the downturn bite and then inflating. I say this because the size of the stimulus packages is likely to leave many Governments' greatly enfeebled. The risk is a return to the 1970s.

Since September the Australian economy has performed much as I expected, although both the loss of domestic confidence and the size of the global downturn has been greater than I expected.

I said from the beginning that the key thing that I was watching was Australia's international trading position.

Our balance of trade in goods and services went positive at just the time we needed. We needed this, among other things, to give Government greater room to move.

The value of our currency also declined as just the right time. I thought that this was silly and said so because it did not reflect the fundamentals. Still, it did help from a narrow domestic viewpoint. Since then the Oz dollar has appreciated, if more against the US dollar than the Trade Weighted Index. The second is important because it is a broader measure.

The balance of trade in goods and services for March actually showed a further strengthening.

I was trying to explain to a friend why this was important. Like the US, Australia was living above its means. This was reflected in low savings and a deficit on the current account.

You can see this in the attached graph from the Australian Bureau of Statistics. back in 2007 we were in deep deficit. Had this continued, the adjustment impact of the downturn on Australia would have been very harsh.

The change in performance since then has been quite remarkable. Yes, the mineral boom helped, and we are being affected as existing contracts near their end. But we still have a real buffer.

We have in fact done a fair bit better than I expected. One of my concerns was that Government stimulus measures would spin over into deficit on the trade account. So far we have avoided this, in part because of an increase on exports of agricultural products. In global terms, this is a very good performance.

Now look at the next graph. This shows volume retail sales expressed in trend terms on a quarterly basis. Remarkable, isn't it, given the global downturn? You wouldn't know from this graph that Australia was in quite a deep downturn. You can see why I was worried about the trade figures in the context of the stimulus measures.

What is likely to happen now?

I have an absolutely dreadful forecasting. Based on savings rates and asset prices I forecast the latest downturn two years before it happened! Still, what can we say?

My feeling is that the global recession is bottoming because of the production/inventory cycle. So we are then going to see an up-tick in purchases and production. What happens then depends upon other things.

There is a fair bit of surplus capacity around, so this upturn will not immediately translate into sustained growth. However, there is a lot of Government capital spend starting to come on line. This will push demand.

This is where my thinking gets very unclear. I need to think some more!