Don't let any politician convince you your taxes will be going down

Whenever an election approaches, we can expect the bulldust count to soar on claims about the prospects for the economy and, particularly, about how well the budget’s being managed.

Election campaigns inhabit a financial fantasyland, with both sides promising lower taxes, higher government spending and improved budget balances.

Our politicians have spent decades training voters to believe that, when it comes to the budget, we can have our cake and eat it.

It’s now pretty clear that, whether the federal election is held in March or May, Scott Morrison will be repeating the winning formula he used last time: the Liberals are the party of lower taxes, whereas Labor is the big-spending, big-taxing party.

You want lower taxes? Vote Liberal.

But take my tip. Whatever party gets voted in, and whatever tax cuts they’ve promised in the short term, over any longer period taxes will be going up.

Why? Two reasons, one general, one specific. And remember this: one of Morrison’s claims is to have abolished “bracket creep” – the way inflation causes you to pay a higher proportion of your income in tax. He hasn’t.

The general reason we’ll be paying more in tax is that, as the Australian Council of Social Services reminded us this week, “as people become wealthier, they expect better health, education and income support and modern public infrastructure.

“As the populations of wealthy nations age, we sensibly devote more resources to health and [aged] care.”

Just so. Where it concerns budgets, the notion of Smaller Government – lower government spending and lower taxes – was always a pipedream.

As the Economist magazine has written recently, “stopping further growth of government over the coming decades will be close to impossible. The most important debates to come will be about the state’s nature, not its size.”

Why is it that economists, business people and mainstream politicians unceasingly advocate economic growth? To raise our material standard of living. To give us more income to spend on the things we want, to improve our lives.

But here’s the trick: many of the things we want more of come from the government, or are heavily subsidised by the government. We pay for them indirectly, via the taxes we pay.

That’s true of health (doctors, medicines, hospitals), education (schools, TAFE and universities), all the various forms of “care” (childcare, disability care, aged care) and much else.

As our incomes rise over time, we spend more on some things but not others, as we see fit. Much of what we choose to spend more on comes from the private sector. Better homes, for instance. Not a problem, as young waiters say incessantly.

But when the things we want more of come via the government, suddenly there is a problem. What? You want me to pay higher taxes just because I demanded more and better health care? Outrageous.

We even have conservative politicians trying to tell us paying more tax for more health care is bad for the economy. Bad for jobs and growth.

What? Employing more doctors, nurses and other health workers is bad for jobs? Spending more on health is bad for growth? Are you stupid? It is growth.

Over the 30 years between 1991 and 2019, federal government spending per person grew at the rate of 1.7 per cent a year, after inflation.

What we got for that included the introduction of Medicare, pensions (but not unemployment benefits) linked to wage increases so pensioners’ living standards kept pace with the rest of the community, and introduction of the National Disability Insurance Scheme.

But get this. Between 2010 and 2018, the rate of real growth in federal government spending per person slowed to just 0.5 per cent a year.

And the budget last May projected that the rate of growth from 2022 to 2024 would be minus 0.7 per cent a year.

But the independent Parliamentary Budget Office warned in its recent review of budget projections to 2032: “Australians’ expectations about the volume and quality of services provided by government mean greater risks that [public expenditures] will be higher”.

That’s a bureaucrat’s way of saying “You guys have got to be kidding”.

The latest growth in real annual spending per person of just 0.5 per cent is unsustainable. The projected fall of 0.7 per cent a year is simply unbelievable.

The Morrison government has been trying to cover the cost of its various tax cuts by, as ACOSS and the community sector have said, running a “low-cost government”. It claims to have guaranteed the provision of “essential services” but, in truth, it’s been cutting corners and penny-pinching all over the place.

Its income support payments to people of working age, of just $45 a day, are well below the poverty line. We have a growing number of people who can’t afford housing, but the government refuses to spend on social housing.

The government imposes long waiting times for in-home aged care packages and other care services – which are often of poor quality. It seems to be yielding to pressure to reduce funding of the national disability scheme.

It has neglected to spend what it should on dental care and mental health care. Its privatised system of employment service providers has failed to reduce entrenched, long-term unemployment. It has allowed a decline in public and community education and training infrastructure.

It has failed to Close the Gap with community-controlled Aboriginal and Torres Strait Islander services.

And it’s made inadequate investment in the transition to a clean economy, disaster resilience and other help for people to adapt to global warming.

Governments can get away with this neglect for only so long before voters start pushing back and – as we saw with the big spending on aged care in this year’s budget, following the royal commission’s damning report – government spending has to catch up.

And where government spending goes, taxes follow – whatever false impressions pollies try to give us in election campaigns.

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Beware of governments using algorithms to collect revenue

A great advantage of having children and grandchildren is that they can show you how to do things on the internet – or your phone – that you can’t for the life of you see how to do yourself. But a small advantage that oldies have over youngsters is that we can remember how much more clunky and inconvenient life used to be before the digital revolution.

When you had to get out of your chair to change the telly to one of the other three channels. When you spent lunchtimes walking to companies’ offices to pay bills. When you had to visit your own branch of a bank to get cash or deposit a cheque.

When you had to write and post letters, rather than dashing off an email or text message. When we were paid in notes and coins rather than via a direct credit. When buying something from a business overseas was too tricky to ever contemplate.

Computers connected by the internet are transforming our world, making many of the things we do easier, more convenient, better and often cheaper. Businesses are adopting new technology because they see it as a way to cut costs, compete more effectively, attract more customers and make more money.

Governments have been slower to take advantage of digitisation, websites, artificial intelligence and machine learning. But there’s a lot to be gained in reduced red tape, convenience for taxpayers, efficiency and cost saving, and now governments at all levels are stepping up their use of new technology – which most of us would be pleased to see.

But, as with so many things, new technology can be used for good or ill. The most egregious case of government misuse of technology was surely Centrelink’s “automated income compliance program” aka robo-debt.

Here, a dodgy algorithm was used to accuse people on benefits of understating their income over many years and to demand repayment. Despite assurances by the two ministers responsible – Christian Porter and Alan Tudge – that all was fair and above board, huge anxiety was caused to many unjustly accused poor people.

The Coalition government obfuscated for years before a court finally ruled the program unlawful and the government agreed to return $1.8 billion. For a scheme intended to cut costs, it was an immoral own goal.

But last week the NSW Ombudsman, Paul Miller, revealed that something similar had been going on in NSW. Between 2016 and 2019, the state’s debt-collection agency, Revenue NSW, unlawfully used an automated system to claw back unpaid fines from financially vulnerable people, in some cases emptying bank accounts and leaving them unable to buy food or pay rent.

The automated system created garnishee orders, requiring banks to remove money from debtors’ bank accounts, without the debtors even being informed. The computer program took no account of any hardship this would impose.

Between 2011 and 2019, the number of garnishee orders issued by Revenue NSW each year jumped from 6900 to more than 1.6 million. The Ombudsman began investigating after receiving “a spate of complaints from people, many of them financially vulnerable individuals, who had discovered their bank accounts had been stripped of funds, and sometimes completely emptied.

“Those people were not complaining to us about the use of automation. They didn’t even know about it.”

As usually happens, we find out about this long after the problem has been (apparently) rectified. Unlike the feds, the NSW Revenue office agreed to modify its process in 2019, so that garnishee orders are no longer fully automated.

People identified as vulnerable were excluded from garnishee orders. And a minimum amount of $523.10 (!) is now left in the garnished account.

But Revenue NSW didn’t seek advice on whether the original scheme was legal, so the Ombudsman did. It wasn’t. The lawyers say the law gives the right to extract money from people to an “authorised person” – not to a machine.

So, two isolated incidents – one federal, one state – and everything’s now fixed? Don’t be so sure. Miller says that, in NSW, other agencies are known to be using machine technologies for enforcement of fines, policing, child protection and driver licence suspensions.

How do we know it isn’t happening – or will happen – in other states?

NSW Finance Minister Damien Tudehope said garnishee orders were a last resort after a person had been contacted multiple times in writing and given options about overdue fines.

“For those who have chosen to ignore our notices and simply don’t want to pay, the community has an expectation we take action to recover what is owed,” he said.

Yes, but few of us want governments riding roughshod over people who can’t pay because they’re on poverty-level social security benefits.

I leave the last word to Anoulack Chanthivong, NSW opposition finance spokesman: “The pursuit of economic efficiency through artificial intelligence should never come at the expense of treating our more vulnerable citizens with dignity and decency.

“Governments at all levels are meant to serve our community and make their lives better, not find unlawful ways to make them worse.”

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Panicking financial markets could stuff up another global recovery

In economics, there’s not much new under the sun. When I became a journalist in the mid-1970s, the big debate was about which mattered more: inflation or unemployment. You may not realise it, but that’s the great cause of contention today.

With prices having risen surprisingly rapidly this year in the US and Britain – but few other advanced economies – we’re witnessing a battle between people in the financial markets, who fear inflation is back with a vengeance and want interest rates up to get it back under control, and the central banks.

The central bankers see the higher prices as a transitory consequence of the supply and energy disruptions arising from the pandemic. They fear that, once their economies have rebounded from the government-ordered lockdowns and fear-induced reluctance to venture forth, their economies will soon fall back to into the “secular stagnation” or weak-growth trap that gripped the advanced economies for more than a decade following the 2008 global financial crisis until the arrival of the pandemic early last year.

The decade of weak growth involved high rates of saving but low rates of business investment, record low interest rates, weak rates of improvement in the productivity of labour, low wage growth and, not surprisingly, inflation running below the central banks’ target rates. All that spelt adequate supply capacity, but chronically weak demand.

In the months before the arrival of the pandemic, central banks grappled with the puzzle of why economic growth had been so weak for so long – and what they could do about it.

In particular, our Reserve Bank had to ask itself why it had gone year after year forecasting an imminent rise in wage growth, without it ever happening. With such weak growth in real wages – the economy’s chief source of income – it was hardly surprising that consumer spending and growth generally were weak, and that inflation remained well below the Reserve’s target.

Earlier this year, with the economy rebounding so strongly from last year’s nationwide lockdown – but before the Delta setback – the econocrats in the Reserve and Treasury realised that recovering from the coronacession wouldn’t be a problem.

But once all the fiscal stimulus and pent-up consumer spending had been exhausted and the economy returned to its pre-pandemic state, where would the impetus for further growth come from? Certainly not, it seemed, from healthy growth in real wages.

What explained the way we’d finally joined the Americans in their decades-long wage stagnation? And what could central banks do about it? The obvious answer seemed to be to run a much tighter labour market and see if that got wages moving.

Perhaps, as a hangover from the 1970s and ’80s, when the world really did have an inflation problem, we’d continued worrying too much about inflation and not enough about getting the economy back to full employment.

For years we’d been making these fancy theoretical estimates of the NAIRU – the non-accelerating-inflation rate of unemployment; the point to which unemployment could fall before labour shortages caused inflation to take off – but unemployment rates had fallen quite low without the remotest sign of excessive wage growth.

Perhaps we should be less pre-emptive. Stop relying on theoretical estimates and just keep allowing the economy to grow until we had proof that wages really were taking off before we applied the interest-rate brakes.

And perhaps we should base decisions to raise rates on actual evidence of a problem with inflation – including, particularly, evidence of excessive growth in real wages – rather than on mere forecasts of rising inflation.

Our Reserve’s thinking was matched by the US Federal Reserve’s. Chairman Jerome Powell told Congress in July 2019 “we have learned that the economy can sustain much lower unemployment than we thought without troubling levels of inflation.”

Which brings us to this year’s budget, back in May. Although the economy seemed clearly to be rebounding from the coronacession, and debt and deficit were high, Treasurer Josh Frydenberg swore off the disastrous policy of “austerity” (government spending cuts and tax increases) that panicking financial markets had conned the big advanced economies into after the Great Recession, thus crippling their recoveries.

While allowing the assistance measures for the initial lockdown to terminate as planned, the budget announced big spending on childcare and aged care, following a strategy of “repairing the budget by repairing the economy”.

Treasury secretary Dr Steven Kennedy and Reserve governor Dr Philip Lowe made it clear they wanted to keep the economy growing strongly until the unemployment rate was down to the low 4s – something we hadn’t seen for decades – as the best hope of getting some decent growth in real wages.

This is still what the central banks want to see: a new era of much lower unemployment and, as a consequence, much healthier rises in real wages to power a move to stronger economic growth than we saw in the decade before the pandemic.

But now Wall Street is panicking over the surprisingly big price rises caused by the pandemic’s disruption, and has convinced itself inflation’s taking off like a rocket. If the Fed doesn’t act quickly to jack up interest rates, high and rising inflation will become entrenched.

Despite our marked lack of worrying price rises, our financial markets – not known for their independent thinking – have joined the inflation panic, betting that, despite all Lowe says to the contrary, our Reserve will be putting up rates continuously through the second half of next year.

So convinced of this are the market dealers that the (better educated) market economists who service them have begun thinking up more plausible arguments as so why rates may need to move earlier than the Reserve expects. ANZ Bank’s Richard Yetsenga, for instance, fears that if everyone tries to spend all the money they’ve saved during the lockdowns, “rates will need to rise to crimp spending intentions”.

See what’s happening? According to the financial markets, the pandemic has not merely cured a decade of secular stagnation, it’s transported us back to the 1970s and out-of-control inflation. That’s the big threat, and unemployment will have to wait.

Apparently, this dramatic reversal in the economy’s fortunes has occurred without workers getting even one decent pay rise.

There are three obvious weaknesses in this logic. First, globalisation has not made our economy a carbon copy of America’s. Second, there’s a big difference between a lot of one-off price rises and ongoing inflation. If the price rises don’t lead to higher wages, no inflation spiral.

Third, even if the central banks did get a bit worried, they’d start by ending and then reversing “quantitative easing” – creating money from thin air – before they got to raising the official interest rate.

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A quick economic rebound seems assured - but then what?

The good news in this week’s “national accounts” for the three months to end-September is that the Delta-induced contraction in the economy was a lot less than feared – not just by the financial market economists (whose guesses are usually wrong) but by the far more high-powered econocrats in Treasury and the Reserve Bank. So now it’s onward and upward.

According to figures from the Australian Bureau of Statistics, real gross domestic product – the economy’s total production of goods and services – fell by 1.9 per cent in September quarter, thanks to the lockdowns in Sydney, Melbourne and Canberra.

This contraction of 1.9 per cent compares with the fall of 6.8 per cent in the June quarter of last year, caused by the initial, nationwide lockdown. We know that, as soon as that lockdown ended, the economy rebounded strongly in the second half of last year, and kept growing in the first half of this year – until the Delta variant came along and upset our plans.

So we have every reason to be confident the economy will rebound just as strongly in the present December quarter now the latest lockdowns have ended. We’ve yet to assess and respond to the latest, Omicron variant but, now so many of us are vaccinated, it shouldn’t require anything as drastic as further lockdowns.

We can be confident of another rebound not just because we now understand that the contractions caused by temporary, government-ordered, health-related lockdowns bear little relationship to ordinary recessions, but also because the early indicators we’ve seen for October and November – including those for what matters most, jobs – tell us the rebound’s already started.

In ordinary recessions, it can take the government months to realise there is a recession and start trying to pump the economy back up. With a government-ordered lockdown, the government knows what this will do to reduce economic activity so, from the outset, it acts to make up for the loss of income to workers and businesses.

As with all contractions, most people keep their jobs and their incomes and so keep spending. In a lockdown, however, they’re prevented from doing much spending by being told to stay at home.

This means everyone has plenty they could spend – even people whose employment has been disrupted. So their savings and bank balances build up, waiting until they’re allowed to start consuming again. When the lockdown ends, the floodgates open and they spend big.

After last year’s lockdown, the proportion of their income being saved by the nation’s households leapt to more than 23 per cent, up from less than 10 per cent. Over the following four quarters, it fell to less than 12 per cent.

What we learnt this week is that, following the latest lockdown, the household saving ratio jumped back to almost 20 per cent. So there’s no doubt households are cashed up and ready to spend.

The main drop during the September quarter was in consumer spending (down 4.8 per cent), with business investment spending down 1.1 per cent, and housing investment treading water. Even so, earlier government support measures mean the outlook for business and housing investment spending remains good.

Why was the blow from the latest lockdown so much smaller than that from last year’s? Mainly because it only applied to about half the economy. The other states grew by a very healthy 1.6 per cent during the quarter.

But the main reason this year’s contraction proved smaller than economists were expecting seems to be that businesses and households have “learnt to live with” lockdowns. We now know they’re temporary and we’ve found ways to get on with things as much as possible.

Businesses have thought twice about parting with staff, only to have trouble getting them back. Businesses have become better at using the internet to keep selling stuff and consumers better at using the net to keep buying.

The volume (quantity) of our exports rose during the quarter and the volume of our imports fell sharply, meaning that “net exports” (exports minus imports) made a positive contribution to growth during the quarter of 1 percentage point.

However, this was more than countered by a fall in the level of business inventories, which subtracted 1.3 percentage points from growth. The two seem connected.

The fall in imports seems mainly explained by temporary pandemic-related constraints in supply. And inventory levels are down mainly for the same reason. Seems cars are the chief offender.

Our “terms of trade” – the prices we receive for our exports relative to the prices we pay for our imports – improved a little during the quarter to give a 23 per cent improvement since September last year.

Both the improvement in our terms of trade and the improvement in net exports help explain some news we got earlier in the week: the current account on our balance of payments (a summary record of all the financial transactions between Australia and the rest of the world) rose by $1 billion to a record $23.9 billion surplus during the quarter.

The surplus on our trade in goods and services rose to almost $39 billion and, while our “net income deficit” (the interest and dividends we paid to foreigners minus the interest and dividends they paid us) rose to more than $14 billion, that was a lot less than it used to be.

If you think that sounds like good news, you have more economics to learn. We’ve run current account deficits for almost all the years since white settlement because, until recent years, we’ve been a “capital-importing country”.

The sad truth is, in recent years we’ve been saving more than we’ve needed to fund investment in the expansion of our economy, so we’ve been investing more in other people’s economies than they’ve been investing in ours.

But that’s because we haven’t had much investment of our own. The rebound to a growing economy seems assured, but returning to the old normal isn’t looking like being all that flash.

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When house prices soar, everyone forgets who suffers most

One of the darker arts of politics involves manoeuvring to ensure that election campaigns focus on issues that favour my side over yours, regardless of whether these are the issues most likely to be pertinent to the nation’s needs over the next three years.

Because the pollies believe us all to be self-centred, they never try to appeal to the greater good. If the world worked the way it should, you’d expect housing affordability – and what each side was promising to do about it – to be a big issue in the coming campaign, but I doubt it will be.

The Libs won’t want to draw attention to it, and though Labor will make noises about how terrible it is for young people, it’s unlikely to have any serious proposal to take the heat out of house prices. It did take a plan to discourage negatively geared property investment to the last election, but now believes this contributed to its defeat, so has dropped it.

As I’ve said before, since home-owning voters far outnumber would-be home-owning voters, neither side wants to be seen as doing anything that stops homes becoming ever-more valuable.

But if you think that’s all there is to the issue of housing affordability, it just shows how narrowly the politicians – and the media – have shaped our perception of the issue. In all the agonising over house prices and home ownership – which has gone on for as long as I’ve been a journalist – we always forget the renters.

If you define housing as having a place to live rather than to own, renters also suffer when house prices soar. The relationship between house prices and rents is far from one-to-one but, even so, rising house prices usually mean rising rents.

The more the number of people moving from renting to owning is restricted by high house prices, the more the growing number of renters puts upward pressure on rents. Rents are rising much faster than prices in general, or than wages.

Our thinking is still heavily influenced by the Great Australian Dream, which sees renting as a temporary state while young couples save the deposit for a home. In truth, many of the roughly one-third of households living in rented accommodation have never had high enough incomes to afford a home of their own.

So, many people will live all their lives in rented accommodation and their proportion is growing as many middle-income couples who, in former times, would have moved on to home ownership, now do so at a much later age – or go into retirement as renters.

The value of the age pension is based on the implicit assumption that retirees own their home. If so, living on the age pension is tolerable. If not, having to rent privately pushes age pensioners below the poverty line. That’s particularly true of single, usually widowed pensioners.

For many years, the federal government dealt with the problem of people on very low incomes by funding the states to provide a lot of what used to be called “housing commission” accommodation, now called public housing.

Trouble is, the rise of neo-liberalism has made government ownership of housing deeply unfashionable. As the Grattan Institute’s Brendan Coates reminds us in a paper issued this week, the national stock of about 430,000 public housing dwellings has barely grown in 20 years, while the population has increased by 33 per cent.

Whereas in 1991 public housing accounted for about 6 per cent of all housing, it’s now less than 4 per cent. Some of this is made up by government-subsidised “community housing”, but not much.

In public housing, rents are capped at 25 per cent of tenants’ incomes. By contrast, Coates says, the typical low-income private renter pays 37 per cent of their income.

When the Hawke-Keating government turned away from public housing, it shifted to paying rent assistance to people on social welfare. But these payments have failed to keep up with private rents.

The Morrison government says spending on social housing is up to the states. But compared to the feds, the states have a lot less money to spare. Anthony Albanese’s Labor has proposed setting up a $10 billion “housing Australia future fund”, the earnings from which would be used to finance the building of additional public housing.

Coates proposes a fund twice that size, which he calculates would provide 3000 extra housing units a year, in perpetuity. Which, he says, would cost the taxpayer very little. He also wants the feds’ rent assistance to be indexed to the cost of renting.

The point is that when people on low incomes become unable to afford private rents, the next step is homelessness.

If, under pressure from all us affluent home owners, neither side of politics is willing to make home ownership more affordable by removing the many tax breaks that make it so attractive as a form of investment, then the least they – and we – can do is reduce the housing pain of those who really struggle to rent a place.

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NEW ISSUES IN MACRO MANAGEMENT: public debt, MMT and QE

Talk to virtual Comview conference

As you well know, thanks to a long period of weak economic growth, we hadn’t made any progress in reducing the federal government’s debt arising from the global financial crisis of 2008-09 before the arrival of the huge budget deficits associated with our response to the pandemic. This has left us – and all the other advanced economies – with levels of public debt higher than anything we’ve known since the period after World War II.

Right now, the economy has yet to recover from the protracted lockdowns employed to deal with the Delta variant of the coronavirus, but the econocrats and most other economists are confident the economy will bounce back almost as strongly and quickly as it did following the end of the initial lockdowns last year. It’s important to remember that the strength of these bounce backs owes much to the huge government spending on the JobKeeper wage subsidy scheme, the temporary Job Seeker supplement and various other assistance programs designed to hold the economy together during the government-imposed lockdowns. The huge loss of household income occurring in a normal recession was thus avoided, leaving people well able to resume spending as soon as restrictions were eased. So there’s no reason to regret the huge increase in public debt. It’s important also to make sure your students understand that the government’s explicit spending decisions explain only part of the huge budget deficits incurred. Much of it is explained by the collapse in tax collections and increased number of people on unemployment benefits – that is, by the automatic operation of the budget’s “automatic stabilisers”. That, too, should be seen as a good thing.

In passing, be clear that, contrary to the “policy mix” of the past 30 years, where monetary policy was the primary instrument used for short-term management of demand, with fiscal policy playing a subsidiary role, fiscal policy has now returned to primacy. To quote this year’s budget papers: “with further support from monetary policy limited, fiscal policy will need to continue to play an active role in driving the unemployment rate lower”.

It’s obvious that budget deficits lead to increased government debt, and only a return to budget surpluses will produce a fall in the absolute level of debt. The underlying cash deficit for last financial year, 2020-21, was $134 billion, or 6.5 pc of GDP, well down on what was expected at the time of the budget in May. This left us with a net debt of $590 billion, or 28.6 pc of GDP. We’ll see the latest estimates of this and future years’ deficits and debt in the mid-year budget update in mid-December. But, though all the pandemic-related assistance measures were temporary, meaning the deficit should fall pretty sharply, all the projections we’ve seen to date show no likelihood of the budget returning to surplus in coming years, “on unchanged policies”.

So, how concerned should we be about our post-post-war record level of debt, and what can or should we be doing to reduce it? And what about the argument of the proponents of “modern monetary theory” who say we should be covering the budget deficit not by borrowing from the public but simply by printing money. And finally, what does the RBA’s resort to “quantitative easing” involve, and how does it relate to the MMT debate?

The changed attitude to public debt

 After the big increase in the federal government’s net debt following the Rudd government’s use of considerable fiscal stimulus to stop the global financial crisis of 2008 causing a severe recession, the government’s view was that, in accordance with the “medium-term fiscal strategy” instituted by the Howard government in 1996, the budget should be returned to surplus as soon as reasonably possible after the economy had recovered. The strategy was to “maintain a budget balance on average over the economic cycle”. That is, the budget would be in deficit during the weak years of the cycle, but this would be offset by surpluses during the strong years, leaving a balanced budget on average, and leaving no net addition to the public debt.

The Abbott government promised to quickly eliminate the debt but, instead, the net debt doubled in nominal terms in the period up to the arrival of the pandemic in early 2020. By then, weak economic growth meant it had taken the Coalition six years just to get the budget back to balance.

The (delayed) budget of October 2020 announced a radical change in the government’s medium-term fiscal strategy. It became to “focus on growing the economy in order to stabilise and then reduce gross and net debt as a share of GDP”. That is, there was no goal to get the budget back to surplus – and, hence, no goal to reduce the public debt in nominal (dollar) terms. Rather, the goal was simply to reduce the size of the debt relative to the size of the economy (nominal GDP). In the government’s oft-repeated slogan: “repair the budget by repairing the economy”.

One of the reasons the advanced economies’ recovery from the Great Recession was so weak was that many of them panicked when they saw how much debt they’d run up and, before their recoveries had properly taken hold, they began cutting government spending and increasing taxes in an effort to get their budgets back to balance. This policy of “austerity”, as its critics called it, proved counterproductive. It weakened their economies’ growth and thus limited their success in reducing budget deficits. This is why Treasurer Frydenberg has repeatedly sworn not to “pivot to austerity policies”.

In switching from using budget surpluses to reduce debt in absolute terms to using stronger economic growth to reduce debt in relative terms, the government is adopting a change in concern about public debt that has occurred among leading American academic economists, influenced by the advanced economies’ pre-pandemic experience of “secular stagnation” or being caught in a “low-growth trap”. Weak growth makes “fiscal consolidation” (spending cuts and tax increases) harder and unwise at a time when governments should probably be investing more to offset the weakness in business investment. At the same time, the low-growth trap has produced exceptionally low interest rates, meaning the cost of “servicing” (paying the interest on) the public debt is lower than ever.

The government (and Treasury Secretary Dr Steven Kennedy) have taken up the American academics’ simple formulation that, whatever its absolute size, a stable amount of public debt will fall as a proportion of GDP so long as nominal GDP is growing at an annual rate exceeding the average rate of interest on the debt. The interest rates on Australian government debt have been between 1 and 3 pc, whereas our nominal GDP should be growing on average by 4 to 5 pc [inflation of 2.5pc plus real growth of 2.5pc]. The wider the gap between GDP growth and interest rates, the greater the scope for modest continuing budget deficits while the debt still falls as a proportion of GDP.

Several points can be made to reinforce this argument for being less anxious about the size of our public debt. First, as I’m sure you understand (but need to explain to every year’s bunch of students), the financial constraints that make it reckless for an individual household to have ever-growing debt don’t apply to governments, particularly national governments. In practice, governments mainly roll-over their debts rather than repaying them.

Second, measured relative to GDP, Australia’s public debt remains about half the size of most other advanced economies’ debt. Third, according to calculations by Saul Eslake, our projected interest payments on the federal public debt will be about 1 pc of GDP over the medium term to 2032, much lower than we’ve been used to. In the late 1980s it was above 2.5 pc. That is, there was never a time when we needed to be less anxious about the interest burden.

Even so, some respected economists – such as Productivity Commission chair Michael Brennan and former Treasury secretary Dr Ken Henry – have expressed concern that this more relaxed attitude to debt is too risky. Henry worries that, without efforts to get the budget back to balance and surplus, we will have limited scope to make an adequate response to the next fiscal crisis. Brennan worries people will conclude that debt and deficit no long matter, that “we can afford the next and the next ‘one-off’ rise in debt”.

But the new, more relaxed attitude to debt and deficit has also been attacked from the other direction – that this attitude remains more worried about debt than it needs to be – by proponents of “modern monetary theory”.

Modern monetary theory

MMT is a school of economic thought that’s been around for some decades. Its great proponent in Australia has been Professor Bill Mitchell, of my alma mater, Newcastle University. But it’s had a great push from the best-selling book, The Deficit Myth, by American Professor Stephanie Kelton.

There is nothing new about MMT. As the syllabus says, national governments face a choice of whether the finance their deficits via borrowing from the public or via borrowing from the central bank – that is, covering the deficit with newly created money. As recently as the mid-1980s, early in the term of the Hawke-Keating government, Australia followed other advanced economies in introducing the rule that deficits must be fully funded by borrowing from the public. This was at a time when the advanced economies were still struggling to get inflation under control. And, since the decision about how budget deficits should be funded is one to be made by governments, central bankers argue that MMT is about fiscal policy, not monetary policy.

Even so, there is much truth to the contentions of MMT. Like everyone else, we have a fiat currency, issued by the government and not backed by a quantity of some valuable commodity such as gold. So, in principle, governments are free to decide how many dollars to create. The MMTers remind us that it’s strange for us to have an arrangement where the private banking system (the banks in total, not an individual bank) able to create money, but the government prohibiting itself from doing so.

MMT is also right in rejecting the monetarist notion that printing money is always inflationary – “too much money chasing too few goods”. As economists have long understood. It’s not how much money has been created that matters, it’s the command over “real resources” – land, labour and physical capital – that money buys. Inflation occurs only when the demand for real resources exceeds the supply of real resources. To demonstrate the point, since the GFC the central banks of America, Britain, Europe and Japan have created massive amounts of money, yet inflation rates have stayed low or fallen (until the recent disruptions to supply caused by the pandemic). Inflation has stayed low because the demand for real resources has remained low relative to the supply of real resources.

Inflation is a consequence of demand being stronger than supply. At least since the GFC, the developed world’s problem has been the weakness of demand relative to supply. This does much to explain the new-found attention to MMT. What can be done to strengthen demand? Why shouldn’t the government add to demand by spending on lots of worthy projects and just create the money to cover it? This is the great theoretical truth highlighted by MMT: for as long as demand is running behind supply, anything the government spends can add to demand without causing inflation.

So in theory, MMT is correct. The econocrats’ objection to it is practical rather than theoretical. If you tell our fallible politicians they can spend as much as they like without bothering to borrow until we reach the point where the “output gap” has been eliminated and aggregate demand is running in line with “potential” – that is, the economy has reached full employment of all real resources – how will you get them to resume covering their spending by borrowing once that point has been reached? Even before you reach that point, how will you get fallible politicians to worry about stopping government spending that wastes real resources when government spending seems like a free lunch? This is what explains RBA governor Dr Philip Lowe’s vehement rejection of MMT. He sees himself responsible for achieving non-inflationary growth. He doesn’t want a new system in which the politicians tell him how much money they want him to create.

Quantitative easing

Short-term interest rates in the US and the other major advanced economies had got to very low levels before the global financial crisis of 2008 precipitated the Great Recession of 2008-09. The US Federal Reserve needed to cut its policy interest rate (the Fed funds rate) a long way to apply sufficient monetary policy stimulus, but was already close to the “zero lower bound”. So it resorted to “unconventional measures”. It intervened directly into particular financial markets that had frozen to get them trading again, and extended its conventional measures, of only influencing short-term interest rates, to lowering longer-term interest rates further out along the maturity “yield curve”. This is “quantitative easing”. Similar to conventional monetary policy, you buy longer-dated second-hand bonds, which forces up their price and so reduces their “yield” (interest rate). Since government bonds set the “risk-free” base on which private sector lending rates are set, this lowers the rates paid by people borrowing for longer fixed-rate periods. The central bank pays for the bonds it buys simply by crediting the accounts of the banks it buys from. That is, it creates the money out of thin air. Once the Fed adopted QE it was soon joined by the Europeans, Brits and Japanese.

It’s not clear that QE does much to encourage borrowing for consumption of goods and services or for business investment, rather than borrowing to buy assets such as houses and shares. But it is clear that the extra outflow of created dollars lowers the country’s exchange rate relative to the currencies of other countries. This lower exchange rate does stimulate the economy of the country engaging in QE by improving the international price competitiveness of its export and import-competing industries. This, however, adds to the reasons the other big advanced economies lost little time in also resorting to QE: so that their exchange rates wouldn’t appreciate against the US dollar.

In principle, once their economies had recovered from the Great Recession the Fed and other big central banks should have stopped buying second-hand bonds and started selling the bonds they’d bought back into the market, thus pushing rates back up to where they had been. It didn’t really happen. Rather, interest rates were still exceptionally low when the pandemic arrived. The Fed and the others leapt into another round of QE.

In Australia, the success of our efforts to avoid being sucked into the Great Recession, and our policy interest rate being a fair bit higher than those of the major advanced economies, meant we didn’t engage in QE at that time. It seems clear that Lowe had his doubts about the effectiveness of QE. But once the severity of the pandemic became clear in late March last year, the RBA cut the cash rate to 0.25 pc (and, in November, to 0.10 pc) and engaged in QE. It guaranteed that it would buy as many bonds as needed to keep the yield on three-year government bonds at the same rate as the cash rate. This was design to assure the financial markets that the cash rate wouldn’t be increased for at least the next three years. This was intended to encourage people to take advantage of the low, emergency-level interest rates. It also had the effect of encouraging the banks to offer very low fixed-rate home loans.

From November 2020, the RBA also announced it would buy $100 billion worth of second-hand federal and state government bonds with maturities of five to 10 years, at the rate of $5 billion a week. This was intended to lower interest rates further out along the yield curve. When the $100 billion had been spent in February this year, the RBA announced it would spend a further $100 billion, although it later decided to cut the rate at which it was buying bonds to $4 billion a week. Early this November, the RBA decided to discontinue limiting to 0.1 pc the yield on the Australian government bond maturing in April 3024. This made it possible for the RBA to decide to increase the cash rate in 2023, even though its forecast still suggested no increase would be needed before 2024.

Purchases of $200 billion worth of second-hand bonds represent about 20 pc of the total stock of federal public debt, meaning the RBA’s purchases of second-hand bonds would be about as much as the government’s issue of new bonds to cover the huge budget deficits it’s been running since the arrival of the pandemic. As part of QE, the cost of the RBA’s bond purchases has been covered merely by creating money, of course. So, despite Lowe’s vehement rejection of the MMT argument that the government fund its deficits by creating money rather than borrowing from the public, his QE has achieved essentially the same effect. The government will have to pay the RBA interest on the bonds the central bank has bought – and in due course, redeem the bonds when their term expires – but, since the government owns its central bank, this will just be a book entry inside the federal public sector. But though you and I can say MMT and QE amount to the same thing, Lowe would insist they are very different. How? MMT means the decisions about how much money to create are made by the fallible politicians, QE leaves the decisions about money creation in the hands of the independent central bankers. So the MMT advocates have had a qualified win.

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Interest rates definitely to rise - sometime, maybe

The geniuses in the financial markets – and they must be geniuses because they’re paid far more than we are – think next year will be an absolute ripper. Workers will be getting their first decent pay rise in six years or more. Say, 3 to 4 per cent. Whoopee. Gee, thanks guys.

Find that hard to believe? So do I. It’s the logical implication of the bets they’re making that the Reserve Bank will begin lifting its official interest rate – which has been at almost zero for a year – by the middle of next year and be up to 1 or 1.25 per cent by the end of next year.

For that to happen, the underlying or core rate of inflation, which has been below the bottom of the Reserve’s 2 to 3 per cent target for years and only just a few weeks ago lifted its head to 2.1 per cent, would need to have shot up close to 3 per cent.

And, because the inflation rate doesn’t rise sustainably unless it’s being driven up by rising wages, an inflation rate approaching 3 per cent couldn’t happen without annual pay rises averaging 3 to 4 per cent.

Reserve Bank governor Dr Philip Lowe has spelt out this relationship between inflation, wages and interest rates almost every time he’s opened his mouth since even before the arrival of the pandemic. He did so again twice last Tuesday and once on Friday.

So pay rises of unheard-of size are the logical implication of the money market’s bets that the Reserve is about to become so desperately worried about soaring wages that it will have raised the official interest rate four or five times in the next 12 months.

Trouble is, I doubt the financial market players are thinking logically. I doubt they’ve thought it through to the extent I just described. The economists who work in the financial markets are well-educated, but this episode makes me wonder whether the guys laying bets in the dealing room even have wages in their mental model of what drives inflation and interest rates.

By the way, I’m not just being disparaging in describing the financial markets as a casino. As Professor John Kay explained in his book Other People’s Money, the buying and selling of currencies, bonds and other real and derivative securities each day in the world’s financial market dwarfs the number of transactions needed by real businesses to conduct their ordinary affairs.

Indeed, Kay told me those genuinely necessary transactions could be put through in about a quarter of an hour a week. So, what are all the remaining transactions? They’re dealers using their bank’s money to trade with dealers from other banks in the hope of making a quick million or two and a fat bonus at the end of the year.

I’m sure these professional gamblers are better at playing poker than you or I would be, but they aren’t trained economists, and they don’t think like economists. Certainly, not like central bank governors.

Because Wall Street has the greatest single influence over what happens in the global financial markets, these guys know more about what’s happening – and likely to happen – in the American economy than their own.

They also have a huge superficial knowledge of what’s been happening in lots of economies in the past few weeks. They know inflation has shot up in the US, Britain and a few other countries, wages have increased somewhat in the US and a few other places, and some minor central banks have started raising their official interest rates.

I think these guys’ mental model of what’s driving interest rates is no more profound than this: prices and wages are rising in the US and other places, rates are already rising around the world, so pretty soon rates will be rising here.

Lowe, the man with his hand on the lever, says he still doesn’t think a rate rise will be needed until 2024, but last week he admitted things could turn out stronger than he expects and make a rise necessary in 2023.

There you are. He’s as good as admitted he’ll have no choice but to start raising rates in a few months’ time. Anyway, that’s what we’re betting on. If we turn out to be wrong, it wouldn’t be the first time, and we won’t lose our jobs. We’ll just lay new bets and keep doing it until we’re right.

Which they will be – one day. Since rates can’t go lower it’s a cert that the next move will be up. Right now, when they’ll be going up is known only to God. In the absence of inside intel, I’d rather put my money on Lowe than on those geniuses.

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Masterpiece: the spin is Morrison's plan to reach net zero is dizzying

The more our politicians are full of bulldust – known euphemistically as “spin” – the more they rely on our short attention span. They make a grand announcement that doesn’t bear close scrutiny, but the media caravan moves on before it’s had time for a closer look. Well, not this time.

I’ve been looking more closely at the Plan to achieve net zero emissions of greenhouse gases by 2050 that Scott Morrison unveiled last week, shortly before jetting off to Glasgow.

It’s full of . . . hyperbole. A masterpiece of the spin doctor’s art. A document carefully crafted to mislead.

For someone claiming to have a Plan to achieve a difficult objective over the next 29 years, it was surprising to see Morrison claiming the Plan contained no new policy measures. By implication, no additional cost to taxpayers.

That’s true – and untrue. We know, for instance, that Morrison had to promise to spend a lot of money just to get the National Party’s permission to commit to achieving net zero by 2050.

So, what policy promises did Morrison make, and how much will they cost? We weren’t told. They weren’t mentioned in the 130-page plan. We’re told we’ll be told sometime before the election.

The Plan says Morrison’s “technology investment roadmap” will “guide” more than $20 billion of government investment in low emissions technology to 2030. So, further spending of $20 billion?

If that’s what you thought, the spin merchants would be pleased. They love giving the impression we can have our cake and eat it. But no, this is not new policy. All the $20 billion has already been announced.

And much of it has already been spent. Much of it by the previous Labor government. A bit over half of it is spending by the Australian Renewable Energy Agency and the Clean Energy Finance Corporation.

These were set up by the evil Julia Gillard in 2011, in association with her job-destroying and cost-of-living killing carbon tax. Tony Abbott tried to abolish them along with the tax, but failed.

Now they’re produced as evidence of how much the Morrison government’s doing to promote new emissions-reducing technology.

The Plan claims the government’s $20 billion will “leverage” more than $80 billion from government and the private sector by 2030. (What it doesn’t mention is that Australia’s total spending on research and development has plummeted since the Coalition returned to power in 2013.)

As to whether the Plan commits the government to spending a lot more, note that the modelling showing we can get to net zero by 2050 rests on various assumptions about the success of future new technology in producing clean products at specified low costs.

For instance, clean hydrogen will be produced for under $2 a kilogram. Carbon emissions from fossil fuels will be captured and stored at a cost of less than $20 a tonne.

But these happy assumptions come with an asterisk. The asterisk leads to very fine print saying “subject to offtake agreements”.

Oh yes, what are they? The Plan doesn’t say. But they’re the government agreeing to buy loads of the clean product at a price that allows the real customers to pay a very low price. That is, it’s a massive subsidy.

How much will the government buy? At what price? Morrison couldn’t tell us if he wanted to because these deals are way off in the future – if they ever happen. They’re not a new policy to spend taxpayers’ money, they’re just an assumption the modellers needed to make - that the necessary money would be spent - to achieve their prediction that we’d get to net zero by 2050.

You’ve noticed that the Coalition which, ever since Abbott rolled Malcolm Turnbull as Liberal opposition leader in 2009, has been vigorously opposed to doing anything much to reduce emissions, has now embraced the net zero target.

But have you noticed that now he’s big on reducing emissions, Morrison is quietly rewriting history to remove any trace of that former opposition? Worse, have you noticed Morrison is now taking credit for any progress we’ve made to date?

Any progress made by the policies of his evil Labor opponents and – as with the pandemic – any progress owed to the policies of those appalling premiers?

This is why politicians have spin doctors. “Our Plan will continue the policies and initiatives that we have already put in place and that have proven to be successful, reducing emissions and energy costs,” some spinner wrote.

Next, Morrison’s claim that Australia’s on track to reduce emissions by “up to” 35 per cent by 2030, well above the government’s target of 26 to 28 per cent. Independent analysis commissioned by the Australian Conservation Foundation confirms this is quite believable.

But, apparently, it’s all the Morrison government’s doing. He speaks of “our record of reducing emissions and achieving our targets” and “our strong track record, with emissions already more than 20 per cent lower”. “We have already achieved 20 per cent,” his energy minister says.

But Bill Hare, of Climate Analytics, says the feds are doing little, but claiming credit from the hard work of the states and territories.

It was the NSW and Queensland governments that saved most of the 20 per cent by restricting land clearing. It’s the states that encouraged the record rollout of rooftop solar and large-scale renewables.

NSW, Victoria, the ACT and South Australia have strong electric vehicle policies. Meanwhile, Morrison & Co have been encouraging gas production with new subsidies – which, of course, won’t be paid for by increasing your taxes.

Spin is claiming credit for any good thing, but blaming others for anything bad. You’ve heard that the Plan “will not cost jobs, not in farming, mining or gas”.

But the actual promise says that “not one job will be lost as a result of the government’s actions or policies under the Plan”.

Get it? Jobs will be lost, but we’ve set it up so no one will be able to blame us.

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Net zero can't be reached by magic, but we can ease the pain

Scott Morrison’s long-term plan for net zero emissions by 2050 won’t impress anyone who’s been following Australia’s long and tortuous battle over climate change. But then, it’s not intended to.

His “learning” after miraculously wining the unwinnable election in 2019 is that whatever half-truths he tells voters will be believed by enough of them. Particularly since God is on his side, not the side of those other, untruthful and ungodly people.

No, his Plan – which is not a plan to achieve net zero, just an optimistic forecast that it will be achieved – is largely a political document, intended to be sufficient to convince those voters who aren’t paying attention that he’s “doing more” to cope with climate change.

His goal is not so much to fix the climate as to neutralise it as an issue at next year’s election. Climate change is an issue that naturally favours Labor. He wants all the focus to be on two issues that naturally favour the Coalition: the economy and national security.

He was walking a tightrope last week. He had to discourage voters in Liberal heartland seats who were worried about global warming from trying to send their party a message by voting for liberal independents – as they’ve done in Tony Abbott’s former seat and, briefly, Malcolm Turnbull’s – by convincing them he was serious about reducing emissions.

At the same time, however, he needed to reassure voters in the National Party’s various Queensland coal-mining seats that he wasn’t serious.

His solution was to produce a document that says: the boffins I hired assure me we’re on track to eliminate net emissions by 2050 but, don’t worry, this will be achieved by the miracle of new technology, without anyone feeling a thing.

There’ll be no new taxes, no new regulations forcing people to do things and no new costs on households, businesses or regions. We won’t shut down coal and gas production, and no jobs will be lost.

Does it sound a bit too good to be true? Voters in the Liberal heartland tend to be well educated and well informed. I doubt it will do the trick.

As we’ve seen with the pandemic, when our federal leaders fail to lead, others feel a need to fill the vacuum. The premiers, of course, but also many people from business and the community.

The latest report from Tony Wood and colleagues at the Grattan Institute, Towards net zero: a practical plan, offers a more realistic assessment of the challenge we face, says why we must get more achieved by 2030 and proposes ways this can be done without too much pain.

Perhaps because he’s not standing for office, Wood is frank about the difficulty in getting to net zero. The scale and pace of change involved in a net-zero target are “daunting, but they are outweighed by the consequences of the alternative.

“Factors outside Australia’s control will shape the flow of capital and the demand for our exports, while climate change itself will increasingly threaten Australians’ lives and livelihoods.”

Just so. Only a fool would believe we can avoid pain by doing nothing. We can seek to delay the pain, but that would relinquish our ability to influence our future, as well as making the pain greater.

The longer we leave it to make big progress towards net zero, the more pain we ultimately suffer. But also, our failure to throw our support behind the global push for earlier progress – which is what we’re failing to do in Glasgow this week – increases the risk that the goal of limiting warming to 1.5 degrees will be exceeded by the end of this decade, making it less likely we ever get back below it.

But while it’s foolish to think we can avoid pain, we shouldn’t imagine the pain will be intolerable. And here’s the trick: provided it’s done sensibly, paying a bit more tax and putting up with a bit more regulation is actually intended to reduce the amount of pain, and share it more fairly.

Wood accepts Morrison’s figuring showing that we’re likely to exceed the 26 to 28 per cent reduction in emissions by 2030 we promised to make in 2015. But we’ll still fall short of the 45 to 50 per cent reduction we’re being asked to make and other rich countries are agreeing to.

Wood’s plan for getting up to the higher target is neither heroic nor frightening. While we wait for the technological breakthroughs Morrison’s modelling assumes will come, we should get on with applying the technology we already have.

Generate electricity almost completely from renewables, and step up the move to electric cars and vans by tightening emission standards for petrol-driven cars, giving EVs tax breaks and supporting the spread of charging stations.

This is the first step towards the new green manufacturing industries that will provide the regional jobs for miners and gas workers to move to as other countries stop buying our coal and gas.

It won’t be easy or painless, but it’s not beyond the wit of decent governments.

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Beware of pedlars of supply-side solutions to home affordability

One thing you can be sure of is that if house prices are soaring, governments will be holding inquiries into it. Unfortunately, the other thing you can be sure of is that nothing will come of those inquiries.

Why? Because their purpose is to express the government’s deep concern about the worsening affordability of homeownership – its heart-felt sympathy for young people struggling to buy their first home – not to tackle the problem.

Why? Because policy decisions made by governments – federal and state – over many years have rigged the housing market in favour of people who already own their homes and against those who’d like to own.

Why? Because the number of voting homeowners far exceeds the number of voting would-be homeowners. The established homeowners – and the industries that benefit from the rigged market, such as property developers and real estate agents – get shirty if they think their privileges are threatened.

Labor summoned its courage and promised to act against negative gearing and the deep discount of capital gains tax in the 2016 and 2019 federal elections but, since its shock defeat in 2019, its courage has deserted it.

Speaking of housing inquiries, as we speak Treasurer Josh Frydenberg has a parliamentary committee inquiring into “housing affordability and supply”. As its terms of reference make clear, it’s not actually about housing affordability, but really about blaming rocketing house prices on inadequate supply rather than excessive demand.

Why? Because, with a federal election fast approaching, its real motivation is to shift the blame for increasingly unaffordable house prices away from the feds and on to the states. Whereas most of the policies promoting demand for homeownership are under the influence of the federal government, most of the policies affecting the adequacy of the supply of homes are influenced by the state governments and their creature, local government.

When I wrote about the causes of rocketing house prices last week, I knew I was leaving myself open to attack because I focused solely on factors adding to demand and didn’t get to supply factors before I ran out of space.

True, no analysis of change in any market price is adequate if it doesn’t examine both sides of the market. So let me make amends.

In simple economic theory, if the price of some item rises, the reason should be that demand has outstripped supply. Let supply catch up and the price should return to where it was. If the demand for homes rises by 100, build 100 more homes and the price should be unchanged.

But such thinking is grossly oversimplified – especially when applied to something as complex as the housing market. For a start, the simple model is designed to analyse markets for “commodities” – simple consumer goods or services you buy and soon eat or use up.

Homes, however, are assets that last for decades and have a resale value. Most of that value resides in the land on which the home is built, and the land goes on forever.

This means a home is both a consumption good – it provides its owner or tenant with somewhere to live – and an investment good, which should at least hold its value over time and probably increase in value.

As the Reserve Bank’s submission to the latest inquiry has pointed out, the growth in the number of homes has pretty much kept up with population growth in recent decades, meaning a shortage of places to live can’t explain rising house prices.

In any case, the price of buying a home is an unreliable guide to the price of finding somewhere to live since there are two reasons for buying a home: as a place to live and as an investment (a good place to park your wealth).

The better guide to the cost of finding somewhere to live comes not from the price of houses and units but from the price of renting. And the figures show that (with the possible exception of Sydney), the cost of renting in capital cities has risen only a little faster than other consumer prices.

This fits with our earlier finding that the number of homes has kept pace with population growth. And it leaves little support for the widely aired claims of people from conservative think tanks that house prices have risen because state and local government planning and zoning regulations are limiting the release of land for housing development or the growth of medium and high-density housing.

This argument has been debunked by Dr Cameron Murray of the University of Sydney. Being based on mere modelling, it fails to take account of the empirical fact that zoning regulations have been eased in recent years, specifically to ensure that home building keeps up with population growth.

This has happened over many people’s objections to the growth in high-density housing. But, unless we want our capital cities to keep sprawling outward forever, more high-rise housing is an inevitable consequence of business’s demand for – and almost every economist’s support for – rapid population growth.

All this suggests it’s the strong demand for home ownership, not any inadequacy in the supply of homes that’s driving prices up so rapidly. But what, and why? I think house prices are rising strongly because federal government decisions have made housing more attractive as an investment.

They’ve made home ownership more favourably taxed than other forms of investment, such as shares, art and antiques, or fixed-interest investments. This has always been true, but it’s become more so, first, with the Hawke government’s introduction of a capital gains tax in 1985, while exempting the family home.

But the biggest change came with the Howard government’s move in 1999 from taxing only real capital gains to taxing the full nominal gain but at only half your marginal tax rate. The popularity of negatively geared property investment took off from that time.

Ask yourself this: if the number of homes is pretty much keeping up with growth in the number of households, what happens when some homeowners decide they’d like to own more than one home, maybe many more? They use their superior borrowing-power to outbid the other home owners, existing and would-be.

The supply of land for housing is limited, but not fixed. That’s because cities can sprawl, or you can pack more households onto to the same bit of land by building up. But both solutions add to costs.

The simple demand-versus-supply model assumes the “commodity” in question is “homogeneous” – all the same. But with houses and units, it would be closer to the truth to say every home is different. Even two houses of the same design are different if they’re in different suburbs.

And some homes are in prime positions – on the harbour, near the beach, closer to town. The cheaper it becomes to borrow, the more people will bid prices higher to get the fabulous place they want.

The more governments use high immigration to increase the size of cities, the more competition there is to buy a detached house, and the more people will pay to get a place that’s close to the CBD.

Ever-rising house prices is a demand story more than a supply story.

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Praying for costless climate change: Lord, send down a miracle

Picture Scott Morrison kneeling by his bed, hands together, eyes closed, asking God to send him another miracle. Or maybe just giving Santa a list of all the things he’d like for Christmas.

Five things, actually. First, technology not taxes. That is, a sudden, unforced flowering of new technology that allows us to go on selling our fossil fuel to the world while – at negligible cost – the technology eliminates all our net emissions of carbon dioxide and other greenhouse gases.

Second, we reach net zero emissions by 2050 with “expanded choices, not mandates”. That is, no one should be forced to do anything. They’ll just choose to implement the new technology because it’s so wonderful.

Third, somebody somehow will “drive down the cost of a range of new energy technologies”. That is, reduce the cost of doing things without emissions so that it’s lower than the cost of doing things by, say, burning coking coal or burping methane. This, however, won’t destroy any jobs.

Fourth, we keep energy prices down with affordable and reliable power. That is, the solar and wind energy that we disparaged for many years is now cheaper than the coal-and-gas-fired power that we’re still trying to prop up, so you can thank us when electricity prices fall.

Fifth, we are accountable for progress. That is, just because we won’t show you our modelling, or tell you how much the deal with the Nationals will cost or what it’s going on, doesn’t mean we won’t tell you after the media’s lost interest.

We’re assured that Australia’s Long-term Emissions Reduction Plan will “achieve net zero emissions by 2050 in a practical, responsible way that will take advantage of new economic opportunities while continuing to serve our traditional export markets.

“This plan does not rely on taxes and it will not put industries, regions or jobs at risk. No Australian jobs will be lost as a result of the Commonwealth Government’s actions or policies under the Plan.”

As Energy Minister Angus Taylor summarised it, the plan “won’t impose new costs on households, businesses or regions.” Morrison says it will not “shut down coal and gas production”.

Other countries are pondering long and hard about how on earth they’re going to get to net zero. Until this week we had no idea either. Now, however, we have a plan that tells us how it can and will be done – at no perceptible cost to anyone or anything.

And if that isn’t hard enough to swallow, try this: the plan doesn’t involve announcing any new policy. So what’s changed since Monday? What’s different? What’s new is that Morrison now has modelling that says we’ll get to net zero with a bit to spare – without the need for any more changes.

The boffins added up the numbers and – surprise, surprise – we’re already on track to net zero. Is ScoMo lucky or what? The Americans, the Europeans, the Chinese, they’re all still struggling with it, but we’ve got it figured.

Funny thing is, it has the feel of Amateur Hour. Who wrote the report? The experts in the Energy Department? No, it was written by management consultants – McKinsey, and has all the colourful diagrams and big type and blank pages you expect from management consultants.

I hadn’t heard that McKinsey was expert on energy or climate science or technological innovation, but maybe I’m wrong.

So who did the modelling? Well, not Treasury – what would they know about modelling? We’ve been given the impression the modelling was done by McKinsey, but my guess is they contracted it out to some outfit that actually knows about modelling.

But management consultants and modellers do share a common temptation: to find out what bottom line the client’s after, and work back from that – a thought that came to me when I saw all the nice round figures in McKinsey’s lovely chart showing how net emissions in 2005 will be reduced to zero by 2050.

Reductions to date – 20 per cent (mainly from once-off land clearing restrictions in Queensland and NSW, which occurred before the 2005 starting point and the 2030 target were chosen). Next, reductions projected to arise from the government’s technology investment road map - say, 40 per cent.

Then reductions from “global technology trends” - say, 15 per cent. Reductions from “international and domestic offsets” – 10 to 20 per cent, but make it 10 per cent. Next, reductions from “further technology breakthroughs” - say, another 15 per cent.

Okay, you can stop there. We’ve made it to a neat 100 per cent. (I think I’m starting to see why Morrison isn’t keen to let the experts see the modelling.)

In a new paper from the Australia Institute, Bending the Curve, Dr Richard Denniss and colleagues assess the plausibility of the Morrison government’s belief that the course of our economy can be significantly altered without changes in policy, without the introduction of taxes and without new regulation or even legislated targets.

The authors say the plan “is based on the assumption that it is not just possible to forecast which technologies will be developed in the decades ahead, and the cost of deploying those technologies, but that such development is inevitable.

“In reality, as those who have pursued ‘carbon capture and storage’ in Australia for the last 30 years have clearly shown, it is not just possible that new technologies might be more expensive than expected, it is possible that they will fail completely to eventuate.”

The plan is just the latest iteration of “techno optimism,” albeit at the more optimistic end of the spectrum, they say.

“White it is inevitable that the cost of some existing technologies will fall rapidly, and that some new technologies will be developed, there is nothing inevitable about the timing of such improvements,” they conclude.

Morrison says his plan involves delivering net zero “the Australian way”. That bit I believe. This is the “no worries – she’ll be right, mate” way of doing it.

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Dearer houses: another problem we’re ‘learning to live with’

The poor relation in all our worries – about the pandemic, the economy, climate change – has been housing affordability. While everything else in the economy has been weak, house prices have been rocketing.

I can tell you why they have, and I can say with confidence that house prices can’t keep rising at double-digit rates forever. But I can’t assure you we’ll ever get house prices to rise no faster than we find easy to afford, nor that we’ll ever manage to reverse the steady decline in the proportion of households owning their home.

When I started in this business in 1974, it was at a record 70 per cent. Today it’s down to 65.5 per cent – it’s lowest since 1954 – and almost certain to keep going lower without radical change.

It’s always possible that it’s all a great bubble that one day bursts, bringing house prices crashing down. That, amid all the pain and destruction – all the families being evicted from homes the mortgage payments on which they could no longer afford – the consolation for others would be much more affordable prices.

For the housing market to one day go from boom to bust is almost certain. It’s happened plenty of times before. It’s a myth that house prices always go up and never down.

But in my experience, they’ve never fallen far, nor for very long. They take a breather for a couple of years before resuming their upward march at a more sedate pace. Until the next boom.

Why am I so confident that, over any period longer than a decade, house prices will be higher? I could say it’s because Australians are obsessed by the desire to own their home, and then gradually turn it into their mansion. But Aussies aren’t different to people in other rich countries.

So I’ll just say housing – along with education, healthcare and other things – is a “superior good”. As our incomes rise over time, we spend an increasing proportion of them on our housing.

This is mainly why house prices keep rising. One consequence of the rise of the two-income family was that a higher proportion of their joint income went on housing. What we hope we’d achieve by this was a better house – bigger, better located or better appointed.

It’s true that newly built houses are bigger and better than they used to be, and established houses are always being remodelled and extended. But when lots of people are trying to get a better place at the same time, a lot of the extra borrowing and spending just bids up the price.

It’s much the same story with the fall in interest rates. From their peak of 17.5 per cent in 1989, mortgage rates are now down to about 3 per cent.

Why? Primarily because the inflation rate’s fallen from 9 per cent to less than 2 per cent, but also because the advanced countries have never got their economies working properly since the global financial crisis, and have been using ever-lower interest rates to get things moving.

(Note that, unlike normal people, economists use the word “inflation” to refer only to the prices of ordinary goods and services, never to the prices of assets such as houses.)

The point is, every time interest rates have fallen a bit over the past 30 years people have used the opportunity to borrow more in an effort to buy a first home or move to a better one. Again, when too many people do this at the same time, house prices are bid even higher.

The main reason house prices have soared during the pandemic is that the Reserve Bank has acted to protect the economy by cutting its official interest rate virtually to zero, and we’ve responded the way we always do to lower rates.

So, much of the seeming benefit of lower interest rates ends up as higher house prices – to the benefit of existing home owners and the expense of young aspiring first-home buyers.

The good news for first-home buyers is that, with rates having hit the bottom, this is the last time house prices will soar simply because rates have been cut. So double-digit rises in house prices can’t last.

The bad news for would-be and recent actual first-home buyers – which won’t come for a couple of years yet – is that the next move in rates can only be up.

The rules of the home-ownership game are rigged in favour of existing home owners. That’s because they far outnumber aspiring home owners. And they’re not willing to give up their tax and other privileges to help the younger generation.

Except, of course, their own kids. The Bank of Mum and Dad has played a big part in making seemingly unaffordable house prices able to be afforded – by some.

The ever-rising proportion of Australians who’ll never own their homes are mainly those who failed to pick the right parents. Want proof of the widening gap between the rich and the rest? Look no further than home ownership.

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Morrison's deal: Nationals rewarded for agreeing to harm the regions

Let me be sure I’ve got this right. Scott Morrison is ending his Coalition’s deep divisions over climate change by agreeing to pay billions in regional boondoggles in return for the Nationals refusing to lift their veto of any increase in Australia’s commitment to reduce emissions by 2030.

The usual way blackmail works is that the blackmailer returns to you something you really value in return for you paying the blackmailer an arm and a leg.

But the way Morrison’s deal with Barnaby Joyce and the Nationals will work is that Morrison – or rather, the taxpayer – spends billions on projects of doubtful value in return for the Nats’ agreeing to nothing more than symbolism: to reduce carbon emissions to net zero by 2050, which will be after all the signatories are dead and gone.

The first point is that agreeing to net zero emissions in 29 years’ time is a decoy and a fig leaf if that’s all you do. To make it real you have to make a commitment you can be held to: a much bigger progress payment in the next nine years to 2030.

That, of course, is what the Glasgow conference is about. The major countries agreed on net zero months ago (as have all our premiers and many of our business and industry groups). That’s just the price of admission to the room.

What you do in the room is proudly announce the big increase in your commitment over what you promised at the Paris meeting in 2016. Those few leaders unwilling to commit to a significant increase will be pilloried as “free-riders” (aka bludgers) on the other countries – and rightly so. You’re a brave man, Scott.

But the second point is more important: all of us will be worse off if Australia’s selfish delinquency damages the global effort to limit the extent of global warming, but the biggest losers will be the small businesses and voters the Nats’ claim to represent – the regions.

The regions will be the biggest losers because, of all the industries, agriculture will be the hardest hit by continuing global warming. Farmers’ loss of freedom to keep clearing land will the least of their worries.

But the regions lose also because we don’t get on with expanding our renewable energy industries – most of which happens in the regions – and lose any “first-mover advantage” in establishing the new generation of manufacturing industries processing hydrogen, clean steel, clean aluminium, and even clean cement using all-renewable electricity. This, too, will happen in the regions.

That is, we don’t get on with generating the new, well-paid and skilled jobs for mine and gas workers to move on to as the rest of the world stops buying our coal and gas.

The amazingly perverse nature of Morrison’s deal with the Nationals – we pay them for refusing to allow us to get on with protecting ourselves against the world’s turn away from fossil fuels – has been brought to our attention in a study by Matt Saunders and Dr Richard Denniss, of the Australia Institute, All Pain No Gain, released today.

They argue that whatever the final cost of the deal turns out to be – no doubt a lot more than its announced cost – it will be far exceeded by the cost to the economy of us not acting earlier to reduce emissions.

To put it the other way, modelling commissioned from Deloitte Access Economics by the Business Council of Australia finds there would be significant benefits to the economy if we lifted our target to reducing our emissions by 46 per cent by 2030.

Comparing this with other modelling by Deloitte, the authors calculate that the additional benefits over the next 50 years would have a “net present value” (the value in today’s dollars of all the incomings and outgoings over the next 50 years) of more than $210 billion.

Now, I never take modelling results too literally, but the Business Council’s argument does make sense. The higher target leads to increased investment in renewables, which increases growth and jobs, as well as greatly reducing the cost of electricity (because, once you’ve built the plant, the cost of extra solar and wind energy is negligible).

Morrison’s excuse for not increasing the 2030 target is that, without the coming new technology, this would force choices and cost jobs. But he’s got that the wrong way round.

As the Business Council (and the Grattan Institute before it) have explained, forcing the pace in industries where the technology is already well-developed – electricity and electric vehicles – leaves more time for the technology to be developed in other industries.

With friends like the chancers of the National Party, the regions need Morrison to see more sense.

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