Monday, April 20, 2020

Coronavirus Australia: Where is the stimulus money coming from?

Australia is following the UK and the USA into a money-printing binge

After dropping $18 billion in its first stimulus package, and $66 billion in its second package, it’s suddenly put the foot to the floor and announced an extra $130 billion in the third package. Then that’s been topped up with another billion for childcare.

As they say, “A few hundred billion here, a few hundred billion there, soon you’re talking real money!”

All this spending is designed to keep the current recession from being too sharp or going on too long. Nevertheless, it has some people nervous. Are we spending too much?

Permit me to reassure you. We can afford this. If needed, we can spend even more.

As the next chart of historic data shows, Australia’s public debt has been very high in the past – peaking in the Second World War, before falling to be far lower before the Global Financial Crisis. (Note, this chart stops in 2008.)

Our net national debt looks modest compared to other countries. It is just 18 per cent – far lower than in the USA, where the comparable figure is around 100 per cent; or Japan, where net debt is 150 per cent of Gross Domestic Product (GDP).

Australia has a $1.9 trillion economy. That’s nearly two trillion dollars, and it doesn’t just happen once. That sum flows through Australian hands every year. (GDP is like a river, not a dam. It measures a flow of money and things, not a pile of money.)

Our GDP is worth equivalent to $75,000 per person (this is what we call GDP per capita). Again, this is how much economic activity there is every year.

So when the Government spends an extra $130 billion in one shot in the middle of a desperate crisis, it’s not even that much, in terms of our economy.

Total coronavirus stimulus spending of $276 billion would represent 15 per cent of our economy. We don’t have to pay that off all in one shot. We can let the debt sit for ages, just paying the interest, if we so choose. That might be a good choice, because at the moment, interest rates are extremely low. This is a cost-effective point in history to go into debt.

As the next chart shows, our current net government debt has been rising, but it is just 18 per cent of GDP. The Government can spend many billions more and still keep net government debt well below 100 per cent of GDP.


There are two main ways you can make your debt go away, and a sneaky third way.

The main way we make debt go away is by paying tax. The Government taxes us more and spends less so it can have a surplus, and it uses that surplus to pay back the people we borrowed from.

You can see an example of this in the chart above – in the early 2000s, then-treasurer Peter Costello ran a bunch of surpluses and finally got the net debt to GDP ratio back below zero, just before the GFC.

At the last budget, you will remember, Treasurer Josh Frydenberg was expecting a surplus. Running lots of surpluses was going to let us slowly pay off our debt, and the forecast looked like this:

This chart is now ancient history, of course. If we ever get to zero net debt it will be much later than 2029-30. And it will require a lot more surpluses.

This is the main argument against spending too much – today’s young people will pay higher taxes for the rest of their lives to fund the expansion in debt caused by extra government spending.

The second trick for making debt disappear is inflation. While $200 billion might seem like a lot now, if we get some inflation over the next 30 years, it will shrink before our eyes.

Anyone who has a mortgage or a HECS debt knows what this is like. On the day you graduate or the day you buy your house, it seems massive. Twenty years later, the sums involved seem a lot smaller. If Australia’s GDP goes to $10 trillion in 30 years time, (which it would if we had 3 per cent growth and 2.5 per cent inflation every year), the debt we took on to survive this recession will seem much less significant.

This raises a key point about the ratio of net debt to GDP: You can make it get smaller by growing the GDP side of the ratio. And you can make GDP bigger using either economic growth or inflation. One reason Japan has such high debt ratios is its GDP hasn’t grown much since 1990. It has had both low growth and low inflation.

The sneaky third way to pay back debt is just printing money and giving it to your lenders. Governments can do that, but historically they have chosen not to, because it tends to cause hyperinflation. However, a variation of this idea is coming back into fashion, with a new name – Modern Monetary Theory.

One reason for the resurgence of Modern Monetary Theory is that the rich world has seen very little inflation recently – Australian inflation has been below the 2 per cent to 3 per cent target range for years. Why worry about inflation when we haven’t seen it for so long?

According to a recent note from Oaktree investment co-chairman Howard Marks, this crisis could shove Modern Monetary Theory into the mainstream.

“Possibly without serious vetting and a conscious decision to adopt it, Modern Monetary Theory is here,” Mr Marks said in a recent note to clients. Of course, the people who like this idea say it has the risks of inflation covered off. Expect to hear more and more about this the higher the national debt goes.


New Queensland rental law changes to protect 'mum and dad' investors

New rules to heavily protect tenants during the COVID-19 crisis will be altered to protect "mum and dad investors" after the original draft was heavily criticised by the real estate sector.

Queensland Housing Minister Mick de Brenni said revised guidelines would be published in the coming days although the prime objective was still to protect financially troubled tenants from eviction.

Despite the Prime Minister claiming lockdown may ease by mid-May, the Queensland Premier is cautious of interstate transmission and may introduce tougher border controls.

"We know for many of those mum and dad investors they are not rich, they are not wealthy, they have simply invested in a property for the family's future," he told reporters on Friday.

"Our guidelines protect that investment and ensure that there is a process for landlords and tenants to come together to reach a result where tenants simply can't pay the rent."

He said tenants could not simply say "I am not going to pay the rent" and that the JobKeeper and JobSeeker packages should provide enough income for tenants to meet their rental obligations.

A framework would be set up for landlords to reach an amicable solution in instances where tenants could not pay. "There will be compulsory conciliation ... which will include full disclosure of the financial situation of the tenant," Mr de Brenni said.

The Minister said there would be a moratorium on evictions and that virtual inspections would be available for landlords wanting to sell a property.

There was a fear the initial guidelines were too heavily weighted in a favour of tenants and could have led to a fire sale of investment properties, according to leading academics.

Under the initially proposed measures, tenants would have been able to ask for rent reductions without proving financial hardship, deny entry to properties and gain automatic six-month extensions on leases.

The Real Estate Institute of Queensland said the financial burden placed on landlords could stretch out to a year.

Griffith University Business School lecturer Dr Sacha Reid believes current and prospective housing market investors may look elsewhere to park their investment funds if tenants have too much power.

"(It) may force people into the stock market and out of property because there's more security in the stock market than the property market if all the rights are with the tenants," she added.

"If a tenant can demand a rent reduction with no capacity to repay that reduction, then why would you subsidise someone else's lifestyle when you can put it in the stock market and ride out the variations in that?"

University of Queensland Professor Shaun Bond said many households had investment properties to build retirement savings and any legislation that adversely impacted landlords had repercussions.

Yet, even if a landlord could evict a tenant struggling to make ends meet, they were still likely to struggle themselves to find a replacement tenant. "If you did have a tenant you wanted to evict, you are probably not going to be able to quickly find a new tenant anyway," Mr Bond said.

"People have to work out, do they sell or how much can they get through the next few months?


Loss of international students set to blow $30b-$60b hole in economy

The Australian economy faces a projected hit of up to $60 billion within the next three years while international students are blocked from coming here due to the COVID-19 pandemic.

The blow from each six-month intake of foreign students lost could equate to the hit the economy took when Australia lost its entire car manufacturing industry.

The country’s eight most prestigious universities face the largest loss of revenue, because of their greater intake of international students, but smaller and regional universities are also likely to suffer severe financial consequences that could force them to shed staff and cut back on courses.

Modelling by Victoria University’s Mitchell Institute projects that Australia’s university sector will lose between $10 billion and $19 billion between 2020 and 2023, depending on how quickly the nation’s borders are reopened to students.

A further $20 billion to $38 billion in wider benefits to the national economy would also be lost.

The overall projection could result in a hole in the economy of between $30 billion and $60 billion.

Mitchell Institute policy fellow Peter Hurley said each six-monthly intake of students missed due to travel restrictions would deliver an estimated economic blow equivalent to when Australia lost its entire car manufacturing industry.

“International university students are a pipeline, so if you miss a six-month intake it is revenue that is not going to be in the system for two to three years,” Mr Hurley said.

“It really is a worst-case scenario for universities.”

The revenue universities have drawn from international students increased by 137 per cent between 2008 and 2018, the institute’s report, Australian Investment in Education: Higher Education, states.

International university students spent $3.72 billion on fees in 2008 and $8.83 billion in 2018.

International student numbers grew 58 per cent in that time, meaning universities also increased their fees to international students.

“There are more of them and [universities] are charging them more,” Mr Hurley said of the sector's increasing reliance on international students.

Meanwhile, revenue from domestic students increased 43.2 per cent as student numbers grew 37.5 per cent, but without a comparable hike in tuition fees.

Victoria and NSW combined draw slightly more than two-thirds of total Australian revenue from international students, claiming $5.99 billion out of a sector-wide $8.76 billion in 2018.

Six universities made more than half of their student revenue from international students, including the University of Melbourne, Monash University, the University of Sydney, the University of NSW, the University of Queensland and Federation University in Ballarat.

Mr Hurley said the larger universities were in a healthy financial position before the COVID-19 pandemic hit and had resources to draw on during lean times.

Most smaller universities had less reliance on foreign students but also had less in reserve and would likely be forced to make tough decisions.

“They’re not going to go bust but they will have to cut costs – they will cut staff, they will cut courses,” Mr Hurley said.

In response to the COVID-19 crisis, the Morrison government has guaranteed $18 billion in funding for universities' domestic education in 2020, pegging the support at expected student numbers before the hit to enrolments from the pandemic. Ordinarily, it would be revised down throughout the year if student numbers were lower than anticipated.

Universities have welcomed the government support but warned it does not address the "big hole" in revenue from the loss of international students.

International education providers have also been alarmed about long-term damage to Australia’s reputation after Prime Minister Scott Morrison recently said it was “time to go home” for foreign students and workers who couldn’t support themselves.

Education consultant Claire Field said the lack of support being shown to international students by the Australian government right now could also do lasting reputational damage to the university sector.

"Our approach is in sharp contrast to the UK, NZ and Canadian governments, all of whom are extending to international students the same support they’re providing their citizens," Ms Field said.

Ms Field said international student enrolments plummeted by 20 per cent 10 years ago following a spate of attacks on Indian students, which attracted overseas media focus.

"If Australia doesn’t provide financial assistance to international students who have lost their jobs because of the coronavirus crisis I expect the damage to the sector to be far greater this time," she said.


Fines and freedoms

When a learner driver is fined more than $1,650 for ‘non-essential travel’ by going for a driving lesson despite the general coronavirus lockdown, what lesson should we learn?

That the most important thing is not preventing the spread of coronavirus, it’s following the rules.

Eventually common sense prevailed, and the fine was dropped, but only after media pressure. After all, the driver was enclosed in a car with her mother: the chance of either contracting coronavirus or infecting others is indistinguishable from zero.

And the number of counter-common sense instances of police enforcement is growing.

The level of government intrusion into the lives of ordinary Australians that has occurred in the past three weeks would have been unbelievable just three weeks before that.

At a minimum, this situation should have required three things from government: serious and credible evidence that the limitations were necessary; extraordinary care in drafting legislation and police implementation to avoid overreach (ie not leaving it to individuals discretion); and clear and unambiguous signposts for when the restrictions will be lifted.

Arguably, not a single one of these things have been done. The second and third were clearly ignored in the rush to give power to police. The rate of new infections has now fallen below the level on 18 March, when the restrictions on large gatherings were announced — yet no end is in sight.

Obviously, this is a constantly evolving situation — and government may have more information than they are letting on — but how can we possibly accept a lack of transparency and detail in the face of such extreme measures?

The concern is that such measures are not actually justified at all medically, only politically. The fear, so potent a motivator at times like this, is not the enduring imposition of a police-state (as some seem to be claiming), but the permanent, partial, erosion of the expectation of individual liberty.

In the next crisis, which is unlikely to be a severe pandemic, people will be less resistant to the imposition of serious restrictions on their freedoms. History tells us such powers, once successfully asserted, will be used again.


 Posted by John J. Ray (M.A.; Ph.D.).    For a daily critique of Leftist activities,  see DISSECTING LEFTISM.  To keep up with attacks on free speech see Tongue Tied. Also, don't forget your daily roundup  of pro-environment but anti-Greenie  news and commentary at GREENIE WATCH .  Email me  here

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