The AFR has a little panegyric of Shadow Treasurer Joe Hockey today:
Productivity reform and a banking inquiry are at the top of his to-do list in what promises to be another brutal year of federal politics. But the shadow treasurer has also added “respect for taxpayers”, and says he won’t walk away from controversial comments about a culture of “entitlement” among some Australians.
…“Yes, it will be a theme for me and it sits very comfortably within the Coalition’s theme. That is the commitment to live within our means. Australians can no longer afford a lifestyle that is fuelled by debt,” he said.
“Everyday Australians know it and that’s why they’re increasing their household savings.”
An admirable framework. I can’t remember the last time a senior politician actually mentioned the “d” word and working against Aussie “entitlement” is always a good idea. To achieve these ends Hockey proposes the following:
- improvements to federal and state relations
- productivity improvements via IR reform
- reinvigoration of the bond market
- defending Australian prudential supervision rights
- a “Son of Wallis” banking inquiry
- fiscal surplus
- respect for tax payers (ie, tax cuts)
So, do these stack up against Hockey’s goals? The answer is sort of.
The productivity measures in points 1 and 2 are welcome and will contribute to productivity growth at the margin. What would be far more useful, however, would be to focus on improving infrastructure, refining industry policy, reforming land policies, investing in education and increasing competition. If you want to improve productivity, you need to be improving how efficiently goods and capital move around your economy, as well as how swiftly it can innovate. Preventing fat wage rises that are not productivity linked helps but is the tip of the iceberg.
All of these things cost money and if you’re aiming to run a fiscal surplus and offer tax cuts then you’re going to be up against it. Especially if you’re also aiming to reduce taxes, especially for the rich, which appears to be a Hockey’s goal. Actually I’m of the view that productivity will be a good news story for the next half decade anyway. As we chew through the mis-allocated capital of the land and mining booms, capital productivity will rise nicely. Joe can breath easy, though he’ll no doubt pass credit to IR reform.
Hockey’s next four themes are all about national savings and it is here that the hardest questions should be asked. A renewed retail bond market seems a reasonable initiative but the next three don’t add up.
Hockey’s clearly stated goal for a Son of Wallis inquiry is to boost competition in financial services. Here’s what I wrote when he first voiced the policy in 2010:
Since the GFC, markets have recovered enough that they will now lend Australian banks money at reasonable rates. But those rates are generally still higher than they were pre-GFC. As well, APRA has pushed banks to refinance cheap, short term offshore borrowings to more expensive longer term loans.
The banks are not kidding that their cost of funds has gone up. As each pre-GFC offshore loan becomes due it must be refinanced at a higher rate. The rise in costs is unlikely to have plateaued because APRA is not finished restructuring international bank borrowing. It has yet to impose new international rules called Basel III.
Hockey is right, however, that the banks can pass on these higher costs only because there is no competition. There is nothing to the banks’ argument that they must ipso facto pass on their higher funding costs to customers. If there were healthy competition then they would simply have to wear it in lower profits. Sadly, because all of the banks borrowed monstrously offshore there is nobody left to take advantage. This is Australia’s version of too-big-to-fail.
But Australia is in a bind. Hockey’s suggestion for increased competition is to extend the nation’s AAA guarantee to RMBS issues. This is a ludicrous solution for a number of reasons, not the least being it relies on the same Wallis structure that has just proved unacceptably vulnerable.
Unless, of course, the guarantee is permanent. In that event, Australia will have established its own version of Fannie Mae or Freddie Mac, the government sponsored enterprises at the heart of the US mortgage meltdown. That runs the risk of breeding a whole new generation of cowboy lenders sporting the badge of the sovereign.
Besides which, a surfeit of credit has already inflated the great Australian housing bubble, the most stark real economic consequence of the failure of the Wallis structure. We don’t need more mortgages, we need more business lending.
It widely known that Joe Hockey’s drive for a Son of Wallis inquiry was the brainchild of AFR columnist and Yellow Brick Road board member Chris Joye. Mr Joye has for some time championed the notion that non-banks need to brought under the the badge of the sovereign to lower their funding costs and increase banking competition. If Hockey is serious about the idea that Australians can no longer afford a lifestyle fueled by debt then this cannot be his goal for a Son of Wallis inquiry. Either that, or the inquiry must also address how to prevent competition from firing up another useless round of housing speculation, this time guaranteed by the tax-payer, for whom Hockey espouses great respect.
Next, one has to ask why Joe Hockey is concerned about point 4, defending Australian prudential supervision rights. The negotiations between APRA and BASEL have not so far resulted in anything untoward. Perhaps Hockey is referring to the pressure upon APRA to apply extra capital charges to the big banks because they too-big-to-fail. But this is a good idea.
If anything, APRA needs more not less transparency. It’s use of internal bank models for allocating mortgage capital in the first place are ludicrously easy.
Finally, if, as the mining boom winds down Joe Hockey is going to aim for a surplus, it must be asked where he expects growth to come from. When Hockey gets Swan’s job, the economy will be facing serious headwinds as mining investment detracts from growth for every quarter for several years. The dollar has already, and will have have, hollowed us out. As interest rates fall and ultimately the dollar too, the rebound in tradables will therefore be muted.
If Hockey runs a fiscal surplus with falling business investment and a current account deficit, by definition other parts of the private sector must be borrowing to support growth. That either means selling a lot of assets or, more likely, a lot more debt for households, again inconsistent with Hockey’s larger pledge of living within our means.
In short, Joe Hockey has an attractive liberal message that is right for the times. What he lacks (at least so far) is a policy matrix to match. He is basically offering a return to Howard era economic policy, which is for government to save and the private sector dis-save , and he plans financial reform to make it possible.
These macro settings can have two outcomes. Households ramp up borrowing, deposits fall, consumption rises, the current account deficit blows out and banks resume growing offshore borrowings. This does not strike me as wise given the global new normal is much more hostile to current account deficits than was the old.
Alternatively, as Hockey himself endorses, households ignore efforts to prompt them to borrow, and the fiscal cuts directly hit growth, risking European style feedback loops.
