The Budget failed to deliver structural reform

The Abbott Government receives some support today from quarters arguing that although it has its problems it at least addresses Australia’s real issues. From Rob Burgess at Business Spectator:

At other points in Australian history it might have been quite enjoyable to watch the lambasting Prime Minister Tony Abbott and his team are copping from the larger part of the commentariat over the May 13 budget.

…That is not to say the government hasn’t offended — Abbott set the bar for honesty as high as possible and then presented Australia with a ‘farrago’ of broken promises, as one Labor speech-writer put it.

…The glee commentators are deriving from Abbott-baiting threatens to punish the whole nation rather than the PM as the great cash-cow that has sustained the nation for a decade, the resources price boom, is ending.

What’s needed, if we are to stop the wheels falling off the economy, is more of the ‘look-through’ principle.

There are obviously many flaws in that budget — particularly the needless persecution of the genuinely unemployed or disadvantaged — but emerging from the political wreckage of that process is something like an economic plan.

Well, yes, sort of. Leith and I support the Budget to the extent that it has begun the wind back of entitlement and unaffordable promises, especially for older and wealthy Australians. But it’s a big stretch to say the Budget constituted a new economic plan. It’s structural reforms were very limited and although there was a big push to cut recurrent spending and replace it with productivity-directed investment, the dividend on that front is highly questionable. Alan Mitchell explains why at the AFR:

The Abbott government boasts that the budget’s $11.6 billion “growth package” will catalyse $58 billion in new infrastructure construction.

Most of the spending will be on roads, but the promised cost-benefit analyses are not happening and, as the Productivity Commission warns, it is hard to know what new infrastructure we need if we are not using the existing infrastructure efficiently.

All we can say with certainty is that our urban roads, in particular, are being used inefficiently, and that the new road investment will come at a cost to the economy. The money sunk in the politicians’ favourite road projects can’t be invested elsewhere, including in projects that might have brought greater benefits to the economy. And among these projects might be less flashy (and, for the more politically influential members of the construction industry, less profitable) road improvements.

He goes on to argue that we need broad congestion charging to insure against the risk that we end up with new toll roads:

…that are overpriced and under-used, while the surrounding public road networks will remain underpriced and congested.

Too right and fat chance as the finance and road oligopolies must be fed their rents.

But it doesn’t end there. Ross Gittins looks at a range of wider Budget proposal and their impact on productivity:

 It makes the federal government smaller, but not better. It’s a giant exercise in cost-shifting: to people on pensions, to the young jobless, to university students, to the sick and, to the tune of $80 billion, to the states.

…Next exhibit on the micro-reform list would be the deregulation of university fees. The claim that this will unleash competition and so make the tertiary education ”industry” a lot more efficient is so debatable…the Gonski reforms which would have put federal grants to schools on a needs basis. He’s left grants to private schools unreformed and unmeans-tested…this is a micro-reform negative. Adjusting grants to reflect students’ disabilities would have done much to increase the skills, employability and workforce participation…

…Medical services account for 9.5 per cent of gross domestic product….There is plenty of room for the reform of excessive schedule fees for certain procedures, perverse incentives and overservicing, particularly by the corporate sausage-machines that have been permitted to take over so much of general practice.

…Finally, ”corporate welfare”. The foreshadowed toughness didn’t materialise…

These are all very sound micro-economic economic arguments. But, to my mind, what was most glaringly absent from the Budget vis-a-vis structural reform was any effort to make Australia more competitive. There was no effort to bring down the dollar (beyond an inadvertent demoltion of consumer confidence) and the basic macro-economic assumption of the Budget is that Australia can continue to run it’s old current account deficit economic model of public saving and private leveraging even though it kills productivity.

The model is directly supported by the regime of extraordinary and world-beating tax expenditures identified by the IMF:

ScreenHunter_1051-Jan.-30-17.39

Negative gearing, capital gains tax, superannuation concessions all hugely mis-allocate of capital across the economy into unused land-banking and price speculation.

Budget detractors have not so confronted this realty yet, either, but that does not excuse the Abbott government. The core of the structural adjustment confronting Australia has not yet even been mentioned.

Comments

  1. ‘Budget detractors have not so confronted this realty yet, either, but that does not excuse the Abbott government. The core of the structural adjustment confronting Australia has not yet even been mentioned.’

    But the Tax Review has. Let’s wait and see what cones of that…

    Good grief look at the histrionics surrounding very modest change – what sort of hysteria can we expect from more substantive structural reforms?

    Does not auger well.

    • The point is 3d1khead they should have used their political capital and done the substantive structural reforms first. Instead they jumped the shark and have blown it all on ideologically-inspired punitive measures that do SFA fix the budget but send a message loud and clear to the poor, the sick and the young: “We don’t give a sh*t about you”.

      Hey, about you piss off?

      • Enough of the bleeding heart stuff. Please.

        Reforms must take place and many will be grandfathered in – give them a chance – sure as hell no other party in Oz politics is prepared to address structural reform in a serious way, least of all Shorten. Let’s see what Budget II and III contain – but given the disintegration of concern re the national interest I fully expect the incompetents in the Senate and a good chunk of MSM (read ABCFairGuardian) to knock and block everything.

        If structural reform is not addressed the welfare enjoyed today will be a distant memory for future generations.

        Grow up.

      • It would have been a hell of a lot easier to sell so called reforms targeting the low end of town if they had first implemented PROPER tax reform that removed the larges enjoyed by the big end of town and implemented polices that simultaneously targeted the big end of town. All they have now is what looks like a targeted attack against the most vulnerable that will do nothing except give the opposition the ammunition to beat them at the next election, with the end result that no reform will occur.
        For supposedly intelligent people i cannot fathom how they cant see how it looks from the other end. Did they really think the people would just idly accept what they are doing. Its just so blindingly one sided in its appearance.
        It reminded me of the last USA presidential election where the republicans just could not believe they lost the election against obama. They where genuinely shocked they lost.
        In this case i think the libs are genuinely shocked that people are not accepting what they have put forward, and they genuinely believe it is some ratbag element that does not represent mainstream. They cant seem to accept otherwise.

      • Let’s see what Budget II and III contain

        Bribes I expect. They’ve blown all their support on this stupid budget. I expect nothing but political desperation for the next two years.

    • sydboy007MEMBER

      too right. Lest you’ve forgotten the way Abbott road to the rescue of the salary packaging industry. You didn’t seem to mind such a large burden on the budget is continuing, and most likely will never be changed.

      sadly I don’t see much meaningful reform happening till the really big crisis descends upon us.

    • There was nothing stopping the Libs from implementing any number of corporate welfare reforms without having to be told the fucking oblivious via some report. The Libs have lied and Australians see it for what it is. The Libs royally fucked their own chances of reform.

    • Good grief look at the histrionics surrounding very modest change – what sort of hysteria can we expect from more substantive structural reforms?

      Does not auger well.

      Martial law?

    • Mark Out West

      3d1K

      Responses are easy when your only concern is SELF, lets see, the trickle down effect with bring joy to the unwashed..

      • drsmithyMEMBER

        Responses are easy when your only concern is SELF, lets see, the trickle down effect with bring joy to the unwashed..

        I reckon Despicable 3 is about a week or two away from “let them eat cake”.

    • “Good grief look at the histrionics surrounding very modest changes..”

      Speaking of hysteria, I have little sympathy for a leader and party that behaved so unbelievably childishly in opposition. Both the major parties have behaved incredibly poorly of late, it’s a shame because as a country do need to make some tough decisions moving forward.

    • dumb_non_economist

      2d,

      Your work on this is to the same low level, lack of evidence work you produce on climate change with the same factless claims.

    • migtronixMEMBER

      The Tax Review, which will no doubt enumerate innumerable recommendations such that only 3 or 4 need ever been given a light touch and the claim that headway has been made on these important reforms is infinitesimally less untrue . After all, that’s what Labor did.

      How about instead of 180 recommendations we stick to 10? And have the Review committee mandate a schedule for implementation — that might be useful and in the national interest.

      But no, you’ll keep slinging the same line of feigned outrage and whispering the tale of riches to be sourced from the rich, just as soon as the mist clears.

  2. The Hockey Budget: All pain, no gain.

    Hey if you were Senator Holes, which measures would you pass?

    I’m guessing fuel excise indexation, changing pension indexation to CPI, and tightening up family tax benefits.

    Anything else?

    • I wouldn’t pass anything which was the implementation of a broken promise.

      If they want to screw the disabled, the schoolkids, the uni students, Medicare universal health system, and the middle classes all for all future time whle giving politicans a 1 year pay freeze and teh top quintile a 3 year penalty and then a very light ongoing comparative ($$$ and prooprtionally) burden, let them seek a mandate from the people.

      Reject the Budget of Betrayal!

  3. The LNP obviously hate middle and lower income households. They must hate the lot of them. They want to kiss goodbye to social and economic mobility, to the social safety net, to security for the aged and unwell. They have an obvious contempt for the young.

    They are liars who tell Great Big Lies.

    Why would anyone – ANYONE – trust this government to institute anything resembling reform? Self-evidently, only an idiot would trust them.

      • migtronixMEMBER

        You’re right they’ll absolutely implement reforms that don’t hinder their class, without batting an eye lid — well maybe just once *wink*.

        Road crumbs is good, those nymbis you love will be all over that, increasing the value of their over valued IPs with every pork-barrel.

        The irony will be ironic Bluebird.

    • We’ve just had six years of Labor and know what they would do – borrow to fund the unsustainable ensuring dire consequences in years ahead ie augment the imperative for reforms, reforms they are not capable of making – this mob are no HawkeKeatings!

      PUP and Greens are a confusing melange of ideology and populism, neither prepared to address structural reform.

      That leaves us with the Libs – better get behind the drive for change and voice support. It’s about the only chance we have

      • That leaves us with the Libs – better get behind the drive for change and voice support.

        Smacks of desperation, absolute desperation.

        Have you noticed anyone, anyone at all (apart from News Corp) getting behind this “stinking carcass of a budget”?*

        * As described by senior government minister.

      • When they were in opposition, the Libs opposed ending the private health insurance subsidy for high income earners and very modest cuts to family payments which also went to high income earners. That was because, according to Abbott and Hockey at the time, these reforms were “an attack on families”.

        Why should Shorten occupy the high ground when Abbott showed that mindless oppositionism and intellectual dishonesty are a politically successful strategy?

        If Abbott is serious about the whole community making sacrifices for the long term good of the nation he will have to reach into the pockets of the rich and powerful with more than a small temporary income tax surcharge. This would upset his friends but it would be in the national interest and snooker Shorten.

      • SweeperMEMBER

        Last time I checked Abbott and Hockey were still borrowing to finance subsidies to foreign made car manufactures (through the novated leasing system) and subsidies to loss making landlords.

        Lets not pretend otherwise Abbott and Hockey couldn’t care less about the fiscal position of the country. This is the party that put the country into the structural budget deficit position in the first place.

        Hockey has achieved something I don’t think any other Treasurer has managed – a contractionary budget with no improvement to the bottom line.

        In it’s dumbness it is comparable to a stimulus package exclusively made up of government purchases of imported goods.

      • @Lorax – exactly!! Well done, better late than never.

        Desperation is the word. No other party is prepared to countenance structural reform. Like it or not, Libs are Team Reform – yeah a bit underwhelming as the first budget shows, but hopefully warming to the task.

        Repel the naysayers and support the reformists – your kids will thank you.

      • Have you noticed anyone, anyone at all (apart from News Corp) getting behind this “stinking carcass of a budget”?*

        Well the media isn’t doing too well these days is it. So it makes good business sense to make hay whilst the whinging is going on.

      • 3d1khead: the desperation is all yours.

        You really are slipping lately. I expect you’ll be moved on soon.

      • The LNP want to undo 70 years of social architecture to satisfy their ideological fantasies and their malign Labor-hate appetite. They lie about every single thing. No-one should be under any illusions now. They want to re-stratify Australian society, kill of social mobility and gut the social compact. They are a menace to the economy as well as society and should be thrown from office.

      • We’ve just had six years of Labor and know what they would do – borrow to fund the unsustainable ensuring dire consequences in years ahead ie augment the imperative for reforms, reforms they are not capable of making – this mob are no HawkeKeatings!

        Let me set the record straight. We had 2.5 years of Rudd Labor government in whose time mining tax was implemented and another 5 years of rule-by-proxy by the MCA after the bloodless coup that foisted Gillard.

      • dumb_non_economist

        2d,

        The same factless claims as always, I suppose it’s easier to cut & paste so the effort per post is lower, but is your employer getting his monies worth?

        Edit: Quote No other party is prepared to countenance structural reform.

        What structural reforms?

  4. Jake GittesMEMBER

    Hockey’s empty word – ‘build’ got overworked in the Budget but it’s been clear there was little of substance – like him and Abbott, when it came to persuasive policy.

    Correction: neither Hockey or Abbott are persuasive – they are not able to use arguments and logic to establish ideas; they are dullard bullies.

  5. We are so far away from reform it is hard to imagine it will ever occur.

    The biggest obstacle is agreeing what “reform” really is.

    The mainstream talk about lower currency (or lower wages), broadening the tax base, and balancing the budget.

    We even get told to “support the Budget to the extent that it has begun the wind back of entitlement and unaffordable promises”

    I’m not sure what an “unaffordable promise” really is? Especially in a country which issues its own fiat currency. Yet such statements routinely go un-challenged.

    So lets define what we need as a society first, and define the reforms from there. I suggest we need
    – More and better Hospitals
    – More an better Infrastructure
    – Lower unemployment
    – Lower cost of living

    What we do not need is a government trying to extract savings denominated in its own fiat..

    • hear hear!

      I would add micro economic reform – to a long list of industries / trades and professions into the mix.

    • GunnamattaMEMBER

      You said it.

      Basically Australia needs an economic narrative.

      Somewhere – after having developed one during the Hawke Keating era involving creating a competitive diverse economy which provided meaningful careers for people and vibrant societies – all talk of what we are trying to do with the economy has evaporated. We now have our eyes firmly planted on our own navels (usually in the form of how far in debt we are as individuals, and how much we are paying for things or how much and what we can claim as a tax deduction) and we have coughed up all sight of the wider economic story as a frame of reference.

      From that perspective (essentially an accountants view) we have a freshly elected batch of ideologues trying to clamp down on budget outlays (affecting one end of society) without going within a bulls roar of addressing the taxation concessions and dispensations on the revenue side, when the fundamental truth of the matter is that bullying single mothers, the sick and the students, isnt going to go within a bulls roar of addressing the structural budget issues the government faces – even if looked at in isolation.

      And the reason it isnt going to go within a bulls roar of addressing the structural budget is because nobody wants to look at the economy we are creating (let alone the one we have created – the worlds most expensive real estate, most uncompetitive external facing sector, and amongst the worlds most privately indebted people, in a menage a trois of economic death) which is effectively handing the future a hospital pass of ‘hope those mining revenues hold up, or we can pick up some extra tourists’ all the while telling the future (anyone under about 50 so it happens) to climb into the bed of economic death by taking out an uber mortgage in a feeble globally exposed competitive position, or to hack out a position in some rentseeking defile and wait for the clients.

      What we need is someone pushing the story of the wider economy – as HnH and UE are doing – and working back from there about the budget that makes sense against that narrative.

      All we have at the moment is a load of people making claims about the budget and families or people or sections of society (and valid viewpoints they often are) but without framing that in the context of either our economic future or even the wider pursuit of a better economy now.

  6. As with most things in life – the truth is probably much duller than we imagine.

    Having made during the last election the slogan “No new Taxes” a burnt in neural circuit in most minds along with the promise that the first term would be about a tax review that would be taken to the following election just like Grandpa Howard did with the GST, Mr Abbott was faced with a problem on getting elected.

    The cupboard was bare (as they expected) and it would get a lot barer quickly if nothing was done immediately.

    Fixing the budget structure could not wait until the next election. Something had to be done now.

    If raises taxes (including remove tax lurks) was off the shelf that just left cutting expenditures.

    And that is what we got with a few ‘hidden’ / temporary tax or fee increases included in the mix.

    No surprise that the effect of that was a lopsided budget that caused more pain to those least able to absorb it and not enough pain for those who can because for the most part the better offs ‘benefits’ are covered by the Tax Review.

    The tough option that Abbott and Hockey squibbed was not announcing that they were sorry but now realised they have no choice and must bring the Tax Review forward and make decisions NOW – starting with the no brainers that have been discussed to death on MB.

    It was that exercise in spinelessness that is now causing them so much grief.

    And it was all a waste of time as they are perceived to have broken their sacred ‘Tax Vow’ anyway.

    Best thing for them to do is to announce:

    1. Measures on the least able will not be implemented until further notice

    2. The tax summit is being brought forward to June with decisions to be made by July. After all most of the work is just blowing some dust off the work that has already been done in recent years and giving the usual suspects some gas bagging opportunities.

    The situation regarding the cutting of expenditures will be reviewed having regard to the new tax changes that are to be introduced.

    If done well they may even get bi-partisan agreement on the changes.

    • By “….The cupboard was bare (as they expected)…” I emphasise that I am merely accepting the current approach to monetary policy in this country where all government expenditures must be financed by government debt.

      OMO by the RBA used to manage the overnight rate are not the same thing as government printing even if they result temporary in changes to the money supply. The purpose of those OMO is not to monetize the expenditures of the government.

      In theory the government has fiat currency powers but by choice it keeps them locked in a box in the cellar and outsources most of that function to the private banks.

      • Not quite true.

        The RBA’s OMO is used to manage the cash accounts of the banks (ESA) so as to target an interest rate. The target rate being wedged between the two penalty rates I think we agree on this point.

        A by-product of this structure is when the AOFM issues new bonds it drains ESA from the banks. But the RBA will supply the banks with additional cash because otherwise they lose control of the target rate. What type of security does the RBA accept? Amongst other things, un-rated government bonds.
        http://www.rba.gov.au/mkt-operations/resources/tech-notes/eligible-securities.html

        So in effect, the Central Bank and Treasury should be viewed in a consolidated way – since from an operation perspective, the RBA will “fund” every bond issue so long as they are doing their job and maintaining a target rate.

        Most western monetary systems work the same way.

      • I don’t disagree with what you have written but you don’t go far enough.

        While the RBA will conduct OMO’s to stop the AOFM issues bouncing the target rate, those OMO’s start being reversed the very next day as the government starts spending and running down its ES balances and the banks ES balances start rising as the checks are deposited.

        The net result is that as the next AOFM issue approaches – because the treasuries ES account balance is getting low – the RBA has drained the cash back again with reversing OMOs. Rising bank ES balances affect the target rate as much as falling ES balances due to purchases on bonds from the AOFM.

        This is why the RBA correctly states that govt spending is, by agreement, fully financed by debt sales.

        The RBA is simply smoothing the lumpy nature of those sales to stop them bouncing around the target rate.

        Which is again why our economy is currently being held hostage by two things.

        1. A loony attitude to how government finances its expenditures.

        2. Leaving the money supply in the hands of our private banks and their endogenous money creating habits.

      • “While the RBA will conduct OMO’s to stop the AOFM issues bouncing the target rate, those OMO’s start being reversed the very next day as the government starts spending and running down its ES balances and the banks ES balances start rising as the checks are deposited.”

        – Agree. The system keeps washing the ES balances balances back and forth as the Treasury conducts its day to day business.

        “The net result is that as the next AOFM issue approaches – because the treasuries ES account balance is getting low – the RBA has drained the cash back again with reversing OMOs. Rising bank ES balances affect the target rate as much as falling ES balances due to purchases on bonds from the AOFM.”

        – I’m not sure I fully understand what you are saying. Clearly as the AOFM issues new bonds (and the system starting point is in balance), this will drain ES balances such that the overnight irate increases. But the RBA manages this process by buying existing CGS from the banks (and others). So the banks will always have the funding needed to buy the new bonds while the RBA maintains it’s interest rate. If this is what you are suggesting, I agree.

        The bond sales are first and foremost a monetary tool. They are needed to ensure the RBA meets its overnight interbank target rate. A by product of Primary Bond sales moves the ESA balances back from the banks to the Treasury (after the Banks received the funds from the Treasury as they net spend). The ESA balances simply move back and forth as new bonds are issued each time. Importantly, the bonds do not need to be rated (unlike Europe). Which is why the hand wringing over S&P ratings is irrelevant for Australia.

        This process can go on forever continuously increasing non-government deposits at Banks (subject to inflation constraints).

        If you believe in endogenous private credit creation, then it is not much more of a step to accept the same for government spending. The same subtle dynamic is in play. In both areas, the banks will always get their required ES balances to support their banking operations.

      • “.. I’m not sure I fully understand what you are saying. ”

        Just as the overnight rate would overshoot if the banks ES balances fell too low as a result of buying an AOFM issue and the RBA avoids this by buying securities and thereby making offsetting credits into the bank ES accounts, when the treasury starts spending and its ES balance starts falling and the ES balances of the banks start rising the RBA will start to sell securities to drain the rising bank ES balances which would otherwise cause the overnight rate to undershoot the target.

        However, I don’t think that it is correct to say the process can continue indefinitely while the government ‘binds’ itself to only spending what has been raised by the AOFM and by accepting what the market offers for the issue.

        By binding itself in this way it introduces a constraint on its ability to spend more than it raises by tax.

        I agree that this constraint is artificial and unnecessary but I don’t feel it can be addressed without addressing directly the issue of allowing banks to create money endogenously.

        I believe they are related issues. If anyone is to endogenously create money, and someone should, it should be the government.

        A further constraint of course is the one that Flawse is rightly keen on and that is the external sector and the need to persuade foreigners to accept $AUS in payment for their goods and services.

        So even if the banks power to create money endogenously was wound back to zero a CAD would remain as a constraint on government action using fiat currency.

      • “However, I don’t think that it is correct to say the process can continue indefinitely while the government ‘binds’ itself to only spending what has been raised by the AOFM and by accepting what the market offers for the issue. By binding itself in this way it introduces a constraint on its ability to spend more than it raises by tax.”

        The Government does not bind itself in that way. The only constraint is Treasury needs a positive cash balance to spend (they also have a 1 day overdraft, but I do not want to complicate this any further). The AOFM issues bonds to the extent Treasury needs to money. As already discussed, the Bonds will always be bought because the RBA balances the ES accounts every day.

        “I agree that this constraint is artificial and unnecessary but I don’t feel it can be addressed without addressing directly the issue of allowing banks to create money endogenously. I believe they are related issues. If anyone is to endogenously create money, and someone should, it should be the government.”

        The Government does issue endogenously – that is the point!!! As previously discussed, the endogenous private credit process is supported by the fact the RBA supplies the ES balances required to sustain banking operations. Anyone who really understand endogenous money understands this point. The RBA is complicit to private credit growth. AOFM Bond issue are no different.

        “A further constraint of course is the one that Flawse is rightly keen on and that is the external sector and the need to persuade foreigners to accept $AUS in payment for their goods and services.”

        Foreigners do not accept AUD for payment for their goods and services. They accept foreign currency after the AUD is swapped. Foreign owners of AUD either buy Aussie goods (trade) or save (capital). The external sector is not really a constraint – more a leakage which can be offset with appropriate fiscal deficits, ala the sectorial balances.

        “So even if the banks power to create money endogenously was wound back to zero a CAD would remain as a constraint on government action using fiat currency.”

        Ok – you are way off here and fallen into the trap of MSM economics. How on earth does the CAD affect the ES balances with the RBA (which we both agree affects government spending!!!!). Take me through the transmission mechanisms – step by step how a AUD swap for a Honda somehow limits the ES balances at the Treasury?

        In short you have this totally opposite. The CAD reflects a swap – we get real goods and services, foreigner accumulate AUD savings. To meet the AUD savings desires, the government should run deficits to prevent the demand leakages (again – serctoral balances). Government deficits = non government savings.

      • b_b

        “As previously discussed, the endogenous private credit process is supported by the fact the RBA supplies the ES balances required to sustain banking operations. ”

        That is the mistake you keep making but it may be more the terms you are using that is creating the confusion.

        The ES balances are not reserves and the RBA does not supply balances to sustain banking operations.

        They are exchange settlement accounts that are used for doing what the name suggests – settling accounts.

        The RBA is simply adding or withdrawing small amounts to those balances to manage the rate that the banks lend between each other to settle their ES accounts.

        As you would expect the balances in those accounts are generally very low because they are only recording the outstanding balances at the end of each day and they all net out.

        Thus in most cases the RBA doesn’t have to do too much to maintain the target rate. The exception is when the banks are all freaking out (Circa 2007) and do not want to lend to each other to settle their balances.

        No surprise that they are suspicious as a bank with a debit balance is a bank that is having more of its checks presented (ie perhaps because they got carried away creating loans).

        The big exception to this general mundane state of affairs is when the government plans on spending a lot more than it taxes. If its spending is largely in balance with its receipts Treasuries ES balance does not move much.

        But if the govt does decide to spend a lot then the AOFM needs to flog some Govt securities, it does so and the resulting transactions result in large credits to treasury’s ES balance and corresponding debits to the banks.

        As you correctly point out the RBA, worried about its target rate steps in and buys some bonds from the banks and then credits their ES balances so they are back to the level that results in banks lending at the target rate.

        So at the end of the AOFM bond day the situation is as follows:

        The Treasury ES account has credit for the value of the bonds.

        The Banks are holding some Govt Securities that the AOFM gave them in exchange for their cheques.

        The RBA is holding some securities that it bought from the banks – it did this to make sure the banks ES accounts did not fall too low.

        The banks are now in much the same position they were at the start of the day. Their ES balance is unchanged, they hold some Govt securities and they hold fewer other securities that they sold to the RBA when it was trying to manage their ES balances.

        Net result the RBA has credited Treasuries ES account which it then proceeds to spend and in doing so starts building up the credit balances of the banks ES accounts as the Treasury cheques are presented.

        The RBA then drains those rising ES balances, to maintain the target rate, by selling securities to the banks.

        So while the RBA did print money to fund the AOFM bond purchases and used the banks as the intermediary that process appears to be reversed as Treasury spends the money and Treasury checks are presented to banks and they become credits in the banks ES accounts.

        If they were not reversed then the RBA would lose control of interest rates as the rising ES balances drive down the inter loan rate below the target rate.

        Hmmmm – but then suppose all those good folk who received cheques from the treasury do not spend the money and thus still have debit entries in their saving accounts corresponding to the Treasury cheques they deposited.

        That means that while the rising corresponding ES account levels reflect the presentation of those cheques and may be managed by the RBA to target a particular inter bank rate – that doesn’t make the deposits in those good folks accounts go away.

        End result RBA prints money that finds its way via the banks via AOFM bond issues via the spending activities of Treasury into depositor accounts and while the effect of those deposits on interest rates are neutralised the money is still ”out there” and thus endogenously created by the RBA and the Treasury if considered as a single unit.

        That sound you heard was a penny dropping.

        Cheers b_b

        I will leave the bit about foreigners and the $AUS to another thread other than to note it doesn’t matter if the foreigner is accepting $AUS or $US- what matter is that someone has to accept the $AUS if we run a CAD and if you don’t offer claims on your property or future income that are considered to have substance the value of your fiat currency will collapse.

      • pfh,

        I think you have got it. The only thing I will add is the ES balance do not change if the money is spent or not. Either way the money ends up in someone else’s bank account as a debit entry. One persons income is another persons spending.

        I very much look forward to the discussion re: external accounts.

  7. The budget seemed more like a restructuring of society rather than an economic “reform” document. Which is where I believe Burgess is correct in suggesting that it is part of an overall plan, but to start to change traditional notions of Australian wealth, ownership and society due to the irreversible population ratios of the next 2 decades.
    It’s hard to reconcile “National Champions” coming out of elite circles, with overall corporate welfare reductions. I don’t believe it will happen, in fact I suspect probably accelerate, one way or another, as just one example.
    The declining birthrate puts Australia into neoliberal survival mode for several decades, does it not?
    Isn’t this what the budget is really about?
    The EoE Budget is a tick sheet of high level planning from think tanks focusing around the demographic change occurring in Western countries ( except for, believe it or not, the United States; they are slated to actually grow).
    “Youngsters” think it’s the Boomers out to “steal it all”. The Boomers think they are safe.
    No one is safe. It’s a managed decline and bigger surprises are yet to come.
    A lot of policy logic being held back from public knowledge due to perceived resistance, whilst in fact implementing it in stages without the whole picture being divulged.
    My point is, this is a stealth demographic budget and nothing more; but with plenty more to come. And it won’t be pleasant for many, but needn’t be any worse than it has to be. So I say be careful what you wish for.

  8. Abbott’s daughters only have a few years until they’ll want to settle down, get married, and have kids, after all they are Catholic so I would think the pressure on Catholic girls to do that might be a bit more. Maybe they’ll land an investment banker like Rudd’s daughter, not that she needed to given her mum’s money. But even their cushy handed to them on a platter jobs probably wouldn’t buy them anything satisfactory. Abbott’s house in Forestville is probably “worth” about 1.5-2m.

    Anyway, maybe the daughters are having a word with him.

    Or maybe I’m full of it.

    • Crocodile Chuck

      He wouldn’t listen if they did.

      Ever notice that they and his wife look uncomfortable in their pictures with him?

    • dumb_non_economist

      I agree with BB, his daughters look fine with him, and I think they’ll be looking to marry up the corporate tree, no hard work counting pennies for them!

  9. Indexing the age pension to CPI, the university HECS/HELP changes and earlier staring down the car industry are good, bold structural reforms. Making the states accountable for raising the taxes to fund schools and hospitals sets the scene for tax reform (including the possibility of congestion charging) and addressing VFI.
    They could do more and there is some very bad policy in there too (paid parental leave, abolishing MRRT). Bad decisionmaking on infrastructure looks set to continue.
    Credit and blame should be laid where it is due. The cause of reform is not served by those who claim that all the govt does is good or all is bad.

    • drsmithyMEMBER

      Indexing the age pension to CPI, the university HECS/HELP changes and earlier staring down the car industry are good, bold structural reforms.

      How is making the University system yet another barrier to social mobility a good thing ?

      • Not really a barrier. No upfront fee and you only start to pay once you reach a relatively high salary.

        There is quite a large taxpayer subsidy for tertiary courses, which provide students with a very good return on investment, but which in many cases deliver little if any public benefit.

      • drsmithyMEMBER

        Not really a barrier. No upfront fee and you only start to pay once you reach a relatively high salary.

        The lack of an upfront fee is rather substantially offset by the several-times-greater debt at the end (now accruing interest as well).

        HECS payments would start at $50k wouldn’t they ? That’s not even close to a “relatively high salary”.

        The point of the HECS changes is constrain access to top-tier institutions to the children of the wealthy so they can mingle and scheme without having to worry about any of the hoi polloi hanging around.

        The quality of education will not differ significant from a top- to bottom-tier institution. It will be all about who you get to hang out with while you’re there, not what you learn – just like private schools.

      • dumb_non_economist

        Pat20,

        I gather you left your abacus at home before making that statement about uni? 20-50% increase in fees and at present a 50% increase in the IR attached to it, no barrier? What about mature aged students who have a lessor time to recoup their investment, what about those who will have to retrain later in life?

        Bold structural reforms my arse! This would have entailed ending NG, getting rid of the 50% rebate on CGs, the super rort, ending the tax distorting concessions at the top levels. Abbott has no intention of going there.

      • dumb_non_economist

        Doc,

        Hahahahahaha….Despicable 3, bloody funny as as good as whoever owns 3″dick and Lorax’s 3d1k’d!

      • A higher skilled workforce that is able to advance the economy as well as pay higher taxes is not public benefit?!?

  10. The Patrician

    Let’s be clear, without explanation and facing an immediate budget emergency, Hockey has rejected the reduction of our world-beating multi-billion dollar tax expenditures as necessary budget saving.

    The inquiries and reviews have already been held. The savings have been identified and quantified. Time is of the essence. Hockey had the option and chose not to make the savings.

    There is no “look through” required.

    This is a gutless gross fail.

  11. Free_Market_Delusion

    Apologies for being cynical.

    But we could bang on her at MB about this stuff but we are preaching to the converted.

    Is anyone really surprised nothing has changed?

    Sure they have cut back on entitlements but thats just libs talking tough, its what they do, no rocket science or vision here.

    I’m adopting a new mantra:

    DON’T VOTE NOW!

  12. The HECS/HELP changes will also hurt the less well of even more because data from the US shows:
    1.More than 40 percent of American students who start at four-year colleges haven’t earned a degree after six years. If you include community-college students in the tabulation, the dropout rate is more than half, worse than any other country except Hungary.
    2.To put it in blunt terms: Rich kids graduate; poor and working-class kids don’t. Or to put it more statistically: About a quarter of college freshmen born into the bottom half of the income distribution will manage to collect a bachelor’s degree by age 24, while almost 90 percent of freshmen born into families in the top income quartile will go on to finish their degree.
    (http://www.nytimes.com/2014/05/18/magazine/who-gets-to-graduate.html)

    So if the same trend exists or continues to or develops here then the lower socio economic families whose kids went to uni will find more often thatn not that the student fails to graduate and has a HECS/HELP bill that is even larger than before, but will not gain much, if any, of the beneifts of a university degree in terms of higher remuneration and lower unemployment.

    Just another example of how perverse is the Liberal Budget of Betrayal because “If you compare college students with the same standardized-test scores who come from different family backgrounds, you find that their educational outcomes reflect their parents’ income, not their test scores.”

    • +1 a multi tiered university system like the US will entrench income brackets as well as be a death knock to regional universities

  13. PS:
    whaty can we expect from following the American model in university education?

    For almost all of the 20th century, the United States did a better job of producing college graduates than any other country. But over the past 20 years, we have fallen from the top of those international lists; the United States now ranks 12th in the world in the percentage of young people who have earned a college degree. During the same period, a second trend emerged: American higher education became more stratified; most well-off students now do very well in college, and most middle- and low-income students struggle to complete a degree. These two trends are clearly intertwined. And it is hard to imagine that the nation can regain its global competitiveness, or improve its level of economic mobility, without reversing them.

    http://www.macrobusiness.com.au/2014/05/the-budget-failed-to-deliver-structural-reform/#comment-366866

    • Perfect model for Australia don’t ya think? Payne (in the ass) seems to see it my way. (tic)

  14. extraordinary and world-beating tax expenditures

    Negative gearing, .. hugely mis-allocate of capital across the economy into unused land-banking and price speculation.

    Ross Garnaut pointed this out last night. http://macrobusiness.cmail3.com/t/i-l-vlruly-dtyhydth-jt/

    There’s not much we can do when the clowns who run the government think they know better than Garnaut.