Tuesday, November 29, 2011

A Show About Nothing

Where else but Australia would the media work itself  into a thumb-sucking frenzy over a 'MYEFO'? Perhaps if you told the Brits it stood for My Youthful Exotic French Odyssey, they might bite. But Mid-Year Fiscal and Economic Outlook? Hold the front page.

In Australia, journos scribble millions of words every year, pulling out ersatz 'analysis' from their proverbials about data that has little or no bearing on the lives of most of us - like monthly forecasts of volatile unemployment data (a throw of the dice by the statistical gods) or, worst of all, whether the federal budget ends the financial year in a small surplus or a tiny deficit.

To be sure, this surplus fetish - the notion that we will be eternally damned in the fires of fiscal hell unless government revenues exceed spending by even a dollar  - is partly of the current administration's own making. But why is it so hard for the media to admit to the public that it is all a cruel (accrual?) joke?

Unfortunately, it seems easier to pirrouette in time with the self-serving political spin that these minuscule numbers mean something. It is simply to beat up a completely understandable shortfall in revenue - due to a deteriorating global economic environment - as opening up the old "black hole" and (god help us) "putting upward pressure on interest rates". In reality, there is a good argument that the increasingly hostile international landscape justifies the government letting the budget's automatic stabilisers do their job and not make a bad situation worse (the budget in this sense is like airbags in a motor vehicle. Your car still gets smashed in a collision, but you survive).

Let's put this in perspective. Firstly, whether the government delivers its promised $1.5 billion surplus next year is neither here nor there. As a proportion of overall revenues of about $300 billion, that is around half of one per cent. Or to put it in numbers that most of us connect with, it's like a household on a $150,000 annual income earning $750 more than it spends over 12 months. Oh, jackpot. If that equation was around the other way, can you imagine your average aspirationals lashing themselves to the mast?

Secondly, let's tackle the Opposition canard - gleefully recycled by some media outlets - that somehow we are drowning in debt.  It doesn't take much - like five minutes on the Internet - to show that total government liabilities at around around 22 per cent of GDP are the lowest in the OECD and compare extremely favourably to just about every other developed economy. Japan, for instance, an economy rated lower than Australia at 'AA', has liabilities of more than 200 per cent of the size of its economy. (Economics 101: It's not the size of the debt, it's whether market hordes think you can pay it back.)

Thirdly, look at the market pricing. It is one of life's great mysteries that the media credulously reports economics out of the mouths of politicians in cowtown Canberra without actually looking at what the global markets think of this supposed "out of control" fiscal mess.

Australian government 10-year bond yields last week hit record lows of around 3.8 per cent. Low yields mean high prices. Put another way, the famed 'international investors' - hungry for low risk assets - can't get enough Australian government paper. Compare the yield, or return, with an equivalent US government bond of less than 2 per cent and you can see the attraction. As to the fiscal situation putting "upward pressure on interest rates", it's actually the other way around.  As mentioned, long-term yields are at record lows. At the short end, the RBA has already cut official interest rates once and the market is priced for more. So notions that the Australian government, like Oliver, is having to plead for more are just, err, made up.

Finally, look at the credit ratings. Australia is now - after the Fitch upgrade - one of only 11 countries globally whose government bonds are rated the top 'AAA' by all three ratings agencies. We are officially seen by the agencies as a better credit risk than the US, the world's biggest economy. OK, nobody believes the ratings agencies after the GFC. Fair enough. So look at the prices instead. They tell you that large fund managers in New York and London and Tokyo - the people actually putting dollars or euro or yen on the table - see Australia as a better bet than most. A highly desirable investment bolt-hole in a chaotic world, in fact.

So to sum up - our deficit is insignificant (and so will be the promised surplus), our debt is the lowest in the OECD, our credit rating is the highest possible and the demand for our bonds is unprecedented. Interest rate pressures are down, not up, and no-one in the financial markets - the people all this hairy chested rhetoric out of Canberra is aimed at - is losing a minute's sleep over Australia. Bigger things to worry about, like, oh, Europe and the United States.

So comparing the actual extent of the "problem" with the level of rhetoric out of our fevered provincial capital makes one wonder why the media makes such a fuss over this. Of course, the answer will be that the fuss is of the government's own making. Wayne Swan wants to look tough. And he's boxed himself into a corner by tying the government's economic credibility to whether the government's cookie jar has a few pennies left over in the middle of a European sovereign debt crisis that is potentially catastrophic. By the  way, in those circumstances, if Swan didn't run a deficit, he really should be strung up.

But this doesn't absolve journalists from actually pointing out to their readers and viewers that the politics of the situation - interesting only to them - and the actual, real-world economics are miles apart. Unfortunately, doing that would involve admitting that the whole debate - like so much in modern party politics - is a confected charade that exists to keep the commentariat in business. In other words, it is a show about nothing.

(See also Stephen Koukoulas: Who's addicted to spending and taxing? )
(See also Tim Dunlop: Deficit Bad, Surplus Good in Political Narnia Narrative)


  1. Interesting to see how News Limited has covered this.

    From today's Herald Sun

    "Julia's Unkindest Cuts"

    and from the Australian

    "Swan's bread and surpluses trick".

    So, no evidence of a campaign against the Labor Government, goodness me no.

  2. "can you imagine your average aspirationals lashing themselves to the mast?"
    Well yes, it's already happened, with the Noalition claiming that a couple on an income of $150,000 will be $750 worse off due to the carbon tax, therefore the sky is falling. Heaven forbid that they might have to trade the RangeRover in on a Corolla, or even worse, cut back on their electricity consumption.

  3. Excellent analysis, Mr D. Keep up the good work.

  4. On the money again Mr D. It's about time members of the Press gallery and finance writers stopped trying to show us all how clever they are. They are not. Nor are the fiscal ignoramuses that pass for the Opposition frontbench. Or the fools in government who think they have to appease the aforesaid fiscal ingnoramuses.