How Can Australia Weather the Financial Storm?

Image via WikipediaAustralia, like the rest of the world, is coming under some battering from the financial crisis. It is worth looking at whether we can take advantage of the situation to make drastic improvements to the overall economy. Let’s begin by looking at where things stand.

Simple version is that the world is heading for recession and demand for Australian goods and services will go down. Various commentators and the Government have talked up China’s growth as keeping Australia from slipping into recession. I don’t think this is going to work. Wall Street Journal has reported a 4% drop in electricity consumption in China in October. Production of goods and services will fall due to the weakening demand in US and Europe, China’s key export markets which will mean China has less need for mineral commodities which has been the engine of Australia for the last few years.

The other idea floating around is that China and India’s middle class will continue to consume. Two problems with that, 1) Chinese and India’s middle class while big is not on the same scale in terms of consumption to replace the demand of the West and 2) much of the middle class in India and China are dependent on jobs that supply goods and services to Western consumers so as demand in the West falls expect to see the number of Chinese and Indian middle class fall. A lot of people don’t understand how the world’s growth has been due to the debt-fuelled consumption of the West. There is nothing to replace that demand.

As to weakening demand in the West a few simple yard sticks indicate that the de-leveraging still has away to go. House prices are still 3 times the average household income and household debt is still much greater than disposable income. In fact we still have yet to feel the effect of unsecured lending and credit card debt.
Unfortunately for Australia, the Government’s hasty and badly contrive deposit guarantee introduce instability into an otherwise stable financial system.

I expect that Australia will fall into recession and while the recession may not last very long the economy will remain flat until the system has de-leveraged itself back to more realistic levels. Golden years are over for now.

But...but this crisis is the single greatest opportunity Australia has to make a rapid shift, a quantum leap if you will, to a low carbon sustainable economy. Taking advantage of the crisis requires short, medium and long term initiatives by the Government, which meld together to shift people into green jobs, reduce per-capita energy consumption and prepare the ground for a low carbon economy by investing in key infrastructure.
Short term, Australia’s already had the fiscal stimulus (by short term I mean right now). That will hopefully keep things from falling off the cliff. Problem with giving money is a lot will go into paying down debt and less into consumption. An additional short term measure is to expand the solar hot water and solar power programs for household. This program already has the management systems in place and has been “closed” due to wild adoption. Simply by adding several hundred million dollars to the program, the number of installations can be increased creating jobs and reducing carbon creation.

Medium term (six months to a year) there are the tax cuts in July 2009. That won’t be enough and although the Government has talked about a 2nd stimulus package, that same money would be better spent focusing on the following initiatives:

• Paying for low income and pension households to double glaze and insulate the homes, install solar hot water and high-efficiency air-conditioning;
• Provide up-front income contingent loans to other households to do the same;
• Fund the installation of solar panels and solar hot water on all government buildings and schools across Australia;
• Soft loans to small business and commercial real-estate owners to install insulation, double glaze windows, install solar hot water and solar panels and purchase new high-efficiency machinery;
• Revamp the car bail-out to allow people to trade to the government low millage cars for hybrid and electric cars;
• Begin construction of a national conduit system across towns and cities starting in regional towns. The single biggest cost of laying fibre broadband is having to dig up the road. By creating a conduit system that anyone can get right of access to will allow new competitors to provide super fast (100+ Mbps symmetrical) to households. Additionally, conduits are standard so the contracts can be tendered to a wide range of construction companies creating short term jobs that are localised.

These initiatives will create green jobs, reduce the per-capita energy carbon energy consumption of Australia while also freeing up household income as utility bills are reduced. Again this income will initially go to paying down loans but then in about one year the income will move into demand replacing the spending of the Government initiatives.

Long term initiatives are everyone’s favourite infrastructure projects. The projects I see as having the best long term pay off are:

• Fund a High Speed Rail on the East Coast initially connecting Sydney, Canberra and Melbourne with an option to Brisbane using TGV standard;
• Fund the development of light rail in the major capital cities and regional centres;
• Fund the development of DC High Voltage transmission lines that connect the centre of regional Australia to the major cities and regional towns.

All three of these initiatives would create a range of jobs over several years. They would also reduce the carbon footprint of the economy. The DC high voltage lines are important as they make large-scale solar more viable by providing an effective, low loss method of getting solar generated power to the cities. HSR can be started quickly by utilising the existing TGV standard and designing to support 500 km/h speeds.

The financial crisis offers the single greatest opportunity to cross the tipping point to a low carbon sustainable economy. A bit of fore thought and planning the Government (or Opposition) can make a huge difference to the country.

Fighting Inflation in Australia using Super

Australia is one of the few nations in the world where the interest rates are rising and rising hard. Commodities boom, over indulgent consumption and 35 year lows in employment have pushed the economy to the limits of capacity.

The debate in Australia is about how to fight the inflation and the recurrent need for the RBA to raise interest rates to combat inflation now outside its 2-3% band. The Rudd Government has brought back fiscal policy to try and help fight inflation by aiming for a surplus of 1.5 to 2% and avoid the RBA rasing interest rates further (unlikely). Although given that for the past 5 years or so the budget surplus has always come in higher that the forecasted 1% its hard to see how a measly 1.5 to 2% is going to make much of difference. It probably needs to be 2.5 to 3%.

The otherside of the debate is how raising interest rates is a blunt policy instrument for fighting inflation, only effects third of households etc. What is missing from the debate is discussion on what other levers that could be provided to the RBA to manage the economy. In many economies there probably aren't many other levers that central banks could use. But Australia has compulsory super for a majority of employed people. The issue is to remove spending from the economy or put another way to increase savings and reducing consumption. Giving the RBA the ability to manage the percentage of income that is paid into super would give the RBA another lever to pull.

The advantages I see in using super contributions this way are;

• It increases the savings rate across a very large majority of households
• It does not directly effect the price of business investment the way interest rates do
• It is spread more evenly across the economy rather than concetrated in the 1/3 of households with morgages
• Individuals don't lose the money, it is simply redistribute to return in the future

The biggest problem I see is the mechanics of actually performing the changes. However, this is a solvable problem as it could rolled into financial packages that most if not all businesses use.

Another possible lever is to allow the RBA to change tax percentages about a median point. But I see that being an even tougher operation and also more politically hazardous. It could be a rather useful tool to have in the back pocket though.

Tags: Superannuation, Inflation, Australia

Transport in Sydney

I've just returned from Christmas in Australia. Starkest difference between London and Sydney was how hard it is to get around Sydney by public transport. Not having a car in Sydney is a significant obstacle to enjoying Sydney.

This only serves to highlight how (relatively) good London's public transport network is. This is not to say that there isn't room for improvement, there certainly is. But the cost of improving London transport is dwarfed by what Sydney needs, nay must, spend to get a decent public transport network.

Unfortunetly for Sydney, public transport is the single biggest hurdle to further development, increased tourism and maintaining its status as a liveable city (which is already rapid falling).

With recent coup in Fiji, the troubles in the Solomon Islands and riots in Tonga, you have to wonder what is happening. Over the last few years, the south pacific island nations have seemingly lurched from one crisis to another and there does not seem to be an end in sight. The question is, how is this going to be solved?

The answer, I think, is a Pacific Island commonwealth that includes Australia and New Zealand.