Saturday, October 9, 2010

Greens look set for inner-city gains

THE Greens could win the state seats of Melbourne and Richmond from Labor if they can repeat their federal vote at the November 27 state election, analysis by The Age reveals.
But on federal voting trends, the Greens would fall just short of taking two other inner-suburban seats Brunswick and Northcote.

A new Galaxy poll reports Labor's two-party lead over the Coalition shrinking to a 51-49 margin. If that is correct, Victoria is headed for a cliffhanger election, with a strong chance that the state will end up with a hung parliament.

By contrast, in the August 21 federal election Labor won 55.3 per cent of the two-party vote in Victoria its highest at federal level since the 1940s.

On first preferences, the Galaxy poll shows Labor's state vote down 5 percentage points from its federal vote, from 43 per cent to 38 per cent. The Coalition is up 3.5 points to 43 per cent, and the Greens up 1.5 points to 14 per cent.

If the swing was uniform which it never is, but it's not a bad guide the Liberals would gain eight seats: Mount Waverley, Gembrook, Forest Hill, Mitcham, South Barwon, Frankston, Mordialloc and Prahran.

If the Greens win the four inner-suburban seats, Labor would be left with just 43 seats in the 88-member Assembly. The Coalition would have 40 seats, with four Greens and independent Craig Ingram holding the balance of power.

Even a transposition of federal voting figures to state boundaries shows the Greens on track to unseat two more Brumby government ministers.

In the state seat of Melbourne, Greens barrister Brian Walters would easily defeat Education Minister Bronwyn Pike, winning 57.5 per cent of the two-party vote assuming Liberal preferences go to the Greens.

In Richmond, Greens candidate Kathleen Maltzahn would beat Housing Minister Richard Wynne, with 55 per cent of the two-party vote.

But in Northcote, leading ALP right-winger Fiona Richardson would just hold off the Greens' challenge, winning 51 per cent to the Greens' 49. Based on the federal figures in Brunswick, new Labor candidate Jane Garrett, mayor of Yarra, would scrape home by 0.6 percentage points. But if the Galaxy poll is reflected in voting on November 27, both these seats would also go to the Greens.

The Age analysis found no other seats within the Greens' reach. While their federal vote after preferences topped 20 per cent in Albert Park, Footscray, Prahran and Ted Baillieu's seat of Hawthorn, they are well back in third place. The analysis shows preference deals will play a crucial role.

There is sharp criticism within Liberal ranks of the federal party's decision to give preferences to the Greens without something in return such as the Greens issuing open tickets.

Premier John Brumby and Opposition Leader Ted Baillieu yesterday refused to say whether they would negotiate with the Greens to form a minority government in a hung parliament.

Mr Brumby said he was trying to win government in his own right, and questioned whether the Greens could maintain their level of support.

"[In] the history of politics in Australia over 20 to 25 years, you'll find various parties, whether it's the Democrats, the Nuclear Disarmament Party, the Greens Party," he said. "Their popularity will fluctuate."

Mr Baillieu has had no discussions about a preference deal with the Greens, he said. "A vote for the Greens has been a vote for the Labor Party for the better part of 10 years," he said. "There are no commitments. There are no deals. In [a hung parliament] we would do what is in the best interests of Victoria."

The Greens would not say which party they would back in the event of a hung parliament. But they are likely to demand the transport portfolio if they seize the balance of power.


Thursday, October 7, 2010

IMF warns of global currency war risk

THE head of the International Monetary Fund has warned of the risks of a global currency war, as tensions over China's undervalued currency threaten to dominate this weekend's annual meeting of world finance ministers in Washington.

As Japan's central bank began intervening in currency markets to put a lid on the rising yen, the IMF again appealed to China and other emerging economies to allow the markets to set their exchange rates, rather than holding them down to gain a competitive edge.

The appeal came in the IMF's new World Economic Outlook, released overnight, which offers barely changed forecasts for growth in 2011: 4.2 per cent for the world, and 3.5 per cent for Australia.

IMF head Dominique Strauss-Kahn told The Financial Times that Japan's currency intervention made sense if its goal was "to avoid disruptive volatility", but not if it wished to influence the yen long-term.

With an understatement worthy of Casablanca, Mr Strauss-Kahn told the FT that "there is clearly the idea beginning to circulate that currencies can be used as a policy weapon.

"Translated into action, such an idea would represent a very serious risk to the world economy," he warned. "Any such approach would have a negative and very damaging longer-run impact."

China is widely seen as keeping its currency undervalued to make its exports more competitive, and hence attract more foreign investment. In the US, Congress is stepping up pressure on the Obama administration to formally declare China a currency manipulator, and take action against it.

In recent weeks, central banks in Japan, Korea and Taiwan have intervened on currency markets to stop their currencies rising. Brazil has doubled its tax on short-term capital inflows to 4 per cent. But Australia's Reserve Bank has allowed its dollar to keep rising. Last night it was trading at US97.20, up 1.5? in a day.

Markets expect it to overtake the US dollar in coming weeks for the first time since it was floated in 1983.

The IMF's latest 90-page set of forecasts virtually ignore Australia, other than to warn that it faces a "low-risk" threat of a housing crash.

For Australia, the main change is that the IMF has lifted its 2011 inflation forecast to 3 per cent but cut its forecast of the current account deficit. It predicts unemployment will be steady at 5.1 per cent.


Wednesday, October 6, 2010

Reserve chooses wisdom over the chatter of economists

THE Reserve Bank board made a wise choice yesterday. And by doing so, it reminded us that its nine members set interest rates, not the bank's senior officials.

A year ago the board raised rates for the first time in this cycle despite market economists tipping no rise and News Limited columnist Terry McCrann saying it was "all but certain" rates would stay on hold.

This time the board left rates on hold despite economists tipping a rise, and McCrann telling us a rise was "all but certain".

The board did its job. On one hand, it would have heard the bank's senior officials argue that rates must rise to head off inflationary pressures they foresee if the resources boom develops as fast as they expect.

They may well be right, at some point. But the board also sees the data suggesting six interest rate rises in the past year have had a heavier impact than the bank had expected. Housing approvals have plunged, retail sales are lukewarm, as is business and consumer confidence.

The board knows that confidence in global financial markets is fragile and that inflation in Australia is falling, not rising. Why move now?

A rate rise yesterday could not have been based on what economic data is telling us, but only on what Reserve staff think is around the corner. The board was right to ask for more evidence before moving.

It meets next on Melbourne Cup Day six days after the release of September quarter inflation figures. If they show underlying inflation in check, a rise would be a hard sell.

The last meeting this year is on December 7, after the national accounts figures are released. That could be a good time to reassess the risks, when there is more data on how we're travelling, and maybe clearer signals on the world economy. .

Glenn Stevens's statement yesterday warns: "If economic conditions evolve as the board currently expects, it is likely that higher interest rates will be required, at some point."

That's true. What we don't know is whether conditions will evolve as the bank expects.

Tuesday, October 5, 2010

Finance razor gangs out to cut spending

The pressure is on for Canberra to put the brakes on its outlays.

Caution is an underrated virtue. When people gripped by some overwhelming idea want to sweep all before it, it's a good thing to stand in the way and ask why.

We needed people to do that in 1989 when the Reserve Bank was raising interest rates to 18 per cent - and planting the last big recession. We need people to do it now.

Think of last week's news that Irish taxpayers will have to pay almost $50 billion to bail out a single bank, raising Ireland's deficit to 32 per cent of GDP. Our bankers may be greedy, but when their Irish counterparts were swept away by the lure of high-return, high-risk lending, our guys were sensible and cautious. They asked the right questions, didn't get the right answers, so they said no.

I don't pretend that the risks we face now are of the same scale as in 1989 or Ireland in the '00s. But there are risks, from three sides. The Reserve Bank believes it has to raise interest rates now to guard us against the risk of inflation, maybe in 2012. The higher dollar is making some imports cheaper to buy, but will cost us jobs and incomes as it puts our firms out of business. And Treasury and the Finance Department want the Gillard government to stop spending so much on us, and make us pay our own way.

Let's first applaud the two departments for putting their briefing papers to the government on the internet (at and It's a great initiative, and even with too much blacked out by self-censorship, they are insightful, substantial contributions to our economic debate.

But before we get swept away by their case for further spending cuts, let's try caution. Let's ask:

Why should we cut government spending any faster? Is it because the budget is in crisis, as it is in the US, Japan, Britain, Italy and Ireland?

Clearly not. Net government debt at June 30 was 3 per cent of GDP, as against 66 per cent in the US or 121 per cent in Japan. Yes, the deficit was 4.2 per cent of GDP in 2009-10, but almost half was from temporary stimulus measures. As the International Monetary Fund puts it, Australia's public debt is ''very low'', and the deficit will soon return to surplus.

Is it that spending has grown out of control, as the opposition says, crowding out the private sector?

From a glance in the rear-vision mirror, you might think so. In 2009-10, federal government spending was 25.9 per cent of GDP, the highest since the 1980s. But exclude the temporary stimulus measures, and underlying spending was 24 per cent of GDP, the same as under the Howard government.

Treasury and Finance estimate that total spending will fall to that level next year, then keep falling. Unless their estimates are very wrong, that's no problem either.

On Treasury's figures, the reason a surplus in 2012-13 will be touch and go is that revenues will be below average - even with a mining tax, applied in a mining boom. Both sides cut income tax too much, too fast, leaving us a revenue base too small to sustain spending. The solution is tax reform.

Is it because the economy will be growing too fast over 2011 and 2012? Should the government slam the brakes on harder to take pressure off interest rates?

If you trust the Reserve Bank's forecasts, yes. It predicts growth of 3.75 per cent over 2011 and 4 per cent over 2012, with underlying inflation rising to the outer edge of its 2 to 3 per cent target band.

But the data shows most of the economy is weak, inflation is still falling, global growth uncertain, and six interest rate rises in a year are already hurting. The jury is still out on this.

Is it because spending will rise further in the long term, so that we will need spending cuts and/or tax rises to keep providing the services and entitlements we have now?

Now we're getting warm. This is what the Finance Department argues, and it's got a strong case. The Howard government opened up welfare benefits and tax breaks to the well off, especially self-funded retirees. As the baby boomers age, this will cost us.

The Finance briefing paper sets out the structural pressures forcing spending to rise inexorably. Not only are the baby boomers getting older, costing us more and contributing less, but governments are subsidising the middle class in areas that are rising fast.

The key lesson from that, to me, is that we need to go after the big, politically difficult cuts, such as tax breaks for negative gearing ($5 billion a year), private health insurance ($1.1 billion), and, yes, owner-occupied homes ($14 billion). Finance also has its eyes on reducing eligibility for family tax benefits, pharmaceutical benefits, and the seniors health card - now received, as it points out, by many who are far better off than the taxpayers paying for it.

Is it because Labor has pledged a surplus in 2012-13 so often that it now has to deliver it?

Now you're very, very warm! The Finance paper points out that a lot of things could go wrong, some spending items are excluded from the forward estimates, and on current settings, a surplus in 2012-13 is not the certainty Labor has suggested it is.

So there are two strong reasons why we'll get spending cuts. Be prepared.


Monday, October 4, 2010

Cost of war may lead to budget gap

THE federal budget is facing a funding gap of up to $10 billion over the next five years, with the Finance Department revealing that no money has been set aside for overseas troop commitments after this year.

In its detailed briefing paper to Finance Minister Penny Wong, released on Friday, the department says overseas troop commitments primarily to Afghanistan are now costing the budget $1.7 billion a year.

It says the budget does not set money aside for drought relief or overseas troop commitments in future years, so any spending has to be added to the budget every year.

On reasonable assumptions, continuation of Australia's commitment to Afghanistan, Iraq, East Timor and the Solomon Islands at current levels would cost $2 billion a year by 2012-13. In theory, that would wipe out half of the $3.8 billion surplus forecast for that year.

In practice, the budget allocates money into a contingency fund to finance spending on issues it can't foresee. In the election campaign, the Coalition proposed raiding the fund of $2.5 billion to pay back debt. Yet last week it also proposed to send another 350 troops to Afghanistan, with tanks.

The Finance Department's briefing singled out defence as a potential area for big spending cuts, which it warns the government could need to reach its goal of returning to surplus by 2012-13. It told Senator Wong that the scale of the fiscal task ahead, and the big rises in defence and national security spending under the Howard government, now present an opportunity for the government to "reassess the strategic posture and funding of defence".

The next paragraph was blacked out from the text made public. But Treasury has urged that military equipment be bought off the shelf overseas, rather than building submarines and ships in Australia.


Sky the limit for building

MORE than 20 per cent of all new homes approved in Victoria this financial year have been in high-rise apartments, as Melbourne's population boom is making it build up as well as out.

In a dramatic shift in favour of higher-density developments, almost 40 per cent of new homes approved in the state in the first two months of 2010-11 have been either high or medium-density.

This has climbed from just 15 per cent in the 1980s as little as 8 per cent in some years as developers and governments have responded to buyers' desire to live closer to the city.

In Melbourne alone, almost half of new dwellings approved this financial year have been apartments, units, terrace houses or other high or medium-density housing.

Councils in the greater metropolitan area have approved 4702 traditional detached houses, and 4026 apartments, units and terrace houses.

It's a dramatic shift from the 1980s and early '90s, when 85 per cent of homes built in Melbourne were detached houses on a block of their own. In the '90s recession, high-rise construction ground to a halt.

But in the past decade it has taken on a new life, especially in and around the CBD. Almost a third of new housing in the metropolitan area in the 2000s was on shared blocks. And in 2009-10, three in every eight homes were some form of medium or high density.

The Australian Bureau of Statistics does not publish figures for approvals for high-rise units defined as apartment blocks of four storeys or more in cities. But in the year to June, 7590 high-rise apartment units were approved in Victoria, almost the highest level on record. They made up 14 per cent of the state's new dwellings, compared with 5 per cent in the '90s. Yet in the first two months of 2010-11, this has risen to one in every five new dwellings in the state.

If you assume they're in Melbourne, then one in four new homes approved in the city so far this year is in a high-rise apartment block.


Friday, October 1, 2010

Flaw found in joint plans to cut deficits

IN A finding with dismal implications for the world economy, the International Monetary Fund has found that the new wave of simultaneous deficit reductions in key Western economies is likely to be far more painful than their governments assume.

A major new IMF study tackles the hottest topic in global economics whether it is more important for the United States, Britain and other countries with high unemployment and high deficits to spend up to stimulate jobs, or cut spending to bring their budgets back under control.

The IMF research, published as an early chapter from next week's World Economic Outlook, concludes that cutting spending is the right path in the long term. But it warns that the costs will be far higher and longer lasting than some have estimated.

It tears apart two influential studies by American-Italian economists Alberto Alesina and Silvia Ardagna, which found that fiscal consolidation rarely does much short-term damage to the economy, and can even bring immediate gains. The Cameron government in Britain, and others, have cited this research to justify heavy spending cuts.

But the IMF study apart from accusing Alesina and Ardagna of choosing their examples selectively found this was true only when isolated countries carried out fiscal consolidation, when interest rates were free to fall, and a slump in domestic demand was offset by rising exports.

None of those conditions was true now, the IMF warned. It endorsed arguments by columnists Paul Krugman of The New York Times and Martin Wolf of the Financial Times that Western countries cannot collectively export their way out of a domestic slump, since most of their exports go to each other.

When isolated countries cut spending sharply, as Australia did in the late 1980s, the study found, a budget cut of 1 percentage point of GDP created a similar cut in domestic demand. But an expansion of net exports halved the GDP cost, while interest rate cuts cushioned demand.

By contrast, the costs to GDP are doubled when the rest of the world is also cutting spending, and doubled again when interest rates are already too low to allow further cuts.

Over the long term, however, the study found that fiscal consolidation more than pays for itself, by increasing investor confidence, allowing lower interest rates, and allowing governments room to cut income tax.

It found that spending cuts deliver more long-term gain than tax rises, mostly because central banks are more likely to cut interest rates to offset the impact.


Housing slump may help keep rates on hold

AUSTRALIA'S housing recovery has vanished. Dwelling approvals plunged again in August to their lowest level in a year, throwing serious doubt on the prospects of another rate rise soon.

With the federal government's stimulus programs coming to an end, the banks turning away builders, and six rate rises in the past year deterring buyers, seasonally adjusted housing approvals fell 4.7 per cent in August to 13,049.

In just five months, approvals have crashed by 24 per cent, after hitting a high of 16,835 in March. Half that crash is due to the Rudd government's social housing initiative winding down, and half to a slump in private sector activity.

The crash has come overwhelmingly in New South Wales, Queensland and Western Australia with Victoria, South Australia and Tasmania islands of strength in a drifting continent.

So far this financial year:

More than 40 per cent of Australia's private sector housing approvals have been in Victoria which has just 25 per cent of the population.

More homes were approved in Melbourne alone than in Sydney, Brisbane, Perth and Canberra combined.

The Bureau of Statistics reports that 8728 new homes were approved in Melbourne in July and August, but just 3420 in Sydney, 2652 in Perth, and 1863 in Brisbane.

Non-residential building also remains very weak. The federal government's school building program has wound down, while private sector activity is still bumping along the bottom.

The figures suggest that the Reserve Bank's six interest rate rises in a year have dampened the economy's prospects more than the Reserve has been willing to admit.

Financial markets, which had been pricing in a further rate rise when the Reserve board meets next week, yesterday slashed the odds of a hike to 50/50, amid mounting evidence of economic weakness.

The Reserve itself reported that business credit slumped by another 0.6 per cent in August, while credit to people buying their own homes in the past quarter grew at the lowest rate on record.

The HSBC bank's new chief economist Paul Bloxham until recently one of the Reserve's senior economic analysts predicted that the Reserve would hold off raising rates again until it had more data to justify a rise.

"One of the least good outcomes would be that the Reserve Bank is in a position where it has to reverse a decision quickly," Mr Bloxham said. "This would be disruptive for both the economy and the financial markets."

The IMF also sounded a warning note in a new report on Australia, released yesterday. It forecast only average growth in 2011, with a risk that a deteriorating world economy could slow the economy further.

The government had hoped rising housing activity could help reduce the shortfall of an estimated 200,000 homes.