Treasury Ignores Housing Sector In Structural Budget Comparison With Ireland

6 Aug

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The Australian Treasury’s recent update to its working paper Estimating The Structural Budget Balance Of The Australian Government, makes for interesting reading.

Interesting, in that it provides all the reason needed to put a broom through the entire department.

Why so?

Treasury points to an analysis which shows that the IMF has repeatedly over-estimated Ireland’s true structural budget position, and calls it a “cautionary tale” for Australia:

Box 2: Ireland’s structural budget balance

Changing estimates of Ireland’s structural budget balance provide a cautionary tale, highlighting the difficulty of estimating structural budget balances in real time.

Since the onset of the GFC, the IMF’s estimates of Ireland’s pre-crisis structural budget balance have been revised down significantly. While the IMF initially estimated that Ireland had been close to structural budget balance in 2007, its latest (April 2013) estimate now suggests a structural deficit of around 8½ per cent of potential GDP in 2007 (Chart A).

Australian Treasury, "Estimate The Structural Budget Balance", May 2013, page 10

Australian Treasury, “Estimating The Structural Budget Balance Of The Australian Government”, May 2013, page 10

The authors then promptly ignore the striking similarities between Australia’s structural position now, and Ireland’s pre-GFC:

While part of the revision to the IMF’s pre-crisis estimates of the structural budget balance is due to a lower estimate of potential GDP, the main reason for the change is that these estimates failed to capture the dependence of the fiscal position on an unsustainable boom in the housing sector (Kanda 2010). With residential investment and house prices soaring, property-based taxes grew at a pace well above GDP growth. Failure to recognise at the time that the bulk of these revenues were cyclical led to significant tax cuts and expenditure increases, which created a large structural hole in Ireland’s public finances.

Alas, the ivory-towered Treasury wonks fail to see that this is not just Ireland … this is Australia they are talking about.

They are too busy obsessing over the process of estimating the structural budget balance, to notice the stark similarity in what has actually happened out here in the real economy.

Indeed, it is clear from the paragraph preceding all of this, that the only lesson they have learned from the “international experience”, is not to over-rely on “point estimates” in making their calculations:

The key point to draw from the analysis is not the specific year in which the [Australian] budget returns to structural surplus, but the steady improvement over time. Indeed, international experience has illustrated the difficulties in disentangling temporary and permanent economic influences on the budget, which cautions against overreliance on point estimates of the structural budget balance (see Box 2).

Australian Treasury, Estimating The Structural Budget Balance, May 2013, page 9

Australian Treasury, “Estimating The Structural Budget Balance Of The Australian Government”, May 2013, page 9

Australian Treasury, "Estimating The Structural Budget Balance For Australia", May 2013, page 10

Australian Treasury, “Estimating The Structural Budget Balance For Australia”, May 2013, Box 2, page 10

Er … no.

The “international experience” does not caution against “overreliance on point estimates”.

It cautions against allowing “an unsustainable boom in the housing sector … with residential investment and house prices soaring”.

It cautions against government fiscal policy that relies on “property-based taxes” growing “at a pace well above GDP growth”.

It cautions against “failing to recognise at the time that the bulk of these revenues were cyclical”.

It cautions against “significant tax cuts and expenditure increases” creating “a large structural hole in Australia’s public finances”.

It also cautions against something else.

Allowing technical wonks, with no real world business experience, no commonsense, and no wisdom, to be employed in what is arguably the most important department in the Australian Government.

Is it any surprise that Treasury cannot get any of its budget estimates and projections within a bulls roar of reality?

Their over-educated eggheads cannot see the forest for the trees.

Here is another striking similarity with Ireland, that Treasury doubtless has not noticed either.

When you add the public debt of Australia’s state governments to the federal government debt, Australia’s total public debt position is now worse than Ireland pre-GFC:

Screen shot 2013-08-05 at 7.39.04 PM

Screen shot 2013-08-05 at 7.37.30 PM

And with Australia’s banking system being the most exposed to residential mortgages in the world…

ScreenHunter_08-Jul.-23-08.09

… now you know why Moody’s has warned of an Australian banking system collapse:

The continued strong expansion in real estate loans—at least relative to other lending segments—has raised some eyebrows. The Australian banking sector has the highest exposure to residential mortgages in the world… The high degree of exposure to the domestic mortgage market raises many concerns. Recent experience has shown that house prices can fall significantly and trigger serious banking meltdowns. But what are the chances of a similar housing collapse in Australia? Many international analysts think the chances of an antipodean housing bust are quite high—it would take a bold economist who has been in a decade-long coma to declare that an Australian housing correction was impossible. When trends in Australian house prices are compared globally, the signs look worrying. House prices have increased for longer and faster than in many of the markets where prices cratered during the Great Recession.

With even our panglossian Labor government now predicting rising unemployment, does all this sound rather like Ireland to you?

Can you see the forest … or only the trees?

See also:

Australia Plans Cyprus-Style Bail-In Of Banks In 2013-14 Budget

Australian Banks “Welcome” Cyprus-Style Bail-In Plan

IMF Tells Australian Lawmakers To “Prevent Premature Disclosure Of Sensitive Information” On Bank Bail-Ins

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4 Responses to “Treasury Ignores Housing Sector In Structural Budget Comparison With Ireland”

  1. Kevin Moore August 6, 2013 at 2:24 pm #

    As I see it, if everyone abided by the following we would not need money, nor would we therefore need a treasury.
    .
    James 2:8 “If you really fulfill the royal law according to the Scripture, “You shall love your neighbor as yourself,” you do well …”
    .
    Matthew 6:19 “Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal:…”
    .
    1John 3:17 “But whoso hath the world’s goods, and beholdeth his brother in need, and shutteth up his compassion from him, how doth the love of God abide in him?”
    .
    Matthew 6:24 “No house-slave is able to serve two lords: for either he will hate the one, and he will love the other; or else he will cling to one, and he will despise the other. Ye cannot serve God and wealth.”
    .
    1Timothy 6:6-10 “Now godliness with contentment is great gain. For we brought nothing into this world, and it is certain we can carry nothing out. But having food and clothing, with these we shall be content. But those who desire to be rich fall into temptation and a snare, and into many foolish and harmful lusts which drown men in destruction and perdition. For the love of money is a root of all kinds of evil, of which some lusting after were seduced from the faith, and they themselves pierced through by many pains.”
    .
    Matthew 23:11-12 “But the greater of you shall be your servant, and whoever will exalt himself will be humbled. And whoever will humble himself shall be exalted.”

  2. mick August 6, 2013 at 4:27 pm #

    “technical wonks, with no real world business experience, no commonsense, and no wisdom, to be employed in what is arguably the most important department in the Australian Government”

    I think you may have meant technical wankers. This tells a more compelling tail.

    Who of us can have any confidence in the whole system when those with the biggest chests to beat in public attain public office whilst those with real intelligence are shunned. It reminds me of when I contacted Wayne Swan a few years ago warning him of the China bubble and against assuming that it would continue. Clearly Swan’s posturing came about from the bad advice coming from Treasury which was modelling on a ‘boom forever’ assumption. So what does this say about those who have multiple degrees and earns high salaries working in the Treasury? Did I use the word “wankers”?

    • Kevin Moore August 6, 2013 at 4:52 pm #

      Mick,

      Do you remember Davy Crockett?

      The story here linked to is relevant even today.
      .
      http://hushmoney.org/Davy_Crockett_Farmer_Bunce.htm
      .
      “Not Yours To Give”
      .
      Davy Crockett on The Role Of Government
      .
      from: The Life of Colonel David Crockett
      .
      compiled by: Edward S. Elis (1884)
      .
      “Money [with Congressmen] is nothing but trash when it is to come out of the people. But it is the one great thing for which most of them are striving, and many of them sacrifice honour, integrity, and justice to obtain it.”
      .
      Introductory note by Peter Kershaw: Davy Crockett served four terms in the U.S. Congress from 1827-1835. In 1835 he joined the Whig Party and ran a failed attempt for the Presidency. Immediately thereafter he departed his native Tennessee for Texas to secure the independence of the “Texicans.” He lost his life at the battle of the Alamo and forever secured his legendary status in history as “king of the wild frontier.”

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