Treasury Ignores Housing Sector In Structural Budget Comparison With Ireland

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, “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 Of The Australian Government”, May 2013, page 9

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:

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

… 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

Tags: deficit, housing boom, IMF, ireland, structural budget balance, treasury