Peter Strong AM

SMART POLITICS, DUMB POLICY Today’s the day that poor policy has a picnic … The Coalition is promising a tax cut for a year and the ability to deduct mortgage payments for first homebuyers, while Labor will subsidise first homeowners to be able to buy with just a 5% deposit. That’s two different dumbs, both released today. The one-off handing of money to the public to “help with the cost of living” has been massively used by the current government – think electricity rebates. And the opposition is set to do the same with its one off fuel tax cuts and tax rebates. Except none of those policies – from either side – actually helps. Inflation is caused by too much money chasing too little stuff. So when politicians give us extra money, that makes the fight against inflation harder and slower than it’d otherwise be. Yet we’ve conditioned the Australian public to believe in this Magic Pudding stuff (rather than focussing on reforms that can help lift productivity – meaning we are simply reallocating shares of the pie, rather than growing it). And making it easier for first homebuyers to buy is the go to policy of governments who are avoiding doing the hard yards. The same equation applies: Australian housing suffers from too much money chasing too few homes, so adding to the extra money going in results in ever higher prices. (Yes, the government is also announcing extra money for homes to be built, but that supply will arrive long after the extra demand they’re adding.) Ditto the opposition’s plan to allow first-time buyers of newly built homes to be able to deduct mortgage payments from income taxes. More money chasing the same amount of housing is the most well worn path to failure in Australian policymaking, and both the government and the opposition seem intent on proving that they can double down on that dumbness yet again. The campaigns of both major parties are a dumpster fire of dumb stuff. Meantime, the world is on fire, and we here in Australia need smart policies way more than we need smart politics … See afr.com/politics/federal/dut… abc.net.au/news/2025-04-13/c…

WANT BETTER POLITICIANS? GIVE THEM BETTER INCENTIVES … The chart below shows the relentless rise of off budget spending That’s where Australian politicians put their trash You’re only meant to be able to put something ‘off budget’ if taxpayers don’t need to worry about it For example, if something is going to earn a commercial rate of return (money will go out, but even more will then come back in), then it doesn’t need the same degree of scrutiny Yet that’s not what’s happening. The rules changed back in 1998 with the Charter of Budget Honesty. That Charter is great, but the politicians have increasingly figured out how to game it A simple example is student debt – money gets loaned out, and then paid back. But you can forgive student debt (the current government is forgiving $20 billion of it) and magically that cost doesn’t show up as a large worsening in the underlying deficit (the number that gets reported) Never get lost in which party did what. That’s always been a mug’s game. Politicians are like everyone else. They’re flawed human beings facing incentives that make it tempting for them to do dumb things So they do those dumb things … The number that includes the trash is actually reported in the budget papers, but not until page 101! A RECOMMENDATION: To discourage politicians from hiding their trash in this spot, then better budget reporting of Tuesday’s budget would say something like “This year’s deficit is now estimated at $X, and at $XX over four years. Including off budget spending, this year’s deficit is now estimated at $Z this year, and $ZZ over four years.” No, better reporting is not a magic wand. But it would be a small step towards giving all politicians less of an incentive to stash trash off budget, because our attention would be drawn to it upfront (rather than only noticed by losers like me who read page 101)

YOU’D STILL RATHER BE US – OUR LOW DEBT IS A BLESSING IN A VOLATILE WORLD My new article in the Fin is grumpy about a bunch of things, so it is worth noting the good news upfront: Australian federal government debts and deficits are a fraction of those in most of the nations we compare ourselves too. The chart is OECD data, which uses gross debt. Net debt is an even better measure, and it is remarkably low. At $541bn, it is less than 20% of national income. (If you hear someone talking about “a trillion dollars in debt”, they’re using the gross figure – meaning they’re trying to exaggerate. The political cycle swings: before they came to office, the current government talked a lot about “a trillion”, and now it’s the opposition. Always use the net number.) Yes, I think our low debt is due to our great luck. But low debt is a blessing in an increasingly volatile world. It gives us opportunities that aren’t open to heavily indebted governments such as those in Japan, the US and the UK. Very happy to take that win – it’s a big one.

AUSTRALIAN LIVING STANDARDS – THE LONG AND GRINDING ROAD My old colleagues at Deloitte Access Economics have released their latest forecasts, including the point that “it is likely to be 2030 before Australian workers recover their pre-pandemic purchasing power” That’s not understood by most Australians, which is why it’s being ignored in the election policy promises of both sides of politics Why such a grind? Three things can shift living standards · Subsidies and tax cuts can improve today’s living standards at the cost of tomorrow’s living standards. (You eventually have to pay for stuff …) But we’ve pushed that lever as hard as it can go · Interest rate cuts can improve living standards, and we’ll get a couple – maybe even three – by the end of 2025. But global markets are screaming that Trump 2.0 is a more inflationary world, and so markets have bid up the globe’s long term borrowing costs. That says there’s some ground to be gained from lower rates, but much less than people realise – and certainly no return to the super low rates of recent decades · So that says the heavy lifting in repairing our living standards will come down to better productivity – being more efficient. And we will indeed benefit from new technologies and a better educated workforce Yet anyone hoping that our productivity growth (and so our living standards) will be turbocharged by our politicians would be disappointed by the Krusty-the-clown quality of the offerings from both sides thus far …