Three Graphs and a Silly Question: Debt and Housing

The latest speech from the Reserve Bank Governor Glenn Stevens, entitled Some Longer-run Consequences of the Financial Crisis contained the following excellent table.

Source: http://www.rba.gov.au/speeches/2010/sp-gov-200710.html#f3

Stevens argues that there are three main lasting international legacies. The first is the "fiscal burden" of the crisis involving both financial sector bailouts and discretionary fiscal stimulus. In relation to the bailouts he argues:

Note that this is not necessarily a permanent burden since, if carried out successfully, the ownership stake can be sold again in due course. In fact about 70 per cent of the funds invested by the United States in banks have been repaid, and the US Government expects to make an overall profit from these capital injections.2 Nonetheless for a period of time governments are carrying a little more debt than otherwise as a result of the provision of support to the banking system.

In relation to fiscal stimulus:

while there was a lot of national variation, for some countries this spending was quite significant relative to the normal pace of annual growth in GDP. To the extent that the packages had measures that increased spending for a finite period but not permanently, the result is a rise in debt of a finite magnitude, but not an ever-escalating path of debt.

Debt ratios, he suggests are being exacerbated by the magnitude of the crisis and the anaemic recovery in Europe and the United States.

According to the IMF, for the group of advanced economies in the G-20, the ratio of public debt to GDP will rise by almost 40 percentage points from its 2008 level by 2015. Fiscal stimulus and financial support packages will account for about 12 percentage points of this. Close to 20 percentage points are accounted for by the effects of the recessions and sluggish recoveries. Another 7 percentage points comes from the unfavourable dynamics of economic growth rates being so much lower than interest rates for a couple of years

... the major countries generally are going to have significantly higher public debt relative to GDP after the crisis than before, and the debt ratios will continue to rise for several more years.

This was largely unavoidable. ... Generally speaking, the public balance sheet has played the role of a temporary shock absorber as private balance sheets contracted.

... At present that additional cost is, in some countries, reduced compared with what it might have been due to the low level of interest rates on government debt that we see. Moreover had the debt not been taken on it could well be that the economic outcomes would have been much worse, so increasing fiscal and other costs. Nonetheless this lasting debt servicing burden is a real cost.

A fairly balanced position from out Governor.

The second long-term implication is the increased role of government in the financial sector.

the intervention was broader than just a temporary period of public ownership – as massive an event as that has been. Take guarantees. Once the Irish Government guaranteed its banks, governments all over the world felt bound to follow suit in some form or other – expanding or (as in our case) introducing deposit insurance, and guaranteeing wholesale obligations (for a fee). The feeling was probably most acute in countries whose citizens could shift funds to a bank guaranteed by a neighbouring country without much effort.

Stevens acknowledges the fact that governments simply must shore up the financial sector in a crisis. The consequences of not doing so are too catastrophic to contemplate. The question for the future is how do governments shape the system so they do not have to make such forceful interventions in the future.

So some central banks, like their governments, have found themselves in very unusual terrain. It is terrain: in which the relationship between the central bank and the government is subtly changed; where the distinction between fiscal and monetary policy is less clear; from which it may be hard to exit in the near term; and a side effect of which may be wastage, over time, in some elements of market capability.

The third implication is the changing regulatory agenda:

In a nutshell, what regulators are pushing toward is a global banking system characterised by more capital and lower leverage, bigger holdings of liquid assets and undertaking less maturity transformation. It is hoped that this system will display greater resilience to adverse developments than the one that grew up during the 1990s and 2000s.

The implication is that the costs of intermediation - the role played by banks in bring borrowers and lenders together - will rise, which in turn will have broader economic effects. The first, Stevens contends, is lower growth and possibly less lending. Stevens observations on the potential impact of regulatory changes are worth quoting at length.

First, I think we ought to be wary of the assumption of a mechanical relationship between credit and GDP. ... did the steady rise in leverage over many years actually help growth by all that much? Some would argue that its biggest effects were to help asset values rise, and to increase risk in the banking system, without doing all that much for growth and certainly not much for the sustainability of growth in major countries. Some gradual decline in the ratio of credit to GDP over a number of years, relative to some (unobservable) baseline, without large scale losses in output may be difficult to achieve but I don’t think we should assume it is impossible.

Secondly ... we have to remember that there is a potential benefit on offer too: a global financial system that is more stable and therefore less likely to be a source of adverse shocks to the global economy in the future. ...

Thirdly, however, the reforms do need to be carefully calibrated with an eye to potential unintended consequences. One such consequence, obviously, would be unnecessarily to crimp growth if the reforms are not well designed and/or implementation not well handled.

Another could be that very restrictive regulation on one part of the financial sector could easily result in some activities migrating to the unregulated or less regulated parts of the system. Financiers will be very inventive in working out how to do this. If the general market conditions are conducive to risk taking and rising leverage ... people will ultimately find a way to do it. Of course while ever the unregulated or less-regulated entities could be allowed to fail without endangering the financial system or the economy, caveat emptor could apply and we could view this tendency simply as lessening any undue cost to the economy of stronger regulation of banks. But if such behaviour went on long enough, and the exposures in the unregulated sector grew large enough, policymakers could, at some point, once again face difficult choices.

In the discussion afterwards, Stevens gave short shrift to one question.

Source: http://boardroom-pc.streamguys.us/files/RBA/RBA20100720_GS_final_1/

Now this question should worry a few people given that it shows just how ignorant people in financial companies can be about the countries they have an interest in. At least he got to ask the Governor a question and is now 'informed'.

The answer shows that the RBA is not really worried about debt at all - either public or private (household). Although the Governor is less sanguine than some in the RBA about growing household debt even further.  

Two other graphs both support and question the governor's benign outlook on public and private debt respectively. The first is from Peter Martin's excellent economics blog.  It's original source is from a Treasury analysis of Public Debt in Australia, which I have covered a while ago here and here.

Source: http://petermartin.blogspot.com/2010/07/wednesday-column-debt-free-got-any.html

 

But while the RBA is not particularly worried about household debt or about the housing market, others continue to warn that Australia's house prices are bubbling. According to the Economist:

House prices in Australia rose by 20% in the year to the end of the first quarter, faster than the 13.5% recorded in the 12 months to late 2009. More concerning, however, is our analysis of “fair value” in housing, which is based on comparing the current ratio of house prices to rents with its long-term average. By this measure Australian property is the most overvalued of any of the 20 countries we track. A frothy property market was one of the reasons for the Reserve Bank of Australia raising interest rates six times between October and May. Since then, the bank has become more sanguine about the state of the market. It cited “some signs that the earlier buoyancy in the housing market was easing” when keeping interest rates on hold in June.
 

For those wanting a more 'balanced' view of the prospects for Australian housing see Rory Robertson, "Extreme predictions on house prices will continue to be wrong". Robertson argues:

Average prices could rise a bit further or fall a bit over the coming year, but they will not collapse, as happened in the US and Japan.

Claims that there is a "bubble" in Australian housing markets don't stand up to serious scrutiny.

Investment legend Jeremy Grantham sees a bubble based on his calculation that housing trades near 7.5 times family income today versus about 3.5 times in earlier times.

Prices supposedly are around twice what they "should be". And "sooner or later" they will return to the "normal" multiple of family income.

Don't bet on it. For starters, the Reserve Bank estimates Australia's price-to-income ratio is near five times income, not seven times, removing any need for home prices to fall that first 30 per cent.

The step up in Australian house prices and housing debt relative to incomes over the past decade and a half was largely a function of the sharp drops in average inflation and interest rates delivered by the early-1990s recession.

These downshifts in inflation and interest rates are structural rather than cyclical. So don't expect the price-to-income ratio ever to return to three times, a level typical in Australia's long gone, bad old days of high inflation.

The recent 30 per cent drop in US house prices is a very poor guide to what might happen here.

Why? Well, because Australian and US housing and mortgage markets are like chalk and cheese. The relative strength of our economy -- 5 per cent unemployment here versus near 10 per cent there -- is part of the story.

More importantly, we have carefully supervised banks and mortgage markets that offer only "full recourse" loans. Australians know they cannot "walk away" from their mortgages without serious financial penalty. There is no "jingle mail" here.

And our home lenders generally hold their loans for the full term, so take very seriously the need to assess whether any would-be borrower is a "good risk" or not.

For those who worry that the level of Australia's mortgage debt is simply "too high", the Reserve Bank has estimated that three-quarters of all mortgage debt is held by the top 40 per cent of income earners.

Home ownership has been steady near 70 per cent for decades, yet the home ownership rate for households with heads aged under 35 years is just 40 per cent, down from 50 per cent in the late 1980s.

The bad news is that young people are finding it harder to buy where they want to live.

The good news is that -- contrary to some claims -- not everyone is overgeared. Some 60 per cent of younger households -- many with steady jobs and good incomes -- do not have a mortgage at all.

According to Robertson we should not worry about simplistic debt to income ratios and should not forget high immigration and chronic under supply of new housing.

Having won his bet with Steve Keen (an easy target) Robertson is feeling reasonably sure of himself:

Australian home prices are relatively high in part because, rather than "spreading out" across our continent, most of us choose to compete to live on the same best-located bits of ground near the beach.

With housing, you get what you pay for.

I'm not so sure.

More on Chinese foreign investment

See previous post and an updated one from Scissors available at http://www.heritage.org/Research/Reports/2010/07/Tracking-Chinese-Investment-Western-Hemisphere-Now-Top-Target

Chinese foreign investment

Trolling through some articles from a few months ago I found this one "Tracking Where China Invests" by Derek Scissors from the Heritage Foundation (HF). In it he discusses the HF's China Investment Tracker.

This interactive display is pretty neat as it shows Chinese investment growing over time.

Now the HF is a conservative think tank and its purpose behind providing such data may be different than mine, but it does provides a valuable resource that is worth looking at if you want to know more about Chinese outward investment.

One of the interesting points that Scissors makes is about the announcement of deals may not actually result in subsequent investment. He uses Venezuela as an example but it could possibly apply to Australia. Governments in Australia love making announcements of 50 billion of this and 20 billion of that but these figures are much more arbitrary and conditional than governments suggest.

The other interesting fact is that Australia has been the largest recipient of Chinese (non-bond) investment in recent times. The US wins hands down in total Chinese investment of course because of China's huge appetite for US dollar assets.

Now whether you think Chinese investment is a good thing or not, it's important to start with the facts

China's hefty investments in sub-Saharan Africa have received deserved attention, but its investment in Latin America has been overblown by some. One reason is a common event in bilateral commercial transactions--grand announcements that never come to fruition. In mid-April Venezuela proclaimed a $20 billion oil-for-loans deal with China, but Caracas' track record in this area encourages skepticism. China has little investment in the Arab world, which is perhaps surprising in light of its focus on energy, but it has sizable engineering and construction contracts there. Australia, at $30 billion, is the single biggest draw for Chinese investment. The U.S. is second at $21 billion, Iran third at $11 billion.

The places where the Chinese have invested most often are also the places where their investments have been most often thwarted: Australia, the U.S. and Iran, in that order. Failures stem from a variety of causes, such as nationalist reactions in host countries, objections by Chinese regulators and mistakes by the Chinese firms themselves. According to the Heritage tracker, the value of failed investments from 2005 to 2009 is a staggering $130 billion. Chinese investment could have been a full 40% larger than it was had the failed deals closed.

He also points out that the biggest recipients of investment have also been the biggest blockers of Chinese investment:

The places where the Chinese have invested most often are also the places where their investments have been most often thwarted: Australia, the U.S. and Iran, in that order. Failures stem from a variety of causes, such as nationalist reactions in host countries, objections by Chinese regulators and mistakes by the Chinese firms themselves. According to the Heritage tracker, the value of failed investments from 2005 to 2009 is a staggering $130 billion. Chinese investment could have been a full 40% larger than it was had the failed deals closed.

The last point is slightly spurious because if investment had succeeded in one place it might not have gone ahead elsewhere.

The potential for Chinese investment growth is huge, but let's keep it all in perspective. In terms of the total stock of foreign investment in Australia Chinese investment is currently minute. The latest edition of the ABS's
5352.0 - International Investment Position, Australia: Supplementary Statistics, 2008 reveals that:

Level of foreign investment in Australia
The level of foreign investment in Australia increased by $66.9 billion to reach $1,724.4 billion at 31 December 2008. Portfolio investment accounted for $921.2 billion (53%), direct investment for $392.9 billion (23%), other investment liabilities for $302.6 billion (18%) and financial derivatives for $107.8 billion (6%). Of the portfolio investment liabilities, debt securities accounted for $689.1 billion (40%) and equity securities for $232.1 billion (13%).
The leading investor countries at 31 December 2008 were:
United Kingdom ($427.1 billion or 25%)
United States of America ($418.4 billion or 24%)
Japan ($89.5 billion or 5%)
Hong Kong (SAR of China) ($56.3 billion or 3%)
Singapore ($43.1 billion or 2%)
Switzerland ($38.1 billion or 2%)

In addition, the level of borrowing raised on international capital markets (e.g. Eurobonds) was $145.3 billion or 8%.

China doesn't make it into the top 5, although much Chinese mainland investment comes through Hog Kong (4th at 3 per cent) and through various other sources such as tax havens like the Cayman Islands and the British Virgin Islands.

So the current position is that Chinese investment in Australia is growing rapidly but from a very low base.
Despite the huge focus on Chinese investment, what has gone largely unnoticed is the considerable increase in Japanese investment, which is much wider in scope than Chinese investment. On this see "Japanese investment in Australia slips under the radar" by Rick Wallace in The Australian. 

A Wave of Japanese investment in Australia is being driven by Japan's economic stagnation and the need for its corporations to seek fresh growth strategies and a secure supply of food and energy.

The key focus of foreign investment has been China in the past two years, but direct investment from Japan to Australia hit $36 billion in 2008, up more than 50 per on 2006 levels, and is predicted to keep growing.

The figure eclipses the long-term average of $3.3bn of yearly direct investment from Japan, as well as the 2008 total of Chinese direct investment in Australia of $3bn.

The breadth of the investment -- in Australia's food, beverage, technology, financial services, energy, manufacturing, mining and resources sectors -- differentiates the current wave of Japanese investment from the property speculation of the late 1980s.

High-profile Chinese resources deals have captured the headlines, but Japanese companies and investment funds have quietly closed out at least $17bn of mergers and acquisitions since 2007.

 

No Bubbles in Sight?

For those wishing for an antidote to negative news on the housing market, the person to read is Christopher Joye. (The institution to follow for optimism on debt is the Reserve Bank of Australia). I must admit that despite a lot of study, I simply have no idea whether there is a bubble or not in the Australian and Chinese housing markets. (After being a long time pessimist I fear being too optimistic and being wrong again in reverse).

Luckily I'm not paid to be either an optimist or a pessimist. What I think is obvious is that increased debt does lead to increased vulnerability as the RBA Governor recently warned about.

But that doesn’t mean it would be wise for that build-up in household leverage to continue unabated over the years ahead. One would have to think that, however well households have coped with the events of recent years, further big increases in indebtedness could increase their vulnerability to shocks – such as a fall in income – to a greater extent than would be prudent.

It may be that many households have sensed this. We see at present a certain caution in their behaviour: even though unemployment is low, and measures of confidence have been quite high, consumer spending has seen only modest growth. This may be partly attributable to the fact that the stimulus measures of late 2008 and early 2009 resulted in a bringing forward of spending on durables into that period from the current period (though purchases of motor vehicles by households – a different kind of durable – have increased strongly over recent months). But the long downward trend in the saving rate seems to have turned around and I think we are witnessing, at least just now, more caution in borrowing behaviour. Of course this will have been affected by the recent increase in interest rates but the level of rates is not actually high by the standards of the past decade or two. We can’t rule out something more fundamental at work.

We can’t know whether this apparent change will turn out to be durable. But if it did persist, and if that meant that we avoided a further significant increase in household leverage in this business cycle, it might be no bad thing. Moreover if a period of modest growth in consumer spending helped to make room for the build-up in investment activity that seems likely, perhaps that would be no bad thing either.

Fortunately, however, for those who don't like to sit on the fence like I (and the Governor it seems) do, there are definite proponents of boom or doom that you can read. For doom read Steve Keen; for boom (but not bubble) read Christopher Joye.

Joye's arguments are very persuasive and he always brings interesting data to the table. But I'm still concerned about the level of private debt in Australia. Most commentators are much more focused on public debt (partly because economists as a bunch are generally anti-govt and pro-market as a first principles assumption).

The problem with private debt is that there is no political constituency to develop policies to keep it down, as there is with public debt. Despite democratic pressures that encourage higher spending and lower taxation - what the Marxist James O'Connor in the 1970s called the "fiscal crisis of the state" and what others on the right called the "crisis of democracy" - eventually governments have to face the judgement of those from whom they borrow or tax.

While the 1980s did not signal the demise of the state as many predicted it did stop the growth of the state - at least while growth remained subdued. As Lindert (2004: 22) points out: "For all the often-reported “crisis” or “demise” of the welfare state, all one really sees after 1980 is a slowdown, not a decline, in the shares of GDP that welfare-state taxpayers put into such programs."

Recent events have shown just how important states remain in the global economy and I'm imagining that the last few years will show a considerable growth in the size of the state throughout the world. But as in the 1980s, this growth cannot continue and the constituencies in favour of fiscal retrenchment are reasserting themselves despite the uncertain nature of the recovery. Last week's G20 meeting was divisive compared to previous meetings and the major divide was over appropriate fiscal stances. (Just quietly those pesky global imbalances are unlikely to go away with the Germans tightening policy and the Americans keeping things pretty loose.

Retrenchment is well under way in Europe as countries as diverse as Greece and Ireland deal with fiscal crises. The Irish have decided to take harsh medicine and as a consequence the Irish population is going through hard times. Greece is another story and the major problem is actually building up a decent tax base. In other words, Greek authorities need to get people to pay tax. The Germans are major advocates of fiscal retrenchment, much to the annoyance of the United States.

One of the excellent points made by David Lindert (2004: 6) in his seminal study of social spending Growing Public is that governments are constrained by democracy:

There is no clear net cost to the welfare state, either in our first glance at the raw numbers or in deeper statistical analyses that hold many other things equal … It turns out there are many good reasons why radically different approaches to the welfare state have little or no net difference in their economic costs. Those reasons are many, in terms of an institutional list, but they boil down to a unified logic: Electoral democracy, for all its messiness and clumsiness, keeps the costs of either too much welfare or too little under control.

But what are the restrictions on the expansion of private debt? Governments have encouraged the growth of debt through taxation policies for housing and company debt.  And financial liberalisation has massively increased access to credit. Don't get me wrong. I'm not anti-financial liberalisation. I would much rather live in an era where access to credit is not rationed and the financial sector is innovative and consumer oriented. But like all good things there is need for balance.

Rather than deal with the consequences of private debt in Australia, governments have attempted to underpin debt through subsidies, guarantees and . There is a good reason for this - any major pay down of debt in Australia will lead to lower spending. Now I hope that the optimists are right, but in the back of my mind is the continuing worry about what level of debt is too much.

Undoubtedly Australia has survived a very big stress test, but it did so by increasing public debt to maintain private debt. As Keynes supposedly once said: "the unsustainable cannot be sustained".


Reference:
Peter H. Lindert (2004) Growing Public: Social Spending and Economic Growth since the Eighteenth Century, Cambridge, Cambridge University Press.

It's time for mining companies to stop bleating and start negotiating

Let's get one thing straight, mining companies making profits from assets owned by the Australian people should pay more tax. The profits made by mining companies are huge and Australia needs to redistribute this wealth across Australia so that we can develop a more diversified economy. There's no doubt at all that cutting the company tax rate by 2 per cent to 28 per cent and increasing the level of super to 12 per cent are good ideas that will be paid for by increased resource rent.

There's also no doubt that this country is a rich one primarily because we have redistributed wealth generated by our resource wealth - mostly agricultural until the 1960s - across Australian society throughout our history. Such redistribution should perhaps have been more extensive and governments could also have used it to build a more competitive, less insular, manufacturing sector. Nevertheless it is Australia’s ability to adapt – though often imperfect – over time to vulnerabilities that have allowed it to be in a position today to respond effectively to new vulnerabilities.

Up until the 1980s part of this redistribution process was done through the inefficient mechanism of tariffs. Tariffs helped to redistribute the wealth generated by Australia’s natural resource comparative advantage because the costs of tariffs and other forms of protection were borne by the resource exporters. For example, if a mining company needed to import machinery that was subject to a high tariff that aimed to protect a local producer then this was effectively a transfer of wealth from the miner to the local producers (and their workers). Farmers who bore increased costs were often compensated by elaborate forms of agricultural protectionism, such as statutory marketing arrangements that raised prices within Australia and which involved further redistribution. Tariffs were also, of course, an important source of state revenue.

Australia has abandoned tariff protectionism and embraced globalisation, but this does not mean we need to abandon redistribution. Indeed, Australia needs to spread the benefits of growth and openness as widely as possible by redistributing wealth and compensating the losers for the continual structural change necessary for adaptation to a globalising world.

While most countries have to adjust to the world ‘as it is’, the choice of adjustment strategy is not set by the forces of globalisation. Varying responses and outcomes are always possible: both the progress of globalisation and adjustments to its opportunities and constraints involve political choices shaped by citizens and the governments they elect.

I agree that the tax was sold badly and was made too complicated by the boffins at Treasury - in particular Ken Henry - who seems to suffer, like Kevin Rudd, from "I'm the smartest boy in the room syndrome". Perhaps it would have been easier just to lift resource rents or impose a federal rent. This would have the disadvantage of not being profits based, but it seems the miners don't like that when they are making large profits and believe that they will continue to do so into the future.

As usual this is all dependent on an assessment that China and India will continue to grow rapidly over the long-term (bolstering growth in the rest of Asia as well and underpinning resource prices). The short-sighted attitudes of miners will hopefully help to get rid of the very risky 40 per cent stake in any losses that the government's RSPT proposed. This was a bad idea and exposes the government to a loss of revenue when the economy slows down, further exacerbating the cyclical decline in government finances that occur during a recession or growth slowdown.

For those interested in a good article on why we need to get more from our non-renewable resources through a resource rent tax should read Sovereign risk? No, superannuation is at risk, thanks to mine bosses by Gerald Noonan

Sovereign risk? No, superannuation is at risk, thanks to mine bosses

June 28, 2010

GERARD NOONAN

There has been an uncommon flurry of interest about Australia in the global media over the past few days, courtesy of Julia Gillard's ascension to the prime ministership.

But when travelling overseas in more normal times, it is rare to read anything about the wide brown land in the press - except perhaps a tit-bit on cricket or tennis.

So imagine my surprise when, on a recent visit to Paris, I spotted a reference to Australia in the International Herald Tribune, an English-language paper owned by The New York Times.

The topic was not cricket, nor was it the miners' squabble with Labor over a resources rent tax. Instead, it was Australia's superannuation arrangements. In the article the writer had singled out two countries - the Netherlands and Australia - as shining examples of good public policy-making in a world of seriously unfunded pensions.

In Europe you can count on one hand the number of countries that can seriously claim to be able to pay for their ageing workforces in retirement. You need both hands and all toes to count the number of countries in Europe and in North America (yes, including the US) that have not got a hope in hell of properly looking after their ageing populations over the next two or three decades.

The Tribune mentioned Australia's compulsory 9 per cent of weekly wages which all employees pay into their super funds. The story noted the government had announced it was planning to lift the rate to 12 per cent (though it did not say that it would take until 2019 to get there).

Overall, the tone was complimentary. You got the impression the Tribune was a bit surprised at least someone had got it right, given all the talk of how the debt problems of the PIIGS counties (Portugal, Ireland, Italy, Greece and Spain) were potentially contagious and threatened a second bout of world economic pneumonia.

So it was something of a shock to return to Australia recently to find all anyone could talk about was executives of very rich mining companies bleating about a tax that they themselves had asked the Henry tax review to impose. The miners had argued to Henry that they preferred a profit tax to the crude royalty system that each state imposes on the amount of minerals they dig up and sell.

These minerals are, of course, part of the common wealth - that is, they belong to us all. We are happy for miners to dig the stuff up and sell it for a substantial profit. But there is a limit to how much profit any company is entitled to make out of common resources, and they should pay an appropriate amount back to the country of origin.

It was almost breathtaking to hear and read the extraordinary assertions made by some mining executives and fellow travellers in the finance industry about how a properly constituted tax would affect their investment plans. And in doing so, they had the chutzpah of raising the spectre of sovereign risk. If anyone seriously thinks a fair tax represents sovereign risk, they are kidding themselves. Try real sovereign risk: the sort of sovereign risk faced by countries that do not look to their fiscal bottom lines. The PIIGS group of countries - and add in Britain and California, both with huge debt problems - will have to endure decades of difficulties juggling their books to pay even modest pensions to their retiring citizens.

In my puzzlement, I wondered what had happened to the previously announced superannuation changes … were they still around, and what had happened to the 2 per cent corporate tax cut that the government also promised as part of its package to help ease the transition to the higher super payments?

No, all still in place. However, the ability of the government to fund the corporate tax cut - which in turn was partly aimed at easing the impact of a gradual superannuation increase over the next decade - was being jeopardised by petulant mining companies.

Now, of course, with the chief government digger, Kevin Rudd, interred in a grave as deep as the Kalgoorlie open pit, the wrangling over the details of a resource super profits tax will pass to others.

It is time for everyone to calm down. Markets hate uncertainty, and the Australian public deserves better. The miners and the government need to nut out the finer details of an appropriate tax and resolve the matter.

It would be a great pity to have to write to the editorial people at the Tribune and tell them they had it all wrong. That, at the last hurdle, the country which had put in place one of the best global examples of social policy for its ageing population had fallen foul of an extremely well-funded and self-interested campaign.

Gerard Noonan is the president of the Australian Institute of Superannuation Trustees and a former editor of The Australian Financial Review.

More stuff on fiscal stimulus ... this time from China

Almost on cue, the next thing I read on fiscal stimulus was a story from the NYT on the growth of debt in China: Local Debt in China Worries Its Auditor. See previous post.

What it shows is the need for balance. Advocates of fiscal stimulus cannot deny the tendency towards rent-seeking and inappropriate borrowing that occurs alongside monetary and fiscal stimulus.

SHANGHAI — China won praise last year for reviving domestic growth with aggressive bank lending and a $586 billion economic stimulus package. But now the nation’s top auditor is warning that the mounting debt of local governments could undermine the recovery in some parts of the country. 

Li Jiayi, head of the National Audit Office, said in a report to the legislature this week that borrowing by local governments had created public debt burdens totaling hundreds of billions of dollars. The report questions whether those governments have the resources to pay down the loans.

The warning is the latest indication that a portion of the government-backed loans and stimulus money could eventually be categorized as bad loans.

Once again there is no agreement on the extent of the problem.

It is unclear how serious a threat local government debt is to China’s booming economy. Some economists say the nation’s debt pales in comparison with that of the United States and Europe and that worries about record bank lending last year turning into mountains of bad debt are exaggerated.

Nicholas Lardy, an economist at the Peterson Institute for International Economics in Washington, said in a column this week in The Wall Street Journal that many of the worries were misplaced. He said that China was smart to invest in infrastructure projects last year and that if debts mounted, local government could service the debt by raising fees on water and subways.

But on Thursday Fitch Ratings, the credit rating agency, warned that record loan growth and aggressive efforts by state-run banks to repackage and sell debt to investors had raised credit risks in the country and could “lead to another financial crisis,” according to a report published by Bloomberg News.

In a release issued Wednesday by Fitch, Charlene Chu, the firm’s senior director for financial institutions in China, said that the financial positions of Chinese banks were more strained than they appeared to be and that “future asset quality deterioration is a near certainty.”