Australian Economy

EXPERT INSIGHT

Despite overwhelmingly endorsing the general stance of the 2021 budget, only a few of the 56 leading economists surveyed by the Economic Society of Australia and The Conversation are prepared to give it top marks.

Asked to grade the budget on a scale of A to F given Treasurer Josh Frydenberg&rsquo;s objective of <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/speeches/budget-speech-2021-22">securing Australia&rsquo;s economic recovery and building for the future</a>, only three of the 56 economists surveyed gave it an &lsquo;A&rsquo;.

But a very large 41% awarded it either an A or a B, up from <a href="https://theconversation.com/could-do-better-top-australian-economists-award-the-budget-a-cautious-pass-148624">37%</a> in last year&rsquo;s October COVID budget.

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The economists chosen to take part in the Economic Society of Australia survey have been recognised by their peers as Australia&rsquo;s leaders in fields including macroeconomics, economic modelling, housing and budget policy.

Among them are a former head of Australia&rsquo;s prime minister&rsquo;s department, a former member of the Reserve Bank board, a former OECD director and two former frontbenchers, one from Labor and one from the Coalition.

Of the panel members who commented on the historic stance of the budget &mdash; expanding the size of the deficit <a href="https://theconversation.com/frydenberg-spends-the-bounty-to-drive-unemployment-to-new-lows-159229">beyond what it would have been</a> in order to drive down unemployment &mdash; all but three offered enthusiastic endorsement.

Emeritus Professor Sue Richardson of the University of Adelaide commended the government for at last turning its back on a &ldquo;debt and deficit&rdquo; mantra, that was &ldquo;never justified&rdquo;.

Professor Richard Holden praised the &ldquo;watershed&rdquo;. In due course there should be increased attention paid to the structure and quality of spending, but for now we should applaud the &ldquo;Frydenberg Pivot&rdquo;.

Saul Eslake said the strategy of providing further stimulus to push unemployment down to levels <a href="https://theconversation.com/josh-frydenberg-has-the-opportunity-to-transform-australia-permanently-lowering-unemployment-156175">not seen consistently since the first half of the 1970s</a> was the right one. It meant the Reserve Bank and the treasury would no longer be working at &ldquo;cross purposes&rdquo; as they had been for most of the past two decades.

But Eslake said the budget fell short in the A$20 billion it devoted to tax concessions for small business in the mistaken and unfounded belief it is &ldquo;the engine room of the economy&rdquo; and in housing measures that failed to heed warnings from history about the risks of ultra-high loan-to-valuation ratios.

Rebecca Cassells of the Bankwest Curtin Economics Centre said the claim that 60,000 jobs would flow from extending the temporary loss carry back and full expensing tax concessions was &ldquo;a stretch,&rdquo; with the connection quite tenuous.

Bucks, but not the biggest bang

Consultant Nicki Hutley said a bigger boost to the JobSeeker unemployment payment would have achieved much more than the $7.8 billion one-year extension of the &ldquo;<a href="https://theconversation.com/the-low-and-middle-income-tax-offset-has-been-extended-yet-again-it-delivers-help-neither-when-nor-where-its-needed-160772">lamington</a>&rdquo; low and middle income tax offset.

Economic modeller Janine Dixon said while spending more to get more people into work was the &ldquo;right setting for the times,&rdquo; Australia had to ensure its workforce was ready to supply the extra aged care and child care and disability services it had funded by delivering the right training, especially in the absence of migration, which has traditionally been used to address workforce shortages.

Labour market specialist Elisabetta Magnani said measures to boost wages in the caring occupations could have achieved the double bonus of drawing more workers into those occupations and shrinking the gender pay gap, given that more than 80% of the workers in residential aged care are female.

Little for net-zero

Michael Keating, a former head of the prime minister&rsquo;s department, said restoring high wage growth would require big investments in education and training, which sits oddly with the cuts in funding for universities. The extra funding for apprentices and trainees only makes up for past cuts.

Professor Gigi Foster said the $1.7 billion spent on childcare subsidies was only &ldquo;surface-level fiddling with the sticker price&rdquo;.

&ldquo;Where is the supply-side intervention required to make childcare services sustainably accessible and of high quality?&rdquo; she asked. &ldquo;Childcare should be viewed as social infrastructure. Instead, when we heard infrastructure, it was mainly code for transportation.&rdquo;

Margaret Nowak of Curtin University said a budget that really &ldquo;built for the future&rdquo; would not have focused on the &ldquo;infrastructure of the past&rdquo;. Professor Richardson lamented that most of the infrastructure spending was on traditional &ldquo;roads and ports&rdquo; when the future was net-zero emissions.

&ldquo;There is little in the budget that supports this transformation,&rdquo; she said. &ldquo;It is an extraordinary lost opportunity.

Nicki Hutley said retooling the economy for zero emissions would have brought forth &quot;more jobs, higher wages, more growth and private sector co-investment&rdquo;.

Some concern about debt

Former OECD director Adrian Blundell-Wignall said a much-greater investment in vaccinations would have helped &ldquo;get the economy back to work and the borders opened sooner which, in turn, would have saved unemployment benefits, tourism, aviation support and the need for the extension of temporary measures&rdquo;.

And he was concerned that a jump in US inflation might cause international interest rates to rise faster than expected, forcing Australia to cut its projected budget deficits in order to stabilise net debt.

Former International Monetary Fund economist Tony Makin, a <a href="https://research.treasury.gov.au/external-paper/the-effectiveness-of-federal-fiscal-policy-a-review">critic</a> of government spending during the global financial crisis, described the budget spending as a &ldquo;knee-jerk primitive Keynesian reaction&rdquo; to the COVID recession.

Unease about going into debt to keep and create jobs aside (and very few of the economists surveyed shared Makin&rsquo;s unease) the criticisms of the economists surveyed relate to execution and details. If Frydenberg had been judged on his approach, most would have given him an A.

<a href="https://theconversation.com/profiles/peter-martin-682709">Peter Martin</a>, Visiting Fellow, <a href="https://theconversation.com/institutions/crawford-school-of-public-policy-australian-national-university-3292">Crawford School of Public Policy, Australian National University</a>

This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/great-approach-weak-execution-economists-decline-to-give-budget-top-marks-161347">original article</a>.

Asked to grade the budget on a scale of A to F given Treasurer Josh Frydenberg’s objective of securing Australia’s economic recovery and building for the future, only three of the 56 economists surveyed gave it an A

jordan_55689

Economists decline to give budget top marks

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EXPERT INSIGHT

The Reserve Bank’s Financial Stability Review (FSR) has taken a balanced approach to the risks for the Australian economy associated with rising house prices.

On the one hand it points out that: “In an environment of accommodative financial conditions with rising asset prices it is particularly important that there is not excessive risk-taking by the financial sector ... increasing the debt-related risks to the economy and financial system from a fall in asset prices and borrowers’ income.”

The Bank describes these risks as: “looser lending standards for individual loan assessments, or a relaxation of internal limits on the share of riskier loans ... [or from] increased risk-taking by optimistic borrowers which could see a deterioration in the average quality of new lending”.

This last style of risk appears to be with investors in mind.

To date, however, the Bank describes lending standards as largely unchanged and remaining robust: “the share of high LVR lending increased over the second half of 2020 but remains low by historical standards.”

Furthermore: “credit growth has increased but remains modest and has mostly been driven by lending to owner occupiers" although “investor loan commitments have started to rise.”

Our own analysis of loan approvals points to investor commitments rising by 31% in the last six months compared to gains of 24% for 'upgraders' and 30% for first home buyers.

However the loan approvals to investors account for around 32% of the total housing loans (including all owner occupiers) compared to 65% in 2017 when APRA introduced a range of controls aimed at curtailing investor activity.

On the other hand the Bank points out the solid starting point that will support the resilience of the system to the potential “increased risk-taking by optimistic borrowers”. It highlights the improved quality of household balance sheets in the wake of higher house prices (“the share of loans for which the value of the loan exceeds the value of the property has fallen to around 1.25% down from 3% a year ago”).

Household balance sheets also remain in good shape from the perspective of repayment buffers ("Around half of all mortgages have prepayment buffers equivalent to more than 3 months' worth of repayments and, 
for more than one-quarter of loans the buffer exceeds 2 years' worth of repayments" while "the share of loans with prepayment buffers of only one month ... remains close to its pre pandemic level of 40%” and “most loans with low prepayments do not represent large risks to lenders”).

Around two thirds of those with low prepayment buffers are held by investors and/or fixed- rate borrowers with the remaining group of relatively 'risky' borrowers having declined to around 10% of all loans from 15% a year ago.

Other specific risks have also eased. In particular, housing loans on prepayment deferrals have declined to 0.7% of all housing loans from a peak of 11% in May 2020.

House price movements to date are also put into perspective – Sydney and Melbourne prices are now a little above their historical peaks in 2017/18, having risen by 5% over the year compared to the 11% increase in regional areas.

Westpac has forecast national dwelling prices to rise by around 20% over the course of 2021 and 2022. That would put Sydney and Melbourne prices 12–15% above their 2017 peaks by end 2022 – an annual rate of increase of 2–3%, hardly worthy of being described in the emotional vernacular as a 'bubble'.

While the FSR sketches out the risks to the economy of lending excesses associated with rising house prices, current observations point to lenders remaining well disciplined while, at the same time, household balance sheets have strengthened.

The overall impression from the Review is that authorities are some way from seeing the need to adopt any direct controls on lenders to address risks associated with rising house prices.

Westpac continues to expect no significant containment measures in 2021.

The FSR also highlights risks around the outlook for business insolvencies and commercial property.

1. Business insolvencies

Businesses in the arts and recreation, accommodation and food, and transport sectors have continued to receive significant support from the government. Firms in these sectors also tend to be more highly geared and have low levels of liquidity.

The highest risks in these areas are around SMEs (although the share of SMEs with deferred repayments has fallen to just over 1%).

Notwithstanding this, the Review expects insolvencies to rise further for some months although some factors are likely to help moderate the rise – cash supports that allowed businesses to wind down operations without entering into insolvency.

Changes to the insolvency framework and the recently announced SME Recovery Loan Scheme are expected to assist SMEs.

2. Commercial Property – Offices

The FSR notes: “impairment rates on commercial property remain low, consistent with relatively low LVRs and strong debt covenants”.

However these impairments are expected to rise in the CBD office markets where vacancy rates in Sydney and Melbourne have reached 20 year highs.

The low number of sales transactions increases the uncertainty about recent price trends.

3. Commercial Property – Retail

Rents and valuations have declined by 6 and 15% respectively since 2019 – particularly challenged by the rise of online shopping.

However the dominance of the large real estate investment trusts in this sector significantly reduces contagion risks. Nearly all REIT securities are held by institutions. They entered the pandemic in good financial health with low gearing and were well-placed to absorb the earnings reductions from rent waivers.

Bill Evans is the Chief Economist a Westpac
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The Reserve Bank's Financial Stability Review has taken a balanced approach to the risks for the Australian economy associated with rising house prices.

bevans

RBA's Financial Stability Review notes risks but no immediate alarms around housing: Bill Evans

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GUEST OBSERVER
For the last two weeks, I have been in the US visiting investors; hedge funds; corporates and officials.
I still have more meetings to complete, including with other Fed officials, but I would like to set out some assessments so far.
One debate is whether current pricing for interest rates; the USD; and the stock market is dependent on a successful fiscal policy outcome for Trump. Alternatively, pricing might be factoring in some economic reform (particularly banking) and not much more. The answer is probably that the share market is more optimistic about a successful policy outcome than the bond market. Bank deregulation (freeing up bank lending) would be stimulatory as long as confidence holds and, with the Fed now proclaiming that the US economy is at full employment, the higher bond rates are justified. However, if the share market needs a successful fiscal plan (centred on tax cuts) to hold current levels, then equities would be vulnerable to a marked sell off in the share market should the plan prove to be elusive.
The problems with a significant tax cut are manifest. It seems that there are around five Republicans in the deficit hawk camp who are firmly opposed to any policy that is not "revenue neutral" and five are "soft no's". The current controversy over Russia will only harden opposition within the party.
Failure to deliver a package by the summer would expose the initiative to a Democrat filibuster. The Ryan/Brady Plan, which was laid out last summer when the Republicans appeared unlikely to win the Presidential Election, does deliver a revenue neutral result (after assuming a fairly optimistic growth response to the plan) but it requires the Border Tax (featuring no tax deduction for costs of import_s and no tax on export sales). This would be an effective tax on the trade deficit. Such a tax would be hugely disruptive and is encountering significant opposition, we understand, from within the White House. Other "nasties" in the Ryan/Brady Plan are to allow interest cost or state tax deductions and no real allowance for retaliating moves from trading partners.
Another possible funding channel might be to impose large tariffs to help fund the tax cuts and achieve some of Trump’s protectionist objectives. Tariffs can be introduced by Executive Order without the need to go through Congress, although they may be subsequently challenged in the courts and by the WTO.
Overall, arbitrary tariffs are likely to be a more distortive mechanism than the Border Tax. However, that option, linked with some unpopular entitlement reform, might be back-end loaded and more modest tax cuts might constitute a plan that could be manipulated to “look” revenue neutral.
In such circumstances, the USD would rise further but the inevitable response from other trading countries would likely trigger a disruptive trade war – the recent encouraging lift in global PMI's and global equity markets would soon dissipate.
It was disappointing to hear generally, that infrastructure reform was a low priority well behind dismantling the Affordable Care Act, tax cuts, banking deregulation and trade. For instance, Trump could establish an infrastructure bank capitalised with $150-$200 billion in Federal funds. That would be funded by the repatriation of deferred foreign profits (taxed at 7.5% - 10.0%) and geared at 6x1 with a Federal government guarantee (the impact on the deficit would only be the funding cost). That would deliver on a key promise and probably gain full Democrat support along with enough Republicans to pass Congress. Such an initiative would encourage growth optimism and, if well managed, boost productivity expectancy.
Alternatively, there could be a national effort to privatise current infrastructure (for example, most toll roads are state owned) with a commitment that funds would be reinvested in other infrastructure assets (not used to fund other contingent liabilities of the state). Complex issues between city/local/state/federal governments would need to be resolved with a likely solution being that the Federal government would need to provide incentives to the cities and states to sell the assets.
There are solutions to the successful implementation of an infrastructure plan. If markets saw genuine progress in banking and other sectorial deregulation along with an infrastructure plan, the inevitable shock to confidence that is likely to occur in the summer if trade and unfunded tax initiatives dominate the agenda could be avoided.
So where does the Fed stand in all of this uncertainty? I expect that it will be comfortable to "skip" a March move until we see more clarity on these issues and, more import_antly, the impact such developments have on confidence and markets. For example, the Fed sees that "financial conditions" have eased due to narrowing credit spreads and a rising stock market despite higher rates and a higher USD. A reversal in markets would tighten financial conditions and associated drop in confidence would force a review of the growth outlook.
I also expect that the "asymmetric" approach to policy-setting is still a key majority view amongst FOMC members - better to err on the side of higher inflation than risk entrenched low inflation. With the slow response from wages to "full employment", there is little risk of getting too far behind the curve. On the other hand, I assess that the Chair now believes that the US has reached full employment and, therefore, the normalisation process should proceed (but with two hikes not three in 2017).
I remain comfortable with the June/December call for Fed policy in 2017.
What do investors think of all these issues for Australia? In short, the key channel will be Trump’s trade policies. Any indiscriminate large tariff or Border Tax would pressure China's foreign reserves and growth outlook. This would likely trigger a protectionist response from China, which while not impacting our resource exports, would most likely threaten our services exports to China.
My central thesis is that the Australian economy is likely to slow in 2018 due to a construction downturn and falling terms of trade. Commodity prices are likely to fall sharply under the weight of a supply response from Australian and Chinese (private) producers; an unwinding of speculative positions in China; and a slow-down in growth associated with a resumption of reform in China following the November Congress.
Downward pressure on the AUD will only intensify in the event of Mr Trump taking the “trade option”. 
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. 
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jchancellor-FAypfDUnLy

Trump; trade and the FED: Bill Evans

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2021 is shaping up as very difficult for universities, as well as the <a href="https://internationaleducation.gov.au/research/research-papers/Documents/ValueInternationalEd.pdf">more than 130,000 people</a> whose jobs rely on the international education sector.

In October 2019 almost <a href="https://www.abs.gov.au/statistics/industry/tourism-and-transport/overseas-arrivals-and-departures-australia/latest-release#arrivals-international-students">51,000 new and returning international students</a> arrived in Australia. In October 2020, this figure had fallen by 99.7% — to just 130.

The Mitchell Institute <a href="https://www.vu.edu.au/sites/default/files/issues-brief-international-students-covid.pdf">has previously estimated</a> about 36% of annual international student spending is on property and another 36% is on hospitality and retail. The large drop in international students inside Australia means the many businesses and property owners that rely on international students will continue to suffer.

Australian states had plans to trial the return of some students with quarantine arrangements in place. These <a href="https://www.sbs.com.au/language/english/when-can-international-students-return-to-australia-here-s-a-state-wise-update">included returning</a> 300 international students to South Australia, 350 to the ACT, and setting aside up to 1,000 quarantine places per week in NSW for international students and temporary migrants. Other states hadn’t specified their plans.

But the NSW effort to bring back international students <a href="https://www.smh.com.au/politics/nsw/hard-to-see-a-safe-corridor-nsw-shelves-plan-for-return-of-international-students-20210107-p56scz">has stalled</a>, while the ACT is still waiting for approval from the Commonwealth and South Australia’s plan has not been finalised. Only the <a href="https://www.sbs.com.au/language/english/when-can-international-students-return-to-australia-here-s-a-state-wise-update">Northern Territory has succeeded</a> in bringing back 63 international students since the borders closed to temporary visa holders in March last year.

But even if all the states had progressed with their plans, there would be nowhere near the amount of international students needed to stem the economic shortfall.

<h2>Fewer students coming in than going out</h2>

The impact of the coronavirus pandemic on the international education sector differs to other parts of our economy. Employment in industries such as retail and hospitality <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release">have recovered slightly</a> from the initial COVID-19 shock.

But the international education sector continues to decline and is yet to reach its lowest point.

While the situation is bleak, there are encouraging signs for renewal.

The concepts of stock (the number of current students) and flow (the number of new students) help understand the nature of the problems facing the international education sector.

Since the start of the coronavirus pandemic, the stock of enrolled international students has become smaller as they finish their courses.

In October 2019, <a href="https://internationaleducation.gov.au/research/research-snapshots/Documents/RS_2021ReturningStudents.pdf">580,202 international students</a> were enrolled in Australian courses. By October 2020, this had reduced by 13% to 502,206.

The stock has shrunk because the pandemic has interrupted the flow of new international students. This means there are fewer new students replacing those finishing their courses.

There is still some flow of new students into courses. For instance, between July and October 2020 <a href="https://internationaleducation.gov.au/research/research-snapshots/Documents/RS_CommencementsOctober2020.pdf">about 25,000 new international students started a course</a> in Australia. But this is much lower than the 100,000 during the same period in 2019.

And from now on, the stock of enrolled international students is likely to continue to fall much more quickly than the flow of new students.

According to <a href="https://internationaleducation.gov.au/research/research-snapshots/Documents/RS_2021ReturningStudents.pdf">Australian government data</a>, about 120,000 international students, or 24% of the enrolled cohort, were due to finish their course between October 2020 and January 2021. With borders remaining closed there is unlikely to be enough students to replace them.

<h2>Students outside Australia aren’t spending in the economy</h2>

Compounding the problem is that many international student visa holders are outside Australia. In the <a href="https://www.abs.gov.au/statistics/economy/international-trade/international-trade-supplementary-information-calendar-year/latest-release">2019 calendar year</a>, international education contributed more than $40 billion to the Australian economy. At the end of December 2020, 158,014 out of 543,522 visa holders were not in the country. This means they will not be spending in the wider Australian economy.

The graph below uses Australian government data to show the location of international student visa holders inside and outside Australia since the start of the pandemic. The number of international student visa holders inside Australia has steadily declined.

<hr>
<iframe class="tc-infographic-datawrapper" frameborder="0" height="400px" id="SrYXY" src="https://datawrapper.dwcdn.net/SrYXY/3/" style="border: none" width="100%"></iframe>

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The number of international student visa holders inside Australia at the end of 2020 (around 385,000) had dropped by almost 195,000 <a href="https://www.homeaffairs.gov.au/research-and-stats/files/student-temporary-grad-program-report-june-2020.pdf">compared to October 2019</a>.

The trials to bring back international students were mostly addressing the issue of existing students (the stock) stranded overseas. Even if they were successful, they would not have had a substantial impact on restarting the flow of new international students into Australia.

<h2>What’s the economic impact?</h2>

Universities have been affected greatly by the crisis. In 2019, universities <a href="https://www.dese.gov.au/higher-education-publications/resources/2019-higher-education-providers-finance-tables">reported A$9.8 billion in revenue</a> from international students. Throughout 2020, <a href="https://www.timeshighereducation.com/news/melbourne-losses-not-bad-predicted">losses may have been somewhat contained</a> as international students were still finishing their courses.

However, the continued reduction in the stock of international students means 2021 should be the year the financial impact of the crisis will bite.

More than 40% of the sector’s <a href="https://theconversation.com/australian-universities-could-lose-19-billion-in-the-next-3-years-our-economy-will-suffer-with-them-136251">annual student revenue</a> now comes from international students.

Based on a reduction of 30% in higher education international students who have either <a href="https://internationaleducation.gov.au/research/research-snapshots/Documents/RS_2021ReturningStudents.pdf">finished or scheduled to finish</a> their courses before 2021, the university sector can expect at least a A$3 billion reduction in international student revenue this year compared to 2019.

Modelling by Universities Australia shows by 2023, <a href="https://theconversation.com/covid-19-what-australian-universities-can-do-to-recover-from-the-loss-of-international-student-fees-139759">universities stand to lose A$16 billion</a> due to the loss of international students. Previous <a href="https://theconversation.com/australian-universities-could-lose-19-billion-in-the-next-3-years-our-economy-will-suffer-with-them-136251">modelling by the Mitchell Institute</a> shows universities stand to lose up to A$19 billion by 2023.

It is not just a university problem. The graph below shows the enormous growth in the international education sector. It uses data from the <a href="https://www.abs.gov.au/statistics/economy/international-trade/international-trade-supplementary-information-calendar-year/latest-release">Australian Bureau of Statistics</a> (ABS) and breaks down the economic contribution into two groups, tuition fees, and goods and services.

<hr>
<iframe class="tc-infographic-datawrapper" frameborder="0" height="400px" id="TDab3" src="https://datawrapper.dwcdn.net/TDab3/2/" style="border: none" width="100%"></iframe>

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In 2019, the ABS estimates 57% of the A$40 billion that international education contributed to the Australian economy, or A$22.8 billion, came in the form of goods and services spent in the wider economy.

<a href="https://www.vu.edu.au/mitchell-institute/tertiary-education/australia-to-lose-half-its-international-students-by-mid-2021">Research from the Mitchell Institute</a> has previously estimated if borders remained closed by mid-2021 there would be a 50% reduction in the number of international student visa holders inside Australia. This would roughly equate to an annual reduction of about A$11.4 billion in spending in the broader economy.

<h2>Green shoots of renewal</h2>

Despite the extraordinary challenges, there are positive signs. Visa application data shows people are still applying for international student visas.

The graph below compares monthly student visa approvals between January 2018 and November 2020. It excludes those whose last visa was a student visa, to better capture new applicants instead of current students extending or changing their visa.

<hr>
<iframe class="tc-infographic-datawrapper" frameborder="0" height="400px" id="Vs9nA" src="https://datawrapper.dwcdn.net/Vs9nA/1/" style="border: none" width="100%"></iframe>

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This graph shows there has been a sharp drop in approvals since April 2020. In April, there was a 78% drop from the number of approvals the year before and an 83% drop in May. However, there has been some stabilisation. In November 2020, visa approvals were around 38% what they were the year before — a drop of 62%.

The fact there are still a significant number of applications and approvals in the current environment is a testament to how Australia remains an attractive prospect for many international students.

It suggests that if the international education sector can weather the storm of 2021, better times await in 2022 and beyond.<img alt="The Conversation" height="1" src="https://counter.theconversation.com/content/153180/count.gif?distributor=republish-lightbox-basic" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important" width="1">

<a href="https://theconversation.com/profiles/peter-hurley-342847">Peter Hurley</a>, Policy Fellow, Mitchell Institute, <a href="https://theconversation.com/institutions/victoria-university-1175">Victoria University</a>

This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/2021-is-the-year-australias-international-student-crisis-really-bites-153180">original article</a>.
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max.kwok_55688

2021 is the year Australia's international student crisis really bites

j.ballantyne1990-6AQqhLzZaK

Economic outlook in 2018 and 2019 expected to be better than 2017: RBA

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Household debt and an increase in income-to-debt ratios add to macro-economic risks, suggests new research.
The study by researchers from the University of Sydney for the Australian Housing and Urban Research Institute reveals how the housing market is one contributing factor to these macro-economic risks. 
Titled ‘Housing prices, household debt and consumer spending’, the study examined the effects of house prices and house-price-induced increases in debt on general consumption spending in Australia, focusing specifically on how such links were affected by the GFC.
The study suggests that policymakers should consider the potential risks that high levels of household debt and rising household income-to-debt ratios bring to the economy.
It points to the dangers, saying a number of countries have regulations that “limit the growth of household indebtedness, while the need to ensure robust prudential regulation remains an important policy priority”.
The study identified the consumption patterns for homeowners and home owning investors at different ages and who had greater or smaller amounts of debt or equity in their properties. 
Before the GFC, a rise in housing prices were associated with increases in consumption (i.e. spending or borrowing) for homeowners, particularly because they borrowed a larger fraction of the property price (i.e. had a higher ‘Loan to Value’ (LTV) ratio). 
However, after the GFC households with high LTVs turned more conservative and were no longer increasing their debt to increase consumption as a response to increases in house prices, the research noted.
“Our findings are relevant for macro-economic stability in Australia,” says associate professor Stephen Whelan, from the University of Sydney," it said.
“In particular, the finding that households with higher levels of debt are most responsive to increases in house prices highlights a potential systemic risk. Financing higher consumption through taking debt among highly leveraged households exposes those households to the risk of significant loss if house prices fall or if interest rates rise. This is in contrast to a general belief in Australia that debt is held by those most able to service it, namely, higher income and higher wealth households.
"Before the GFC, for every $100,000 increase in house values old-aged households increased their consumption by $1,000 per year and middle-aged households increased consumption by $1,700. After the GFC, consumption by old- and middle-aged households dropped to $600 and $1,600 per year respectively.
"The significance of this is seen if we consider there are 1.69 million households aged 65 and over who are homeowners (90% of these households do not own another property), then just $400 less being consumed each year by each household means a loss to the economy of approximately $608 million when compared to pre-GFC household consumption."
The report also finds differences in the consumption responses of home owning investors with and without debt.
Following the GFC, home owning investors with no debt became more conservative, reducing their consumption response from around $3,000 to approximately $2,600 per annum for every $100,000 increase in house prices. Whereas investors with mortgage debt became more responsive as their consumption response rose from $1,700 per annum to almost $2,900 per annum for a $100,000 increase in house prices.
The conclusion of this finding was that these investors with mortgage debt are not as risk-adverse when compared to other homeowners.
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Soaring household debt poses risks to economy: AHURI

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Australia’s current expansion is its longest boom.
GDP growth has been continuous for 26 years, with no ‘technical recession’ during that period.
By some measures, Australia’s is the longest boom of any developed economy, although there is some debate about that. What it means can also be disputed.
For example, Australia has had contractions in per capita GDP, so part of the boom is due to strong population growth. Although the cycle is not dead, its amplitude has been tamed, at least for now. It is also important to understand how it happened. Luck and good management have both played a role. There may also be lessons that can help sustain growth in the future, as well as for other countries. Fiscal reform is a priority if the longest boom is to continue.
Recessions are nasty. They usually result in a rise in unemployment, which is highly positively correlated with ill-health, high crime rates, and other negative social and political outcomes. Recessions can also have lasting effects. Long-term unemployment can lead to skill atrophy, making it harder to find a job even once the economy recovers. Deep and long recessions, like the Great Recession, have had a lasting negative effect on a generation of workers.
Although not recent, examples from Australia’s recessions are still powerful and worth recalling. The impact of Australia’s early 1990s recession (1991) on the labour market was deep and damaging. The unemployment rate rose significantly and did not return to its pre-recession level for 14 years. It caused significant harm. For example, many middle-aged workers who lost their jobs in Victoria’s manufacturing industry, which was hard hit, never worked again. Designing policy to avoid recessions has been the macroeconomist’s ‘Holy Grail’.
Australia’s 26 years of growth are important and worth acknowledging. They will also hopefully yield lessons for the future. However, it is important to be clear about what Australia’s experience is not. It does not mean that the cycle is dead. The world has had a number of periods where sensible observers claimed that this was the case. In 2003, Nobel prize-winning economist, Robert Lucas, famously stated that the ‘central problem of depression-prevention has been solved’, ahead of the Great Recession in 2008. Harking back to earlier days, there was a strong belief in Australia in the 1960s that the Keynesian prescription of active demand management, using fiscal policy, had solved the macroeconomic problem of that time. This was before significant recessions in the 1970s, 1980s, and 1990s. These accounts proved to be hubris.
Australia will almost certainly have a recession at some point. However, what is clear is that over the past 26 years, the volatility of Australia’s economy has been much lower than at any other time in the country’s history and most other countries experiences. This is worth studying. Australia has managed to dodge a number of global shocks, including: avoiding a recession during the Asian financial crisis in 1997/1998, the IT bubble of 2000, and the Global Financial Crisis of 2008/2009. Australia also avoided having a recession at the end of a housing credit and price boom in 2002/2003, during a drought of the early 2000s and at the end of the recent mining investment and commodity price boom, which peaked in 2011/2012.
Part of it has been luck. Australia’s geography has become a blessing. What Australian historian, Geoffrey Blainey, famously described in 1967 as a ‘tyranny of distance’ from Western markets has become the ‘power of proximity’ as global growth has shifted towards Asia. Australia has also been fortunate to have a large stock of high-quality resources, such as iron ore, coal, and gas that have been in high demand.
However, it is not all luck. A strong rule of law has helped. While many other large mining economies, with weaker institutional foundations, have suffered from the ‘resources curse’, Australia has managed to benefit from its large resource endowment. Market reforms in the 1980s and 1990s, including the floating of the Australian dollar, made the economy more flexible and better able to deal with global shocks. There may be lessons for other countries. Although the Global Financial Crisis raised questions about the ability of market-based systems to deliver widespread benefits, Australia stands out as a successful market-based economy.
Good economic management has also played a role. An independent central bank with a clear mandate to flexibly target inflation has proved to be an appropriate institutional arrangement for a medium-sized commodity-producer. The RBA has adeptly managed the cycle maintaining on- target inflation and financial stability and deserves significant credit for the long boom.
There have also been challenges. In recent times it has proved difficult to run balanced budgets, with the federal budget approaching its tenth consecutive year of deficit, despite the earlier boost to national income from the mining boom. Economic reform has also proved difficult, particularly of the tax system, which is becoming increasingly inefficient. Housing supply, energy, and climate policy also need reform and policymakers ought to continue to focus on ramping up infrastructure investment. The lack of reform may, itself, be a consequence of the long boom as policymakers and voters may have become complacent. It would be disappointing to think that Australia might need a recession, with all of its damaging effects to the economy and communities, in order to motivate reform.
Eventually, Australia’s long boom will end. The trigger will most likely be a negative shock from overseas. A sharp downturn in Asia, when one arrives, would prove harder for Australia to deal with than the Global Financial Crisis, which was centred on the developed world. Australia’s high levels of household debt would be likely to exacerbate any downturn.
Australia needs reform to support productivity growth and prepare for the next downturn. The priority should be fiscal reform, which leads to sustained budget surpluses. Measures should include, shifting the tax mix towards more efficient taxes, such as consumption tax, and cutting back on public spending commitments that do not deliver strong economic returns.
If there is one clear lesson from the long boom it is that Australia has benefited from a key part of the policy apparatus that is used for managing the cycle and securing the economy – the Reserve Bank of Australia – being independent from the political process. With this in mind, policymakers ought to consider ceding more authority for reform of other policy areas, such as transport and social infrastructure, energy and tax policy, to independent agencies. This could involve making recommendations by agencies such as the Productivity Commission, Infrastructure Australia, or Australia’s Parliamentary Budget Office, more binding. While politically challenging, the government could consider setting up an independent fiscal authority, akin to the RBA, but aimed at managing fiscal spending and taxation decisions.
As the global economy finally recovers from the lingering effects of the financial crisis, now is the time to focus on reform. It is clear that reform would help if the longest boom is to continue.
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Paul Bloxham is the <a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team" target="_blank">chief economist</a> of Australia and New Zealand for HSBC.
 
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Australia’s longest boom: How Australia did it and can it keep growing?

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GUEST OBSERVER
Australia continues to grow jobs, but wages aren’t keeping up and policymakers are running out of options.
Let’s begin with an economy that is doing relatively well.
In the US, the data were both predictable and moderately positive.
Consumer prices (as measured by the CPI) were up only 0.1% in October, but this was in line with expectations. Recall that two major hurricanes drove up gasoline prices in September, and those increases rolled off (they were up 13.1% in September and fell 2.4% in October). The year-on-year CPI increase was 2.0% – again, in line with expectations.
The Producer Price Index (PPI) rose by a healthy 2.6% on a year-on-year basis – despite a drop in gasoline prices for producers of 4.6% (note the difference between wholesale and retail price changes). Perhaps most importantly, there were relatively strong increases in elements of the index that the US Federal Reserve cares most about (as they are less cyclical than, say, energy prices), like healthcare costs.
Less expected, but happy news, was the 0.2% rise in retail sales. That puts retail sales up 4.6% on an annual basis. This is further evidence of the solid rebound in the US economy.
And now to Australia.
On the plus side, a fair number of jobs are being created. As Treasurer Scott Morrison was eager to point out on Thursday, 296,400 jobs have been created this year; 236,000 of them full-time.
But the continued depressing news is about wages. The wage-price index was up 0.5% for the third quarter, below market expectations of 0.7%. That puts annual wages growth at 2.0%. With inflation running at 1.8%, that means real wages growth is effectively zero. And it has been like that for a long time.
This is causing enormous problems for Australian households and policymakers.
Recall that Australian households are among the most highly leveraged in the world – with debts at around 190% of GDP. So what is going to reduce that debt?
There are two possibilities: more inflation or more income. Inflation helps reduce the debt in real terms, and income helps for obvious reasons. Right now, both avenues look shaky.
On the former, the Melbourne Institute reported on Thursday that inflation expectations fell this month, providing further evidence that future inflation is likely to be low.
On the latter, there has been a continued run of low wages growth. This is an experience being felt in advanced economies around the world. That suggests it is something to do with technology, or global economic conditions, and therefore not all that amenable to policy.
That leaves us with heavily indebted households, with no obvious way out. This, of course, puts a strain on consumer spending, which in turn affects business investment and employment, and the whole (vicious) cycle loops back on itself.
What is the cut-through for policymakers?
The RBA could drop interest rates from their current 1.50% level – and increasingly some economists are suggesting that. The worry is that a rate cut might further fuel housing prices, making the problem worse, not better.
Federal income tax cuts would be another avenue, but with the budget in structural deficit, and with an economically illiterate crossbench, that looks unlikely.
The government could embark on a major infrastructure spending plan, which could rejuvenate regional employment in areas hit by the forces of globalisation. With interest rates at very low levels, for very long maturities, this seems like a good idea, as long as the projects are assessed on a rational basis.
The concern in this regard is politics. Both major parties have their predilections and bases to pander to. A bad outcome would be, for example, a big coal mine investment by the Coalition, and some uneconomic green-energy boondoggle by the opposition.
<img src="https://counter.theconversation.com/content/87517/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">As I have said before in this column, the US seems to be navigating the post-2008 economic world relatively well, although caution is certainly warranted. Australia is doing much less well. And the narrative that we have “successfully transitioned from the mining boom” seems a lot more like wishful thinking than hard evidence.
Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW.
This article was originally published on <a href="http://theconversation.com" target="_blank">The Conversation</a>. Read the <a href="https://theconversation.com/vital-signs-australias-mining-boom-transition-is-on-shaky-ground-87517" target="_blank">original article</a>.
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Australia's mining boom transition is on shaky ground: Richard Holden

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A majority of Australians are optimistic about the state of the property market and will continue to invest in this space, new research has revealed.      According to new data from Mortgage Choice, 64.3% of Australians believe the housing market will continue to perform the same as it has in recent years, if not better.  This data makes it obvious that the majority of Australians remain upbeat about investing in property and will continue to buy and sell dwellings. Over the past few weeks, we have heard endless commentary about an ‘inevitable slowdown’ in the property market.  According to data from CoreLogic, property price growth has started to stagnate in recent months. Over the three months to November, property prices grew just 0.4% across the combined capital cities.  As a result, many market commentators have started to panic and are suggesting that this is the beginning of the end. Some commentators have even gone so far as to suggest we could soon see a property price crash across some of the bigger markets, notably Sydney and Melbourne.  The reality is, property prices are merely stabilising after a few years of runaway growth. This stabilisation is something we have long expected.  The fact is, significant changes have been made to investment lending policy in recent months. Moreover, interest rates have been sitting at historical lows for well over 12 months and will continue to sit at historically low levels for some time yet. Both of these things have combined to take some of the heat out of the market. And while the heat has started to come out of the market, Mr Flavell said there were no signs to suggest a property crash was on the radar in Australia.  For a crash to occur in the housing market, there would need to be a number of economic factors at play.
Firstly, supply would need to be significantly high enough that it exceeded demand. Secondly, the cost of borrowing money would need to rise rapidly in a very short period of time, and unemployment would also need to reach dramatically high levels.  Moreover, there would need to be a large number of people looking to liquidate their properties at the same time.  If all those factors were to occur, a crash could be a possibility, but based on how our economy is travelling at the moment, it is fair to say that we are not in for a crash.  According to the Australian Bureau of Statistics (ABS), Australia’s population grew 1.6% over the year to March 2017 – which is significantly higher than other developed nations.  In total numbers, our population grew by 389,100 over the past year, and all of those people need somewhere to live. If we want to cater to our growing population, we need to build more properties, and that is exactly what we are doing.  So, supply and demand are working in good kilter with one another. At the same time, interest rates are low and we expect them to stay lower for longer. Meanwhile, the unemployment rate is trending downwards, with the latest data from the ABS showing that the unemployment rate fell 0.1% throughout September to 5.5%. When you consider all of the above economic data, there is nothing to suggest that a property price crash is in our near future.  In fact, the opposite is true. With interest rates sitting at all-time lows, lenders competing for business and property price growth stagnating across some markets, now was a good time for prospective buyers to achieve their property goals.  If you have plans to be in the property market, now is the right time achieve your goals.
John Flavell is the chief executive officer of Mortgage Choice.
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What bubble? Majority of Australians ‘optimistic’ about property: John Flavell

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GUEST OBSERVER
Most recent estimates show the Higher Education Loan Program (HELP) debt owing is nearly A$52 billion in 2017-18. It’s forecast to increase to A$75 billion by 2020-21 and up to 25% of those loans are unlikely to be paid.
Legislation to lower the initial HELP repayment threshold from A$55,000 to A$45,000 (with a rate of 1%) is likely to pass the senate after passing the lower house on March 27th. This legislation includes linking indexing to inflation instead of average weekly earnings, which will slightly increase the rate of debt accumulated (20 year average for inflation is around 2.6%, compared to 1.8% for average weekly earnings).
Increasing repayments on HELP debt by lowering the initial threshold is an easy target. Why? Because people who owe money don’t pay much attention to their HELP balances, let alone the parameters that determine repayment and accumulation.
Since the ATO stopped posting statements in 2013, people owing HELP debt are left to their own devices and to check their balances on the ATO site. General financial advice points to giving HELP debts low levels of attention and paying down high-interest loans first.
Proposed changes, like replacing the annual average weekly earnings indexation with the 10-year government bond rate, abolishing the deceased-estate write-off for estates exceeding A$100,000, and lowering the initial threshold to A$42,000 have drawn media attention over the years, but have not been met with outrage by those potentially most affected.
But there are softer tactics that could nudge debtors into increasingly making repayments voluntarily.
Students need a financial toolkit
First, equip students with a financial toolkit. It would involve legislating education providers to deliver financial literacy programs that include information about the HELP scheme and their obligation.
Such a program should include making students aware of the parameters, repayment projections under various scenarios, and potential changes to the scheme as proposed by political parties or commentators. If the provider (university or vocational educator) offers HELP then surely they have a moral obligation to provide this service.
Offering financial literacy programs through tertiary education providers also fills a gap in the National Financial Literacy Strategy. ASIC’s MoneySmart would be an ideal curriculum consultant.
Such programs are already implemented in the US. Due to the large scale of privatised student debt issues, 53% of universities offer financial education program to students.
Studies on the efficacy of these programs demonstrate increased financial knowledge, reductions in financial at-risk behaviours (like delinquencies, excessive credit and over-spending), and increases in responsible behaviours (including improving regular savings and planning).
While the settings in the US differ to Australia (commercial interest rates, not extinguished by death), privatisation has been previously explored.
Australian debtors don’t “default” like US debtors because most student loans are like a commercial loan in the US. In Australia, graduates only do not pay if they don’t reach the repayment threshold, or die.
Bring back discounts
Second, bring back discounts on voluntary payments over A$500, abolished by the Liberal government in 2017 . Previously, discounts were 15% up until 2005, then 10% until 2014, then 5%. What, then, incentivises people to pay lump sums?
Communication is everything
Third, the ATO needs to communicate with HELP debtors on a regular basis to overcome laziness and put HELP debts as first priority in personal financial decisions.
Text messaging is effective in influencing behaviour. Text messages prior to indexation have encouraged balance checks and lump sum payments (particularly at tax rebate time) and may be effective in increasing voluntary repayments. These strategies work by subtly reframing the way messages are conveyed, and regular presentation of messages, to positively impact behaviour.
A positive aspect of the legislation under consideration is that lowering the initial repayment threshold means HELP debt repayments will appear on payslips. Because of this, early on in a debtor’s working life they will be able to increase their awareness of HELP debt owing.
The threshold reduction needs to be compatible with the original intention of the income contingent loan scheme to provide equitable access. Lowering the initial repayment threshold will put increased financial pressure on relatively low paid workers, many of whom are women. Under the new changes, a person earning A$46,000 will repay nearly A$9 a week. While this doesn’t sound like much, a single mother may strongly disagree.
<img src="https://counter.theconversation.com/content/94910/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">The government should consider pursuing other, more gentle and effective behavioural tactics to reduce the national HECS debt in the lead-up to the budget, rather than one that has the potential to hurt low paid workers.
Tracey West, Lecturer in Behavioural Finance, Griffith University
This article was originally published on <a href="http://theconversation.com" target="_blank">The Conversation</a>. Read the <a href="https://theconversation.com/lowering-the-help-repayment-threshold-is-an-easy-target-but-not-the-one-we-should-aim-for-94910" target="_blank">original article</a>.
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