John, the current global situation
is obviously very uncertain.
And there is this kind of historic pattern
that labor governments tend to deal
with things like depressions and recessions
and global financial crises.
Is that we're headed, do you think?
Well, a couple of points.
I mean I've been analyzing and predicting
economy since the late '60s.
And I think the risks today, the unpredictability today,
is greater than any time I can remember.
And we've had some pretty big shocks through that
period, whether they were oil price shocks or recessions
or stock market corrections or Asian crises or whatever.
We've had big, big shocks.
And I think the risks are much greater than I can remember.
And last weekend the yield curve, as they
say in the US inverted.
Short rates went above long rates,
which in using Federal Reserve data
suggests that there will be a recession in the United States
within three to 24 months.
So I think the US is slowing down.
Europe is definitely struggling and slowing down.
China's slowing down.
And on top of that you've got Trump,
which are a main source of volatility in the system,
and unpredictability.
You've got--
And China.
The whole issue of--
China's debt problem, 300% of GDP.
A lot of structural issues.
Their growth rates a lot lower than probably 4% or 5%
rather than 6 or 7, which the government keeps announcing.
But it's not a real number.
And so if global growth slows, and we
have some of the weaknesses in the system come to the fore,
particularly the over valuation of stock markets, bond markets,
currency markets, property markets in different stages
for different countries.
I mean, they're all bubbles, and they'll all burst.
So you could have another global financial crisis--
Yeah the cupboard is a bit bare as far as
the Australian government goes for dealing with this.
I mean, interest rates don't give you much scope these days,
do they?
They don't have much capacity, because the reserve banks
that the interest rate haven't changed
since I think August 2016.
But I've been saying all through that period
that they'll probably-- the next change of any would be down.
And I think they might put it down,
but you're in a world where when it's as low as it is,
it's not going to make much difference.
People are going to rush out and spend or invest.
So you're not going to get much effect
from lowering interest rates even a 50 basis points or so.
And the fiscal position, although the government will
announce a surplus, and they'll say how clever they've been
and they're back in surplus, and they'll probably
predict for years of surpluses.
The truth is that they've all, both sides of politics
have made very large expenditure commitments that carry
through the 2020 and beyond.
Obviously education health commitments are significant.
They are moving into the 2020 big numbers.
The NDIS, which is the disability insurance
scheme, which is I think they've predicted
a 600% increase through to the end of this decade
in the costs of running that.
And that's going to blow out.
And then you've got a whole host of infrastructure commitments,
and you get a lot in this budget that are unfunded.
And you've got hundreds of billions
of dollars of defense commitments,
that-- you know, submarines, frigates, fighter
planes, you know.
They're all unfunded.
And they're big numbers.
So if you look around the literature,
there's a book recently being published
by Mike Keating, who used to be Secretary
of the Department of Finance.
I think Prime Minister and cabinet.
And he's predicting sort of a 3 percentage point increase
relative to GDP in the tax burden over the 2020s.
I don't hear anything about that,
and of course we'll hear more tax cuts,
and mine's bigger than yours.
And none of them are affordable.
And the revenue stuff is kind of--
or the revenue projections are kind of fictional aren't they?
I mean it's based on sort of projections of commodity prices
and probably won't hold up, and when we're still
dealing with treasury forecasts about growth
that really don't reflect--
The treasury's been-- the one thing
they've been consistent about is being consistently
wrong in their forecasts.
And very ambitious in some of those numbers.
Particularly a turnaround say in wages,
which is supposed to give you the big bracket creep
base of the system.
They have underestimated some of the commodity prices
in the last budget, so now they've come in higher.
That gives them a revenue boost.
But that's not sustainable, particularly if the world
economy is slowing down.
I mean we might have seen better iron ore and coal prices,
but they won't be sustained.
So I think the budget will be scrutinized
as to what numbers they actually pick going forward
for the next several years.
And so they don't--
the revenue looks better now than it
has, partly because of forecasting errors of the past,
and partly because they've never picked up
a bit of additional tax revenue from the corporate sector.
Some catch up tax, and some of the bigger companies
where they hadn't paid much tax.
But basically the corporate tax system
has been working like a resource rent tax.
A high risk, high commodity prices
that had a better return.
But we also see evidence of how few of the big companies,
Exxon Mobile was, you know.
I forget what it takes out of the system every year,
but it's well over $30 billion, don't pay any tax.
And those who in the LNG sector aren't
going to pay much tax for another decade or so.
So the corporate-- there's an issue
as to whether the corporate tax base is really sustainable.
And all this is coming on the back, too, of the banking royal
Commission where there are real issues of trust, I suppose.
And uncertainties about precisely what a new government
is going to do with the recommendations
that royal Commission, which were quite modest,
and in some ways conservative.
But the findings of the royal Commission
were of course incendiary in a lot of ways.
I mean it seems to me to be another uncertainty too.
See, they don't-- neither side is doing is really admitting
the reality, the economic realities.
I mean they're spinning it to favor
their particular position.
And the fact is that the narrative say of the government
doesn't match the lived experience of most Australians.
I mean, most Australians are really
struggling to meet the cost of living week in, week out.
And that's housing, or that's electricity and gas prices,
or it's medical insurance costs or childcare costs or whatever.
All those elements, the big elements
in a family's household budget, are rising much faster
than the measured rate of inflation.
And people's wages have stayed flat.
I mean under 2% over the last several years.
This is a big issue.
To be very big issue.
This flat wages thing, I mean for those
of us of a certain age, the idea of this being a problem--
It's hard.
It's a bit bizarre, really.
But it is these days.
And they-- see what the households
have had to do is both run down their savings,
and run up their debts.
To show you how ridiculous some of the rhetoric
of the government has been, when the household savings rate fell
to pre GFC levels, Frydenberg went out there and said, see,
that shows you how confident people are.
You know, they're spending.
Because if you look at the consumption numbers,
they're not spending, but the retail sales
numbers-- they're not spending.
They're pretty flat.
So basically we've now got a record level of household debt,
it's about 120% of GDP.
It's nearly 200% of household disposable income.
So households have had to run up their debt,
run down their savings, just to survive.
And they're doing it unlike in the early 2000s.
They're doing it at a time when the value of their houses
is stagnant.
And their houses falling.
House prices are falling.
So they're getting a negative wealth effect.
And go to the royal Commission.
That showed basically that a significant percentage
of the bank lending books, the mortgage books are the big four
banks, are subprime.
They knowingly lent people much more money
than they could afford, and now the idea
there is, of course, that they've
got a bit of initial equity in the house,
as the house price continues to go up, they get more equity
and they can ultimately service that loan.
And a lot of those loans are interest only loans.
But they fudged the household expenditure numbers,
income numbers and expenditure numbers,
to get to give them a bigger loan.
Then house prices fall, their equity falls,
the pinch is real.
I mean mortgage stress is becoming
very significant as an issue.
And it's only going to get worse.
The banks themselves are exposed now,
because they've got subprime quality loans on their books.
You know what the bank's like, they say oh, you're not really
meeting your covenants, you're not meeting your interest
payments, and so on.
Well, you know, we can't have a fixed interest.
So interest only anymore.
You've got to come to principal interest.
That kills most people.
But when you house prices falling your equity
is disappearing, your net position in your house
can be negative.
If you've bought near the peak in the house
as house prices come off 10% or 15%, you're behind.
And that's a significant percentage of people.
Of course we had really a substantial housing boom.
Now the government's done nothing
about the cost of housing.
And you know it took a couple of decades
to correct this problem, where millennials
can't afford to buy a house in Sydney and Melbourne.
They aren't going to fix it in under a decade or so.
You're going to work on both supply and demand.
So it's like electricity prices are
a couple of decades of climate wars scoring
points on each other.
Bottom line is, electricity prices,
gas prices gone through the roof,
and people are still getting very large electricity bills.
It's like the government saying, I've got a big stick.
I'm going to belt the power companies or whatever.
It's not making any difference.
Couple of hot days and your average price goes up.
Because you go-- you really are paying
super high prices on peak days, and this sort of thing.
So you know, there's a lot of misrepresentation in all that.
Now I think the average voter knows all that.
It's one of the reasons why I think
to the standing of both major political parties
has gone down.
And even in the last two state elections, Victoria
and New South Wales, and all those by elections,
the aggregate vote of liberal labor
went down, because people just [? jack-- ?]
they've given up on the two major parties.
So independents and minor parties are getting nearly 20%
of the vote.
Starting to see independents emerge in the lower house.
Now, this is an interesting situation.
Where neither of them are being believed,
neither side is really being believed,
and although I don't expect an independent or minor party
to make that much difference to government,
it's a way of registering a protest vote.
Yeah, well, it was up around a quarter.
[INAUDIBLE]
It was around a quarter, I think, of just under quarter
at the last election.
In the lower house.
The other thing that I noticed the other day in the New South
Wales state election is a very high percentage of pre polls.
Nearly 20%.
People have made up their mind, they
don't want to hear the arguments,
don't want to listen to the campaign, it's all rubbish,
you know.
I'll just-- I've already decided, I'm going to vote.
I did man a polling booth last week,
and I found a very high percentage of people
that no, don't want the paper.
Just walked in and voted.
People had kind of made up their minds.
They've made up their mind that they've basically given up
on both sides of politics, and it's
a choice for the vote of the lesser of two evils.
And then when they've made that choice,
they're going to live with the evil
the two lesses, because they don't have any policy
positions, right?
That are really going to solve the problem.
I'm interested, though.
I mean, some of the most contentious of economic policy
differences between the parties at the moment
are very generational.
They're sort of about the one you mentioned before,
housing affordability.
The franking credits one is in many ways about retirees,
and who essentially provides revenue,
and who gets refunds and all the rest of it.
Superannuation is another one.
It seems to me there's a range of issues
that really bear on the different experiences
and opportunities of younger and older voters.
I'm wondering if this is the first campaign--
certainly in my living memory--
where that's the case.
Where generational differences matter.
Basically a lot of the policies add up
to intergenerational theft.
You know, you kicked the problem down the road,
you leave it to the next generation to deal with.
And it's going to be a lot harder for them
to deal with it, whether it's the budget need to be repaired
in the 2020s as we've been saying, or climate change,
for example, you don't want to meet your Paris
commitments or your duck and weave around it
and actually Paris is about half what
it ought to be in terms of meeting a sensible 2050
emissions reduction target.
That's a big legacy to push down to your kids.
And when you think about, yes if the tax
is going to be going up in 2020s, that's
when you know current folks in their 20s and 30s
are going to be going to higher tax--
Imagine your wages stay flat.
Unemployment starts to become an issue.
And cost of living still continues to go up.
And then the tax burden goes up rather than down.
You know, it's sort of a multiple number of whammy
is on the average person, and the younger generation,
those that are supporting the older generation,
are really carrying quite a load.
So none of that amazingly features.
I noticed a few years ago when Costello introduced
the intergenerational report.
I'd built it down at budget time.
The budget that he brought down didn't reflect
one thing in that report.
There was no medium term strategic thinking.
And it's never been any different.
And we know what's happening to the population,
and what will go.
Some of these are reasonably hard numbers
in terms of the number of people that--
the costs of aged care, the shift to the older population,
age mix shift.
And some of these things are well known,
they're well documented.
They don't factor them in, and as you're
saying by not dealing with it, they
push the problem against the older Australians for example,
or against the younger Australians,
and it's amazing to me that that doesn't feature more
as an issue.
And Howard gave a speech yesterday
saying inequality doesn't exist in Australia.
Is exaggerated.
Well, I'm not sure which planet he lives on,
but it ain't this one.
Because it is really is an issue, and people feel it.
And when you ask a politician why you're in politics,
they say, oh, you know.
To make a difference.
What most people believe that to mean
is they make a difference for themselves.
They're not trying-- they're in there for the system,
they're probably earning more money
than they'd earned outside.
They're not skilled for the jobs they get.
And so in those circumstances, it's
not surprising there's a loss of--
a mounting loss of trust and belief in government.
Do you think-- I mean one argument would
say that a change of government's
not going to make an enormous difference.
And I suppose one of the things you said before.
Yeah.
I mean I'm thinking of some of these big economic policy
issues.
So the housing affordability is an interesting one.
I mean, how much would something like the negative gearing
changes that labor's advocating, what kind of difference
is that likely to make?
I mean, my assumption would be not terribly much
in the short term, given that--
And it is going farther, it's going to be [INAUDIBLE]..
Yes, and it's only on old houses.
Yes, yes, so they've constrained it quite a lot.
But don't forget, it was introduced when housing prices
were running away.
And there was a lot of foreign demand and speculative demand
and so on in the system, which is making it harder and harder
for the average Australian, particularly younger
Australian, to buy a house.
Now of course we have a situation
where the market's turned, house prices are coming off,
real mortgage stress, and OK, you're
making negative gearing change.
You probably won't have much impact.
I suspect that might delay it, further grandfather phase
it whatever.
The time is not yet right.
They don't want to get hit with accusations,
that, OK prices are falling and you're going to kill it.
You know?
And that exaggeration is there in the system already.
So yes, some of their policies--
look.
From a tax point of view, tax reform point of view,
I don't like any of those small changes.
While you can defend them as part of a broad review
and go through all the tax expenditures,
go to all the concessions that are
in superannuation and housing and so on,
that are skewed in favor of the wealthy.
You know, and yeah sure, you would fix that
as part of a general overarching reform.
But if you're just doing bits ad hockley,
you don't necessarily improve the situation.
And you actually make it more complicated
when people want a simple tax system,
you're making it much harder for the average person
to understand their tax.
And the effects are not necessarily
what you assume they will be.
And so I think while they've taken
some clear positions on a couple elements tax,
and capital gains tax discount, negative gearing.
Franking credits.
They're not necessarily now going
to have the effects that they hoped they would have when they
ended when they announced them.
So I suspect when they get into government,
they'll say, oh, you know, well I
didn't realize it was what it was, and they'll change it.
And in some areas they can make a big difference.
Say they really did adopt the idea
that we need to make the transition to a low carbon
society.
The government's economy.
And accelerated that process, and that created all these jobs
and billions of dollars of investment
that are presently being lost.
They could make a huge difference,
and, OK they'll have to accelerate the retirement
of coal fired power stations.
But 70% of the existing coal fired power stations already
beyond their design life.
So look, it's possible for them to do that.
And that would make a huge difference
and we'd stop all this nonsense.