Wednesday, 7 March 2012

Mr Hockey's Speech - More Holes than Swiss Cheese

Shadow Treasurer Joe Hockey gave a speech to the Sydney Business Chamber and while the sentiment in the speech surrounding strong growth, low taxes and job creation was sound, it was riddled with factual errors and a misrepresentation of some facts.

I have not seen any media coverage of the errors – the speech seems to be been taken at face value – but below is an analysis of some of Mr Hockey’s comments,  with my comments in the square brackets.
  • “since 2007 the ratio of net debt to GDP of the leading western economies has grown from 52% to 82%”  [That is a swing of 30% of GDP; in Australia, net debt to GDP has grown from minus 3.8% to 8.9%, a swing of 13% of GDP.]

  • “Sovereign risk was never an issue before but since the election of Labor in 2007 analysts have added it into the Australia equation”.  [Sovereign risk is difficult to determine but on two important measures, sovereign credit ratings and government bond yields, sovereign risk has fallen.  For the first time ever, Australia has a triple-A credit rating from all three major ratings agencies and the 10 year government bond yield is now around 4.0% having recent hit an all time low of 3.65% - it was above 6% in late 2007 when the Coalition was in office.]

  • “if the Labor Party does manage to deliver a surplus next year it will not be based on a significant reduction in the size of Government but rather, it will be based on a massive increase in tax receipts for the Commonwealth.”  [Factually wrong.  The size of government – taken as government spending – will fall from 26.0% of GDP in 2009-10 to 23.6% of GDP in 2012-13.  As a memo item, the Howard government’s average government spending to GDP ratio was 24.2% of GDP.  The tax to GDP ratio will rise from a 30 year low of 20.0% of GDP in 2010-11 and will reach 22.3% of GDP in 2012-13.  As a further memo item, the tax to GDP ratio in the last Howard year was 23.7% and the average tax to GDP ratio under Howard was 23.4% of GDP.]

  • “we will achieve a surplus in our first year of office and we will achieve a cash surplus in every year in our first term”.  [Assuming a late 2013 election, this is promising what the current government is already going to deliver.]

  • “Under the Coalition the budget will not be the first lever pulled in the event of another downturn.  I would prefer to see greater use of monetary policy for managing demand, with movements in interest rates used to smooth the economic cycle…. I would prefer to see monetary policy used as the primary tool for managing demand. ”  [This hints at undermining more than two decades of bipartisan support for the RBA to set interest rates independently of government.  This is a very dangerous path to follow and would see international investor take fright at the prospect of political interference in the RBA and implicitly, in the inflation target.]

  • Australia should ideally be running very large budget surpluses.  This would allow money to be put aside for a rainy day.”  [There is an inconsistency in Mr Hockey’s approach.  Putting money aside “for a rainy day” suggests that the Coalition would be willing to run down surpluses if there was a shock to the economy – I thought he said they’d prefer the RBA to cut interest rates?] 

  • “The second step in the Coalition plan for a stronger economy is to reduce the overall burden of taxation.”  [This is an interesting issues touched on here …
  • “A number of private sector commentators now believe the inflationary impacts of the carbon tax will be higher than the government has said.”  [Mr Hockey provides sources for many items in his speech but not this.  Who says this?]


  1. So he taxes us for a surplus, and then never uses, even in a crisis.

    So in other words, taxing for no apparent reason. Isn't this mercantilism?

  2. Do you think that when Hockey, and the opposition in general, talk about "Sovereign Risk" they are really referring to "Political Risk" or "Country Risk"? ie: the risk of investing in Australian companies, property etc. rather than risk of the government defaulting?

  3. By the way, the commentators who say the carbon tax will be more inflationary is Warwick McKibbin and others in the AFR.

  4. As for the "rainy day" statement, I don't think he has been inconsistent at all. He simply said that the use of the surplus cash "will not be the first lever pulled". He didn't say the lever would never be pulled.

    Being willing to do something isn't the same as preferring it.