Monday, 1 August 2022

The Future of the Federation : Lessons from the pandemic

There’s been a wealth of lessons to be learned as economies try to recover from the pandemic.

Most are being ignored.

A return to pre-pandemic days is what most policy makers appear to want.

Back to the days which have produced the mess we are now in.

The pandemic has brought all our problems into sharp focus.

We have a lopsided economy.

Capital and profits have increased their share of the national pie at the expense of wages. The trickle down effects haven’t eventuated. Asset prices have risen instead.  Owners want a return on their capital and to that end the financial sector  has been tasked with extracting more and more from the real economy leading to a more unbalanced economy. Government spending has been unable to keep up with the needs of the economy.

Are we going to rely on tax reform to help rebalance the economy?

We might be waiting a long time.

This note is intended to review the state of play and look for other ways to relieve the pressure on services delivery, particularly for State governments, the engine rooms for so many services that are crucial to our well-being.

Post pandemic policies have shown how government spending, borrowing and the role of the Reserve Bank interact.

As a rule most focus is either on the role of the General Government or the RBA. They are rarely considered as a consolidated Group.

Only when they are treated as one, does a realistic picture emerge of what is happening. Peer at the economy through an accountant’s lens and the view looks awfully like what Modern Monetary Theory (MMT) adherents see when they view the economy.

Government spending creates private assets. Budget repair will reduce private assets. Do those promoting budget repair understand this simple iron law of accounting?

Banks are intermediaries in the settlement process, interposed between the government (RBA) and the people. If instead of having a/cs at various banks for settlement purposes, everyone had an a/c at the RBA, then government spending would be directly credited to peoples’ a/cs. The balance of peoples’ a/c at the RBA would appear as a liability of the RBA just as notes and coins do. 

But they’re not debts that the government need to repay. This is one of the fundamental points most commentators and scaremongers fail to grasp.

With banks as intermediaries, reserves are created each time the government spends. Convention dictates that some of the reserves need to be swapped for government bonds should the government wish to spend and finds itself without any money.

It’s a convention not a necessity.

A recent development that eventually made it to Australian shores, has seen the central bank, the RBA, purchasing some of the government’s issued bonds.

A close look at effect of spending on the consolidated government (which includes the RBA) shows it makes no difference if the government spends what’s in its RBA a/c, or whether it runs an overdraft at the RBA or whether it raises funds by issuing bonds which are bought by the RBA and subsequently written off.

A government borrowing from itself doesn’t impose a burden. The reverse is more likely. Private assets are boosted when spending occurs.

Looking at the consolidated government, gives a more realistic view than focusing on just one of the members of the consolidated group, the General Government.

It is instructive to look at the Australian government’s financials, which aren’t included with the Annual Budget, but do appear 5 months after year’s end usually in November.

When RBA Governor Lowe tells us RBA bond buying is not supposed to indicate a new way to finance government spending is he saying net government borrowings of $684 billion at June 2021 compared to gross borrowings of $888 billion, the difference being those bonds bought by the RBA, is a figure without meaning. 

What does it mean then?

Surely it must mean the government only owes $684 billion to third parties.

Then why does everyone parrot on about a trillion dollars of debt?

Is it a rounding problem or a lack of understanding of what consolidated accounts mean?

As to where RBA got the money to purchase bonds, and how it was recorded in its accounts, this can be answered by having a look at RBA’s cash flow statement. It reveals how money is created in a modern economy.

The means to create money isn’t confined to the RBA. Most is created by private banks.  Outsourcing money creation to banks is an enormous privilege.

 ‘Creation’ is the operative word here. As the Bank of England reminded us in 2014, loans are not made from existing deposits. Loans create deposits. The Commonwealth Bank’s cash flow statement reveals this reality, with operating activities divided between income and expenses on one hand, and new loans and deposits on the other. It is a tell tale snapshot of how banking in a modern economy works as opposed to how most people imagine it to work.

The pandemic and the subsequent response have emphasised the crucial role State governments play in service delivery in a wide variety of important areas. Compared to the measures enacted to help banks by the RBA, much more could have been done.

If the Tasmanian experience is any guide, reporting income on a profit and loss basis by State governments, has helped disguise the cash flow losses that are likely to persist for quite a while, with the supply of services likely to fall further behind what’s needed.

Tasmania’s looming fiscal sustainability problems have been well documented but largely ignored by politicians. Admitting to problems always prompts questions about what the proposed solutions are and why has it taken so long to confess.

At this stage there are no firm solutions. The progress of tax reform is glacial, and like glaciers in the era of climate change are just as likely to melt before much progress is made.

The prospect of Stage 3 tax cuts and possible budget repair which will reduce Australian Government coffers even more, suggests States aren’t a priority for the Australian government/RBA.

We need a backup plan to assist them.

The RBA needs to be given an enhanced role in the Federation, not just as banker to the private banks but helping States and Territories as the pre-eminent deliverers of services to the people.

When the Federation is viewed as a consolidated whole, government financing and spending by the States can be carried out in the same way as the activities of the Australian government since March 2020.

All government spending increases private assets.

But the key to the future is grasping the fact that government liabilities created by spending aren’t necessarily debts which must be repaid.

They only become debts if we so choose.

We need to run the show for the benefit of the people not the banks.

Thursday, 30 June 2022

Basslink for Sale Chapter Three

 

The Basslink sale process has picked up speed.

We’re likely to see a new owner for Basslink in the next three months.

How the dust settles will affect Tasmania’s plans for the future shape of Tasmania’s electricity industry.

Friday, 10 June 2022

Marinus and the case for more Tasmanian wind farms

 

Project Marinus will unlock the value of Tasmania as a renewable energy powerhouse we are told. The basis for this claim is difficult to find. It is yet to be publicly revealed how consumers and government owned electricity companies, Hydro Tasmania and Tas Networks will benefit.

More wind farms will be needed and it is for that reason this blog takes a close look at Woolnorth Wind Farm Holding P/L (WWF) which has just released its  financials for the calendar year 2021.

WWF produces about 10 per cent of Tasmania’s electricity needs. In 2021 it received an estimated $95 for each MWh of electricity produced, a slight rise from $94 in the 2020 year.

WWF sells its output to Hydro Tasmania pursuant to a power purchase agreement (PPA). Without the PPA, had WWF sold its output into the spot market it would have only earned an estimated $60 per MWh (2020: $74 per MWh).

Hydro therefore subsidised WWF to the tune of $36 per MWh for 2021, an estimated $34 million in total.

The Shenhua Group a Chinese state-owned company owns 75 per cent of WWF acquired from Hydro which still owns the remaining 25 per cent. Shenhua bought its share subject to Hydro agreeing to the PPA.

Over the remaining term of the PPA Hydro is likely to pay subsidies to WWF which will be more than enough to repay WWF’s borrowings which at Dec 2021 stood at $239 million.

Had Hydro not sold its 75 per cent share it would have been able to repay the borrowings used to construct WWF. Instead, it pays subsidies to WWF to do the same thing.

It follows the pattern established by the Basslink deal, rather than the government owned Hydro building and owning the cable, it was decided to pay someone else to do it. The payments that have subsequently been made would have paid for the cable twice over. Apart from the two carbon tax years there’s not a lot to show from the now abandoned Basslink deal except Hydro with more debt and a community that has suffered as a result.

The pattern of privatising benefits and socialising losses is evident from WWF’s latest financials. In the absence of any clear evidence of how benefits and costs of the Marinus Project are to be shared one is left with the forlorn conclusion that past practices are likely to be repeated.

Sunday, 5 June 2022

Tasmanian Budget delusions

 

Barely a year ago Treasury’s Fiscal Sustainability Report revealed large icebergs on the horizon which will require Tasmania to chart a different course. Captain Gutwein had a good view from the bridge of what lay ahead. Unfortunately he has since resigned his commission.

New Treasurer Michael Ferguson has not yet fully acquainted himself with the outlook from the bridge if his Mercury Talking Point article on 2nd June (Tassie has the lowest net debt in the nation ) is anything to go by.

“From 2022-23, we will achieve positive net operating cash flows. This means that the Government continues to live within our means”, Mr Ferguson stated.

Most people would assume this means operating receipts will be greater than operating expenses. Government accounting standards however allow net operating cash to include capital grants from the Australian government.

Needless to say, capital outlays on infrastructure for such items as roads and the Bridgewater Bridge for which the grants will be paid to us, aren’t included when calculating net operating cash.

Nor are equity contributions into government businesses such as Tas Rail and Tas Irrigation also sourced from the Australian government as capital grants.

Include all outlays and there are large cash deficits in every year and for at least the next 15 years according to the 2021 Fiscal Sustainability Report. There is no way this can be described as living within our means.

Saturday, 30 April 2022

Debt deficits and the new Federation

What happened to the spring of hope we hoped would follow the Covid winter of despair?

The shortcomings of the existing system have become glaringly obvious. There was much talk about life on the other side of the pandemic, a place where we could build a better and fairer future on more secure foundations.  

However, two weeks of electioneering has confirmed that a move to a better place is too bigger task for our bickering political class. We are back to the same old ways of policy free mudslinging scaremongering and pork barrelling. We have learnt nothing.

There is a conspiracy of bipartisanship not to delve too deeply into important issues.

For instance, consider government debt and deficits and the all-important question of where money comes from. There has been so much to learn from how we managed the Covid crisis that should be front and centre of any election campaign. But discussion is conspicuously absent.

Most Federal government debt is not repaid. It is rolled over at maturity, replaced by new debt. As any Accounting 101 student knows debt may appear on the liability side of a balance sheet but so does owner’s equity. Debt that doesn’t have to be paid represents additional equity in the nation. Government debt is mostly owned by banks and large funds and are analogous to redeemable preference shares in Australia Inc. Interest gives the holder a regular return. The holdings can be sold at any time or redeemable at the end of the term, usually replaced with new borrowings. Debt may be owned by foreigners. But the interest on those borrowings is still paid into Australian bank accounts. If the owner wishes to repatriate the funds the Australian dollars are swapped for whatever currency is needed, so the interest always remains in Australia. Government borrowings should not be used an excuse for austerity by constantly raising the spectre of burdening our heirs and successors.

The Covid response required massive new borrowings. However, most of the new debt is owned by the Reserve Bank (RBA), our bank. We owe the debt to ourselves. The RBA now owns $288 billion of government debt. One third of government debt which is approaching $900 billion is now owned by ourselves. How is this a burden? Interest is paid to us. If bonds are ever redeemed the proceeds are returned to the government as dividends by the RBA.  This is the new reality. Central banks around the world are doing the same.

Sunday, 13 February 2022

Basslink: Turning a blind eye to its lessons

 

A compulsive obsessive desire to ignore the lessons of history is slowly choking us.

If Tasmania is to become a renewable energy powerhouse, shouldn’t we have some understanding how existing wind farms and the Basslink interconnector work, who profits and who pays?

What’s the difference between regulated and unregulated interconnectors and what are the ramifications of the termination of the Basslink Services Agreement announced on 10th February, an agreement covering an interconnector that was supposed to have a life of 60+ years but is falling apart after only 15 years.

Without stopping to analyse what went wrong with Basslink we seem to be careering ahead to build an even more expensive one, whilst the State refuses to face up the underlying fiscal sustainability of a government  which is gradually falling behind in attending to its core functions.

At the centre of energy policy is a Minister who is the shareholder minister in charge of Hydro, TasNetworks and the retailer Aurora Energy, and who pretends he is able to seamlessly resolve any conflict between competing parties whilst also looking after the interest of renewable energy proponents, consumers and Tasmanian taxpayers.

If it sounds too good to be true that's because it is.

Saturday, 5 February 2022

Native forest logging mythology

 

THE fact that trees may regrow does not make native-forest logging industry sustainable.

Dorset Mayor Greg Howard was reported (Mercury, February 2) as slamming people who do not accept his reality that because forests regenerate, forestry is one of the only truly sustainable industries.

It’s a non sequitur that is easily shown to be such by a close examination of Sustainable Timber Tasmania’s financial statements.

Over the past 20 years net contributions by governments to STT have been about $500 million.

Over that period the value of STT’s forest estate has plummeted by 75 per cent.

The latest financials show the estate is worth $186 million.

Despite all the assistance, it still lost most of its value. Ipso facto STT is financially unsustainable. No other conclusion is possible.

If that sounds bad, the reality is worse.

STT’s forest estate is based on expected future net proceeds. That is, future harvest revenue less future expected costs. But STT only values standing timber. The costs of regenerating the forest are ignored.

“All coupes regenerate,” claimed Mr Howard. Maybe, but if regeneration costs are not counted when valuing forests, how can Mr Howard claim they are sustainably managed? This is the fundamental flaw in arguments peddled by the native-forest harvest lobby.

Were regeneration costs included when calculating future expected proceeds, almost all native forests would have a negative value.

Standing timber may have a value. Most native forests don’t, if one includes the mandatory regeneration costs when calculating future net harvest proceeds.

It gets even worse if one attributes a value to all the other non-timber losses that occur when forests are harvested and which bean counters preparing financial statements overlook.

There are habitat, water catchment and carbon losses and, in the case of Blue Derby Mountain Bike Trails, clear spillover costs that affect tourism.

Harvesting trees generates cash, but that does not make it sustainable.

(published in The Mercury 5th Feb 2022)