Economic Exaggeration

Unfortunately it looks like Andrew Leigh has fallen into bad company. He was singing a duet with Craig Emerson in the Parliament this afternoon:

It is a pleasure to rise today to speak on an important issue of economic management. When we talk about the importance of good budget management it is important to remember one simple fact: if the tax-to-GDP ratio today were the same as it had been under the Howard government then the budget would be strongly in surplus.

Dr Emerson: By more than $20 billion.

Dr LEIGH: By more than $20 billion, I am informed by the minister. But if the tax-to-GDP ratio under the Howard government had been what it is today then many of their budgets would have been in deficit. That is a simple fact which those opposite cannot deny.

Of course they can deny that – if the private economy was as strong now as it was during the Howard era the government would be collecting a lot more tax revenue. If the private economy was as weak then as it is now, the Howard government would’ve collected less tax revenue. But there’s the thing – it is not by accident that the private economy is weak now. It is almost entirely due the the mismanagement of the current government.

We have had a few bits of history being disinterred over recent times—we have just discovered where Richard III is buried. And thanks to an IMF report we have discovered a little bit about past budget practices in Australia. An IMF report released in January examined 200 years of government financial records across 55 leading economies. It identified two periods of fiscal profligacy in recent years. When were those periods? Well, if you listened to those opposite, you would be led to think that it was under the current government. But in fact that is not what the IMF found. The IMF found that those two periods of fiscal profligacy were under John Howard’s term in office in 2003 and during his final years in office from 2005 to 2007.

This is a discredited application of an otherwise interesting IMF study.

We discussed the paper here at the Cat on January 11.

So long story short: The IMF study finds in one out of three tests that the later Howard era spending was profligate. In that test the post-Howard era is specifically excluded from the analysis. The IMF itself describes that particular test as:

…somewhat less standard, it has greater flexibility to capture sudden changes in behavior and influential observations in opposite directions in close proximity to each other.

But it does fit in with our expectations – so I suspect it is over-weighted as being important. In fact the result in table 12 is weak – it isn’t confirmed in any of the other tests or in table 13.

A few days later Henry Ergas shredded the ALP interpretation of that paper in the Australian.

Indeed, that test gives many bizarre results. For example, it not only finds Italian governments to be consistent models of fiscal rectitude, but also singles out 2002-05 as years of fiscal prudence in Britain, even though that was when the Labour government’s budget deficit blew out of control.

Precisely because of the difficulties of placing much weight on any such measure, the paper provides a table that combines its tests – and which does not identify any fiscal imprudence in the Howard years.

The interpretation that the IMF study was given in the Fairfax press and ABC is wrong and misleading.

Andrew Leigh should know all that – he is smart and he is good at econometrics. So what is the story?

My take is as follows: The ALP have locked themselves into an attack on the opposition’s track record in office. We saw that over the weekend with Craig Emerson’s efforts and then today with Andrew Leigh. I’m not convinced this is a good strategy. Every time the ALP talk about the economy and the Howard government voters experience cognitive dissonance; they have happy memories of that period, yet the ALP are telling them they are better off now than then. Really? Well look at some of the policy advice they get. Andrew Leigh quotes analysis by Stephen Koukoulas on budget cuts going back to the Fraser (who?) era.

Here is Stephen Koukoulas (former Senior Economic Advisor to Julia Gillard) telling people they have never had it so good:

In the past year, electricity prices have risen 17.7 per cent of which about 10 per cent was due to carbon. This is a big rise. That said, the household expenditure weights used by the Australian Bureau of Statistics show that electricity accounts for just 2.5 per cent of the average household expenditure on the basket of goods and services that make up the CPI.

Electricity is, therefore, a small part of the average household budget.

In terms of some comparisons for where an average household spends its money, purchases of tobacco make up 2.5 per cent of average household consumption, the same as electricity. Spending on meals out and take away foods accounts for 5.5 per cent; alcohol 4.8 per cent; rent 6.9 per cent; petrol 3.5 per cent and holidays and accommodation 4.9 per cent.

So quit yer belly-aching. Just to make sure he doubles down:

Think about it. The average household spends as much on tobacco as electricity and spends more than twice that amount on takeaway food and restaurant meals.

So the ALP (and their advisers) are not serious about the economy. They make dodgy claims, misrepresent IMF studies, and dismiss concerns about the cost of living and especially electricity as the grumblings of malcontents (who probably smoke too much).

(HT: Noodle – who was frantically texting me to watch Andrew’s speech on APAC).

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31 Responses to Economic Exaggeration

  1. Craig Mc

    There’s nothing this government won’t lie about, because frankly, what during the last five years can they afford to be honest about?

  2. H B Bear

    Remember the reaction at the time when Howard told people they had never had it so good? While he may have been right, they didn’t want to hear it – and especially from him. There has been a big disconnect between Australia’s macro-level economic performance and peoples day-to-day experience of it.

    If The Leg-over Man and his mates want to start to play “what if” scenarios to compare Rudd-Gillard with Howard they aren’t going to get very far. That stuff is best left for unread memoirs on book store remainder tables.

  3. Steve of Ferny Hills

    If Rudd and Swanee saved us from the GFC, how come the economy is weak? They can’t have it both ways. China has been going gangbusters.

  4. .

    If Rudd and Swanee saved us from the GFC, how come the economy is weak?

    Tony Abbot

  5. You left out this bit:

    Dr LEIGH: And if pigs could fly, the budget would still be in surplus today. If money grew on trees, and if little pixies came and made our shoes in the night from leather pieces left on the doorstep, the Australian manufacturing industry would be operating at an all-time high.

    Dr Emerson: Little pixies, which were banned under the Howard government.

    Dr LEIGH: And as I have just been reminded by the minister, these little pixies were banned by the Howard government. But if they had not been, the budget would be in surplus today.

    Just more obediently churned-out boilerplate from Dr Leigh, privileged son of Labor. He and Emerson must have realised that if the others jump ship, they may soon be the brains of the organisation.

  6. old44

    Cheap rent of $380/week at 6.9% of salary gives an annual salary of $286,000, what fool came up with these figures?

  7. Question: Will Mista Rabbit explain his role in the banning of pixies?

  8. johno

    The average household spends as much on tobacco as electricity

    He’s kidding, isn’t he.

    Just about every household pays for electricity, but after decades of relentless attacks, most people have been bullied out of smoking. So how many households spend ANY money on fags?

    Do you think he meant, those household that spend money on ciggies spend a similar amount on electricity?

    Even an esteemed former Senior Economic Advisor to Julia Gillard should understand the importance of that distinction. After all, she saved the world from economic Armageddon.

  9. Bruce

    He was singing a duet with Craig Emerson in the Parliament this afternoon

    That would be ‘Emo is not a dirty word’ since we know he’s a Skyhooks fanboi.

  10. brc

    Think about it. The average household spends as much on tobacco as electricity and spends more than twice that amount on takeaway food and restaurant meals.

    I do not believe that for a second.

    My electricity spending dwarfs things like takeaway for me. I bet my local takeaway would love that to be reversed, but one is discretionary and the other is locked in by people on a mission to save the planet.

    On the tobacco comparison, did the clueless Foxtrot Whisky stop to think for a moment that’s because both are loaded up with taxes?

  11. Rabz

    When we talk about the importance of good budget management …

    Oh, spare me.

    I have stated previously on this blog that my not so esteemed local member Dr leigh (for a ‘Dr’ he is) is an absolute plonker (and I’m being kind here – wouldn’t want Sinc removing my comment).

    His grasp on reality appears tenuous at best, as you would expect from a privileged, insulated member of our arrogant, parasitic, braindead political class.

    There is a touch of the “Let them eat dirt” about the wankery of leigh and that staggeringly stupid, utterly ridiculous amoeba emerson.

    As for the kook, don’t get me started…

  12. Eddystone

    Seeing as the greater part of the retail price of tobacco, not to mention a fair bit of the retail price of electricity, is down to government taxes and charges, there is an obvious way to improve the lot of the peasantry most vulnerable in our society.

  13. .

    No, taxes stop people spending money…until they pay the tax.

    Well said.

  14. Andrew

    Steven Koukoulas and Andrew Leigh are both suppose to be economists and to be some of the most brightest minds in the country on this topic…seems to not be the case.

  15. grumpy

    “The average household spends as much on tobacco as electricity”…and that is the problem with averages, my friends. My annual electricity bill is 4000% higher than my annual tobacco bill.

    Also someone should tell him that spending on tobacco and takeaway is a discretionary expense whereas electricity is a necessary expense, unless you want to live on unicorn poop and rainbow energy like the watermelons want everyone else to.

  16. Skuter

    Andrew Leigh should know all that – he is smart and he is good at econometrics. So what is the story?

    The story is that he is dishonest.

    Steven Koukoulas and Andrew Leigh are both suppose to be economists and to be some of the most brightest minds in the country on this topic…seems to not be the case.

    They are both sycophants and charlatans. Pure and simple. These two gave up the quest for truth and understanding long ago. They are now into obfuscation, spin and lies.

  17. Andrew

    The Lying Slapper and Swanny were trying to hoodwink people with what Emmo and Leigh were saying last night.

  18. Abu Chowdah

    Greg Jericho just loves to fellate the ALP. I’m sure, however, that when he was in the APS he was disciplined and ensured his politics never colored his advice. Very sure. Very sure, indeed.

  19. Andrew

    Sinclair and others will be interested to know that I have engaged Mr Emerson in the debate on this topic. He seems to claim that increasing the tax free threshold in this budget explains why the Labor Govt as a % of GDP is taxing lower since they came to power in 2007.

  20. candy

    ” purchases of tobacco make up 2.5 per cent of average household consumption, the same as electricity”

    that sounds totally bizarre.

  21. Skuter

    http://www.budget.gov.au/2012-13/content/bp1/html/bp1_bst5-03.htm (See table 7 here for tax rates)
    http://www.budget.gov.au/2012-13/content/myefo/html/13_appendix_d.htm (See tables D1 and D2 for receipts to GDP and tax to GDP ratios)

    The two links above tend to prove Emerson’s contention wrong (if what Andrew @ 4.14pm says above is correct). Small problem with timing and causation. As a matter of fact, Treasury forecasts tax to GDP to rise after the rate changes. In part this must be because of an increase in labour supply, no? To think that cretin has a PhD in economics…

  22. Andrew

    Skuter, here is what he and I both said.

    Me: “If @CraigEmersonMP thinks that tax as % gdp is lower under this Govt, what taxes did this Govt cut, to reduce that figure?”

    Emerson: Only the Liberals would claim tax as a share of GDP was lower under previous Government. This claim is utterly false.

    I do understand that tax as a % of gdp is higher under the Howard Government, but when challenging Emerson on what the Government did to cut taxes (that is what the Government claims they did), he did not answer me. I pressed him on the topic again.

    Me: “Name the taxes ALP cut”

    Emerson: “Trebled tax-free threshold. Fact.”

    The only tax Emerson could name was the tax free threshold. WE all know that the tax free threshold only was introduced in the recent budget, not back in Labor’s first budget. The decline in “Tax as a % of GDP” happened back when Labor first came into power. Accepting Emerson’s premise that they cut taxes to lower that figure, where are the other taxes he cut back in 08-09?

  23. Skuter

    So Emerson is a liar. I’m utterly shocked Andrew. Aren’t you?

  24. Andrew

    So Emerson is a liar. I’m utterly shocked Andrew. Aren’t you?

    Not shocked but I am sick of him and others misrepresenting the facts.

  25. Skuter

    …but I am sick of him and others misrepresenting the facts.

    I hear ya brother!

  26. Skuter

    Sinc, I reckon this tax-to-GDP nonsense that Emerson, Swan, et al. keep sprouting really needs to be exposed for the utter bullshit it is. Time for a detailed post on the issue if you are so inclined???

  27. Andrew

    I agree with Skuter. It is a common cry by lefties and analysis says that Labor is not really a lower taxing Government. The figure is thrown around a lot without people knowing the true meaning of the figure.

  28. Skuter

    When I say a detailed post, I am specifically referring to an analysis of tax rates vis a vis the tax-to-GDP ratio.

  29. Andrew

    Offered Emerson to address the claims on this blog page. To his credit, he does often reply to the tweets. Unfortunately, he didn’t answer the questions I posed.

  30. mundi

    labor in Qld got routed because they continually increased the cost of everything, while private sector wages stagnated or declined.

    Federal labor are in denial.

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