A budget about today, dressed in the language of tomorrow

Treasurer Jim Chalmers has now handed down five budgets. All of them, including this one, project deficits. The forward estimates show deficits stretching to 2029-30 and beyond. The budget itself does not return to balance until 2034-35, on Treasury's own modelling. Gross debt crosses \$1 trillion next year and reaches \$1.25 trillion within four years. Interest on that debt is now the second fastest growing expense in the budget, behind only the National Disability Insurance Scheme. At \$30 billion a year, interest alone exceeds the total cost of the Pharmaceutical Benefits Scheme.

The Treasurer calls this "responsible fiscal management." The budget is built around a claim of intergenerational fairness. Both descriptions sit awkwardly with the arithmetic, but the deeper problem is simpler. This is a budget about managing the present. It does very little to set the country up for the future: the productivity slump goes largely unaddressed, fiscal resilience continues to erode, and the housing supply problem is treated as a tax problem rather than a supply problem.

Weekly Energy Update

Australian Wholesale Fuel Prices

Finding r-star after the Great Divergence

TL;DR: r-star, the real neutral rate of interest, is one of the unobservable star variables in mainstream macroeconomics. It is notoriously hard to estimate. The Australian IS curve coefficient on the real-rate gap is small relative to macro noise, so the model cannot choose between a growth anchor, a bond-yield anchor, or a blend of the two. Those three approaches, drawing on Wicksell, imply a real r-star between roughly 1.5 and 2.6 per cent, and a nominal neutral cash rate between about 4.0 and 5.1 per cent. With the RBA policy cash rate at 4.35 per cent, policy is not extreme. The data alone does not say whether it is mildly restrictive or mildly accommodative. The post-GFC track record and Governor Bullock’s recent language both lean toward the yield-anchored interpretation, on which 4.35 per cent is mildly restrictive.

Finding r-star after the Great Divergence

After doing additional analytical work that further shaped my views, I have withdrawn my original post. 

Please see the replacement post here.

Weekly Energy Update

 Crude prices/futures

Update on the Iran War: the Mexican Standoff

Where Things Stand

Sixty-one days after Operation Epic Fury began, the war has settled into a structure neither side wants to call by its real name. The shooting has mostly stopped. Nothing else has been resolved.

A two-week ceasefire took effect on 8 April after Pakistani mediation. Trump has since extended it indefinitely. Both sides have accused each other of repeated violations. On 11 and 12 April, US and Iranian officials met face-to-face in Islamabad for twenty-one hours, the highest-level direct talks since 1979. They produced nothing. By 12 April Vance had publicly conceded no agreement. By 13 April the US Navy had imposed its own blockade on Iranian ports. By 18 April Iran had reimposed the Hormuz closure it nominally lifted the previous day.

This is the war now. A dual blockade with no agreed terms, no fixed deadline, and no visible off-ramp. Iran controls the Strait of Hormuz. The United States controls Iranian ports. Both sides are inflicting sustained economic pain on each other and on third parties who never asked to be involved. US Central Command (CENTCOM) has redirected 38 ships from Iranian ports. Iran has reduced Hormuz traffic to a trickle. The Pentagon has assessed that mine clearance alone could take six months.

Central Bank Purposefulness, Take Two

I wrote about central bank purposefulness a couple of months ago, and on reflection I was not happy with what I had written. The argument was buried under too much scaffolding. This is a second attempt, stripped back to what I actually wanted to say. The core argument is that a central bank should follow three principles:

• Don't be a cowboy;
• No surprises; and
• Stay in your lane.

The first is about how the Bank moves, the second about how it communicates, and the third about what it comments on. Each is a piece of the same underlying point. The Bank's credibility is the asset that makes its instrument work, and credibility is built and lost through the ordinary discipline of how the institution carries itself. Cowboy rate setting depletes it. Surprises deplete it. Editorialising on matters outside the mandate depletes it. Everything else in the post is consequences of those three.