Are we set for a big cash budget?

This week in Talking Finance:

• Bevan Shields, Federal Editor and Canberra Bureau Chief for The Sydney Morning Herald and The Age runs through the politics of the ABC, the transformation of Prime Minister Scott Morrison, and ponders whether we’re set for a big cash budget.
• Julia Lee, Equities Analyst at Bell Direct analyses the impact the Fed’s rate rise will have on markets.
• Gerard Burg, Senior Economist – International, Group Economics at the National Australia Bank checks in on the trade war between the US and China, and what impact that is having on China’s economy; and
• Ben Grubb, freelance writer and former Fairfax technology editor updates me on the government’s anti-encryption legislation.

Hello and welcome to Talking Finance, I’m Alan Kohler.  The ABC is the big story of the week of course, including the political story, so let’s turn to Bevan Shields, Federal Editor and Canberra Bureau Chief for The Sydney Morning Herald and The Age, because those two papers have been leading the story, particularly with the break that the Chairman, Justin Milne, tried to get Emma Alberici sacked.  We’ll get him to dissect the saga, also, the transformation of the Prime Minister Scott Morrison, his image and to wonder whether we’re set for a big cash budget after the budget outcome for 2017-18 this week.

Last night, of course, we had the Federal Reserve raise interest rates, so let’s talk to Julie Lee, Equities Analyst at Bell Direct to analyse the impact of that.  And of course, bubbling away in the background is the trade war between America and China, so let’s turn to Gerard Burg, Senior Economist International and a China specialist at NAB, to see how the Chinese economy is going and whether the trade war is having an impact on it.  Finally, Ben Grubb, freelance writer and former Fairfax Technology Editor, brings us up to date on the government’s anti-encryption legislation.

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I’m joined now by Bevan Shields, who’s the Federal Political Editor and Canberra Bureau Chief for The Sydney Morning Herald and The Age.  Bevan, we’ve all been swamped by the ABC story this week, but is it a political story? 

BS:  I think it’s more of a political story than anything else really.  It has an amazing intersection between very well-funded public broadcaster, a broadcaster that’s on the whole, loved by the Australian community and the people who run it and the people who fund it.  It’s one of those stories for me that has all the ingredients really and it’s achieved what something hasn’t for a very long time, which is push pretty well all other political stories off the front page consistently for the last four or five days.

Do you think there are political consequences for the – I think we’ve got a departmental inquiry and a Senate inquiry now into the thing.  I guess, my observation would be that so far, the Prime Minister and other ministers and so on have all been saying the right things.  No one’s really stepping on a land mine at this point, are they?

BS:  That’s right.  I do think there will always be the debate about who would protect the ABC and who will better fund the ABC.  This does come against an interesting backdrop where the New South Wales Liberal Party Conference voted to privatise the ABC.  Now, that’s never going to happen but that, I think, planted a seed in the public’s mind, a seed of doubt about the Coalition’s commitment to the ABC, now say they will never privatise it but it’s an interesting backdrop for all of this.  Whether or not this whole affair blows up in the government’s face, I’m not convinced yet.  So far, we haven’t seen any evidence at all that Malcolm Turnbull or his Communications Minister or anyone else in the Government asked for particular reporters to be sacked.  So far, the Chair of the ABC was the one asking particular reporters to be sacked.  My personal view is, the Government can complain as much as they like about reporters or about particular stories, good luck to them, most of the complaints would be baseless, I would think.  But, the real issue is how those complaints are dealt with internally at the ABC, and that’s where we’ve seen the strike emerge.

What you seem to be suggesting though Bevan is that the whole scandal possibly plays better for the ALP than it does for the Coalition.

BS:  I think it does, but I think it probably depends on how things develop from here.  Alan, this is a story that’s moving very quickly.  As we speak now, the Communications Minister is about to hold a press conference.  If the Government can draw a line under this and get it out of the way and get a swift resolution, I think people will move on relatively quickly.  If this drags out to parliamentary inquiry, that has the potential to be very damaging for everyone.

Just moving along to the other political stories, I guess the other main thing going on is the transformation of Scott Morrison into an ordinary guy.  There was an arresting story by Sharri Markson in The Daily Telegraph of a feature sort of profile of him.  How do you think it’s all going, his image transformation?

BS:  I think it’s a work in progress.  I did laugh at that piece that the Prime Minister made a point of noting he’s got a mortgage just like everyone else with a lot of zeros on it, but I do wonder whether the public would go, “Yes, but we’re not paid $550,000 dollars a year.”  There’ll be little stumbles like that along the way, but I think there’s a very concerted effort to soften Morrison’s image.  What had worked for him in the past, the tough guy on boats, won’t for him now as Prime Minister.  He’s got a very strong social media presence, he is not really interested in talking that much to newspapers or 7:30 on ABC, he’s doing a lot of commercial media.  He’s following the John Howard playbook of doing a lot of commercial radio and it’s clearly an attempt to introduce another side of Morrison that the public hasn’t seen.

I think the public is getting wiser and wiser around this and I think many would know what’s going on, but my person view is people have an open mind about him and they’re prepared to listen to what he’s got to say and listen to the other side of him that he wants to present.  As you would know well, it’s fascinating, the amount of planning and strategizing that goes into these image makeovers and there’d be an army of people buying the things who are making it happen.  

Yeah, I was looking, as it happens, at the media section of his website, the Prime Minister’s website, yesterday morning.  The number of things he’s doing each day is extraordinary, I had no idea.  I don’t listen to commercial radio much and the list of things just on that day before was amazing.

BS:  It is and as a journalist and editor it’s very hard to keep up because you need to listen to everything, but he’s absolutely on a blitz.  Malcolm Turnbull had, I think, a deliberate approach of trying to slow down the cycle and speak less and when you have something substantial to say…  But communications for Malcolm was clearly an issue for the party and obviously that approach wasn’t working and they’ve now moved to a sort of more frantic pace.

The other thing that happened this week was the budget outcome for 2017-18.  The deficit of $10.1 billion was more than $19 billion dollars better than they’d predicted in the 2017-18 budget.  I’m thinking we’re going to have a bit cash splash election campaign, there’ll be lots of give-aways, wouldn’t you think?

BS:  There will be, it’ll be raining money I think.  This is the key question really, the budget is in relatively good shape, that’s helped more by surging company profits and employment rather than any particular thing that the Government’s doing on the spending front of the budget.  But, the real issue now is what are they going to do with all this money?  Will they stick to their promise to offset spending commitments in an election campaign with savings?  We’re getting mixed signals around that, but it’ll be an interesting tussle between whether they think voters will reward a party that is responsible on the budget and tackles the deficit. 

We’ve done a lot of polling, Sydney Morning Herald and The Age, that shows the public is very concerned about debt and deficit, but at the same time voters may be more interested in what might be provided for their hip-pocket and what the Government might be spending on roads and rail and all those other sort of sexy things that can sometimes win votes.

Of course they will, Bevan, of course that’s what the public’s going to be interested in.

BS:  [Laughs] I live in hope that maybe some people still care about deficit, but I might be a bit naïve.

Great to talk, Bevan, thanks.

BS:  Thanks, Alan.

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Joining me now is Julia Lee, Equities Analyst at Bell Direct.  Talking after the close in New York, but before the open in Australia.  Julia, the Fed raised interest rates last night as expected.  Was there anything in the statement that surprised the markets?

JL:  I think the interest rate was expected, but it’s the eighth time since 2015.  The key was the statement and if we have a look at the statement we saw the removal of one sentence around accommodative policy and I guess that’s significant because if we have a look at US economic growth targets that the Fed’s forecasting, we saw them raising their target from 2.8% to 3.1% this year, and from 2.4% to 2.5% next year, so the Fed is expecting to see strong economic growth come through.  However, the Federal Governor said he does not expect to see inflation surprise to the upside.

Of course, the other thing that we were watching was dot-plots and expectations remain pretty much unchanged for further US rate hikes of about 1% by the end of next year, and that was forecast by the Fed dot-plot and the median rate expectations of the Fed governors.  If we have a look at the market reaction though, we do see the market pulling back from the highs of the session and in fact, by the end of the US session we saw the US stock market ending towards the lows of the session.  It looks like the market unimpressed with the removal of that accommodative policy and it looks like the Federal Reserve is expecting to see stronger economic growth come through and it’s really no change in terms of raising interest rates next year.

Yeah, before the Fed statement the market index was up and then afterwards it closed down a third of 1%. 

JL:  Yeah, I think there was about a 200-point difference in terms of the Dow, so it was quite a big market reaction and ending near the lows of the session does tend to be a bearish signal going into the session tonight as well.  We’ll need to watch to see whether we do see a back-up and the US session tonight is also a little bit weak, but certainly it looks like the market reaction was quite soft. 

And the US Dollar sort of spiked downwards and then back up again, so little change on currencies.

JL:  Not much of a change in terms of currencies and look, the US currency has just been moving sideways and against the Aussie Dollar we’re trading in about 72.6 US cents, so that’s a gain of 0.1%.  It is going to be quite interesting to see how markets around the region trade today.  If we have a look at the Spire Futures, it is pointing to a down day in Australia, down by 0.3%, and if we have a look at how some of the commodities traded we did see oil prices coming under a little bit of pressure in New York, we also saw copper prices slightly lower and gold and silver prices also coming under pressure.

What do you think the next thing the markets are going to be focused on is, Julia?

JL:  I think the big thing will be the mid-term elections in November.  We know that China has put off talks on trade probably until after those mid-term elections and it really does depend on whether Trump manages to consolidate power or whether we do see a shift in the power equation.  Of course, President Trump has been the strong force behind a lot of the trade tensions that we’ve seen around the globe.  Early November, it’s going to be a big one for the markets and for the outlook, in terms of global growth.  Of course, it’s important because the market at the moment is wondering whether we’re able to keep up this increasing pace of growth for the global economy, or whether we do see some easing back of growth.

Thanks, Julia.  Great to talk, thank you.

JL:  Thanks.

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Joining me now is Gerard Burg, who’s the Senior Economist International at NAB and his specialty is China, which is what we’re going to talk about.  How much damage do you think the trade war with the US is going to cause the Chinese economy?

GB:  At this stage it’s still really hard to say.  It all depends essentially on how China’s Government responds, and I’ve actually seen three to four measures that they’re trying to fight the trade war at the moment.  We’ve seen they’re trying to support their exporters by putting some tax rebates.  We’ve seen a looser monetary policy to try boost the economy more generally.  You could argue that the pressures de-wind a bit to help exporters as well, certainly they are suggesting that isn’t the case.  But the one that’s happened more recently is we’ve seen some of the restrictions on infrastructure investment and that’s kind of going back to the well when it comes to the older style of stimulus that they’ve implemented in the past.  

That’s interesting isn’t it, because as you’ve pointed out, it suggests that they don’t think that the Chinese consumers are ready to step up in a way, that they’ve had to go back to their old ways of stimulating infrastructure investment rather than consumption.

GB:  That’s right.  I mean, that’s how they sort of fought off the GST and they also did the same thing in 2012 when there was a soft patch for the economy.  We hear a lot about how China’s economy is changing, and it is changing more towards domestic consumption, but it’s a really slow transition.  Last year, Chinese price consumption was only about 39% of GDP, and that’s compared to about 60% in the most advanced economies.  There’s still a long way to go before consumers are really ready to support the economy.  One of the reasons is that they simply save too much.  National savings in China just a couple of years ago was over 50% of GDP, it eased back to about 46% last year, but that’s still incredibly high world-wide.  The average is around about a quarter of GDP, so it’s still a huge factor there. 

It’s interesting, I suppose it’s a demonstration of the paradox of thrift, where it’s great if one person saves, but if the whole country saves it’s not great.

GB:  Yeah, and there’s a lot of structural things within China’s economy that encourage people to save.  We highlighted a few factors that influence this and we’ve talked in the past a lot about the high level of income and wealth inequality.  That’s one factor that contributes to it.  Wages growth more recently has slowed quite considerably and that sort of encourages people to hold back a little bit.  We’ve also seen household debt really on the rise.  Property prices in China have been going through the roof, people have to save a lot to get a deposit and once they’re paying a very large mortgage, obviously that constrains their consumption a bit.

But perhaps the really big factors we’d see are the impact of the One Child Policy, which meant that there’s fewer people to support you in retirement and the breakdown of the sort of social security system in the 90s which has never really fully recovered are some of the factors that are really sort of supporting that high level of saving.  Essentially, it’s about supporting yourself based on a case of unemployment or in the case of your retirement because the Government can’t support you longer term.

I suppose that’s why it’s going to take so long to change that.  These are big structural issues that can’t be shifted overnight. 

GB:  Yeah, and there’s been talk of widespread social safety nets introduced for some time, but it’s been something that’s had a really slow path to reform and progress, but it’s perhaps something that they really need to intensify.  Perhaps, the needs trumpet consumption longer term, that this might be one of the policy changes that actually occurs in response to this trade dispute with the US.

Just on the trade dispute and back to where we started the interview, how worried do you think Australian investors, particularly those who are in resources stocks should be about the impact of the trade war on the Chinese economy.

GB:  Every time we try and look at the impact for Australia, we’re kind of left with that classic kind of converse response of, on one hand… We sort of think there’s some risks but there’s also the potential for some benefits, and we’re still not 100% sure where Australians sit, particularly given the likelihood of this increased infrastructure spending.  It may increase demand for things like steel, fighting for its demand for iron ore and coal exports too.  There’s a potential benefit to that.  What we tend to see is the bulk of our resource’s exports are consumed domestically within China, so we don’t think there’s a big flow-through effect from the impact of the tariffs.

But in saying that, overall, we expect the economy to be a little bit weaker and that can flow through to international income and therefore, demand for some of our other exports, particularly things like education and tourism.  There’s some pay points there but I don’t think resources are necessarily going to be one that slides too much.

That’s great to know, Gerard, thank you very much.

GB:  Not a problem, always happy to talk.

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And now let’s talk to Ben Grubb, former Fairfax Tech Editor and now freelance, about the great saga of the spyware on our phones.  Ben, last time we spoke in August we talked about the Government’s desire to setup a backdoor to phones and so on.  You said that they were trying to make it sound like a side-door, but it actually is a backdoor, to get around encryption.  They’ve actually gone ahead and drafted the legislation and apparently, they had 15,000 comments in the consultation, 15,000!

BG:  That’s right, Alan.  Now, it would be important to note that 14,000 or so of them were form letters that were setup by a group called Digital Rights Watch.  A significant number were petition style submissions from privacy advocates, people who are quite interested in ensuring their privacy stays intact.  But still, a number of technology companies, the Googles and Facebooks and Twitters of the world, remain worried.  The legislation was put out for draft when we were last speaking and then they received those submissions.  Then the Government decided to – I think it was about 7 or 10 days after submissions closed on that consultation, they put the legislation into Parliament. 

Lots of people are kind of upset that they seem to be rushing it through, but it’s going through and yet another consultation process in the Parliament and the House of Representatives, where again it will undergo some scrutiny.  The tech giants say that it will undermine encryption as we know it and by putting in a vulnerability for, let’s say, the good guys, i.e. law enforcement and our spy agencies, it means that it won’t stop the bad guys from finding those vulnerabilities.  The Government, meanwhile, said that it’s not introducing vulnerability, there’s nothing to worry, everything is A-Okay.

But you really can, I guess, sympathise with the Government.  The law enforcement agencies are telling them in a number of cases now, the high priority ASIO cases, they’re just simply unable to access the contents of communications.  Those messages that maybe terrorists and paedophiles are exchanging with each other and they say that we need to have a way that works for all and that’s kind of where we’re at at the moment, lots of angry tech giants and a government that has its law enforcement knocking on the door saying, “We need these changes.”  What was good to see, however, from the consultation process was they have decided, the Government, that is, to remove a requirement that would require the tech giants to remove security protections in the case of protecting the public revenue. 

Tax evaders, you’re off the hook, you can still talk in encrypted means.  That was just one of maybe two or three changes that they made.  There’s still no judicial oversight.  While you’d have to get a search warrant potentially to gain access to the messages, there’s still no independent judicial oversight to, I guess, judge whether what is being asked of a tech giant, to remove those security protections, is whether it’s proportional, whether it warrants it.   

Ben, just because something makes the tech giants angry, doesn’t make it bad.

BG:  Yeah, I know, that’s right, Alan.  I think most reasonable people would say that if a law enforcement agency goes and asks the judge for access to communications, whether they’re encrypted or not, I think they’d expect them to be able to protect them and to gain access.  I do think that there is going to have to be a compromise, what that compromise is though is what they’re arguing against.  I guess, the valid fear here is that by creating weaknesses in products, won’t stop the bad guys from also exploiting those weaknesses. 

How do you do it in a way that ensures that everyone is happy or slightly happier than they are now?  Because there is a threat to the tech giants that by doing what they’re being asked to do, will create systemic weaknesses.  If you look at the legislation versus the explanatory memorandum that explains the legislation, the explanatory memorandum says one thing, but it’s not followed through in the legislation.  Because, for various reasons, they say it would allow for the bad actors to exploit it and that’s not good, they say. 

Ben, you’ve been kicking around technology for a long time.  Do you think there’s some way for a middle ground to be reached here, for the law enforcement agencies to get what they need, which is obviously access to encrypted data and conversations, while at the same time protecting us?  Or is it simply an on or off button, either it’s open or it’s not open?

BG:  I think it is on-off.  You can’t give one key to – it’s like the TSA key, right.  Even though they argue that it’s not a key here, it’s just like a side-door.  They don’t like the term, backdoor, perhaps because it’s got negative connotations that come with it.  But if you weaken a product or you provide a TSA style key that people, when they go to America you have to have a TSA lock and I think the TSA has the key, but what ended up happening was that TSA agents would take a photo of that key or they’d lose the key and the key would end up on eBay for anyone to purchase and now anyone can get into those suitcases very simply.  It just kind of undermines the security of the suitcase.

It’d be the same case here, you weaken it, or you provide another key that only the good people can access – bad guys are always going to find a way to exploit that, so I guess the question becomes for Australians, what do we think?  Do we think that this is one for the greater good?  And two, do we think that we need to go down this path?  Will more people die or less people die?  I think it should probably come down to that point.  We don’t have a lot of terrorist activity in Australia, so if we introduce something like this and people’s privacy is eroded, is it worth it?  I do tend to look back in history because we learn lessons from history and perhaps it’s an extreme, but in Nazi Germany, they used the census data, where they collected everyone’s religion, against the people. 

People voluntarily said, “I am Christian.”, “I am Jewish.”, and they gave that to the government hoping that they would use that data in a good way, but they turned that around and they gathered up all of the Jewish people and then killed them, murdered them.  That’s an extreme example where people’s privacy was eroded and then turned against them and we have to think about examples like that, where if we go down this path will it actually be sought for good?  Governments change over time, once you start doing something like this it’s very hard to go, “Oh, we’re not going to do this anymore.” 

It is very much an on/off switch and it’s an interesting path that we’re going down and we seem to be leading the world.  Everyone is looking at us, especially in The Five Eyes circles as to where we go with this next.

But it does seem to be that the Government has decided to go down this path, it’s ignored the consultation and it’s introduced a bill more or less unchanged.

BG:  Yes, and I was kind of predicting that they would make the changes that they have because it would seem silly to chase tax evaders.  This should be just for the most serious of crimes, the crimes where there is going to be life or death.  I think most people would expect there to be judicial oversight.  They would expect for there to be more transparency, reporting mechanisms… At the moment, you can just self-authorise, an officer in a number of instances could just go, “Okay, we need this, we need to do that.”  They can go to a tech company and offer them more and say, “Unless you do this, you’re going to be fined this amount every day until you actually do it.” 

The types of things that they could be asked to do, some people were even saying – this is the telecommunications industry, representing of Telstra and Vodafone and even the handset manufacturers, they’re saying that they could potentially see spyware pre-loaded on people’s smartphone before they even buy it.  There’s potential here for the scope to creep and I think the Government just needs to perhaps, slow down a little bit, listen to those concerns and then try to find what is somewhat of a middle ground.

Good on you, Ben, thanks.

BG:  Thank you, Alan.

And goodness me, Olivia Newton-John turned 70 yesterday, goodness gracious me!  Here she is with John Travolta singing, ‘You’re the One that I Want.’ From Grease, what a great song!

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That’s all from me, have a great week!

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