US theatrics obscuring debt issue
There's general disbelief that Republican opposition to President Barack Obama's healthcare and insurance makeover put this year's US budget into limbo and forced the partial closure of the government, but it is the mid-October deadline for the debt limit to be raised that really matters.
The government closure bears down on growth, but only gradually.
A stand-off on the debt ceiling, on the other hand, threatens a US debt default that would reverberate around the world.
The market bounce showed that there was still optimism that the government shutdown could turn out to be a circuit-breaker.
Republicans will get nowhere, capitulate, and do so in a way that kills their appetite for a brawl over the debt ceiling, so the theory goes - and if it is right a quick settlement of the budget brawl would be counter productive. The Republicans would need time, a week perhaps, to become totally dispirited as criticism of their tactic ramped up.
The great annoyance is that Washington's theatrics are overshadowing continuing signs of global recovery.
As the budget bill hit the wall and the shutdown commenced, the markets were hearing, for example, that US manufacturing activity grew at the fastest rate in nearly 2½ years in September, and that the jobs market had stabilised in Europe in August.
In the local market, stronger retail sales data and rising home prices helped investors ignore the US brawl for the time being.
Online jumping
The Australian Bureau of Statistics reported on Tuesday that merchandise retail sales rallied in August. On Wednesday, it redrew the retailing landscape.
Its August trade report revised trade numbers as far back as 1998, and the past three years are a massive statistical upgrade of how much international internet shopping Australians have been doing. More than $20 billion is added to the total.
The new numbers make Australia's trade balance and balance of payments look worse. They are also likely to revive calls for the threshold to be cut, extending the coverage of the Goods and Services Tax.
The bureau says the revisions more completely capture imports of goods that are priced below Australia's low value threshold of $1000, goods that come in by parcel post, notably. It estimates that goods with a value of only $50 million came in undetected in the September quarter of 1998.
In 2005 however, the threshold was lifted from $250 per item to $1000 per item, internet shopping took off, and serious licks of money started flying under the radar.
Revisions for the past three years that capture imports previously undetected decrease the surplus on goods and services for 2010-2011 by $7.3 billion, lower the surplus on goods and services in 2011-2012 by $6.8 billion, and increase the deficit on goods and services in the year to June 30 2013 by $7 billion.
Consumption goods accounted for 65 per cent of the revision in 2010-2011, 80.5 per cent of the revision in 2011-2012, and 95 per cent of the adjustment in the latest year to June.
That's a sign that it is online buying that is behind the rise.
The local retailers have been talking about intense online competition for years. This revision backs up their comments, and supports calls by Solomon Lew, Gerry Harvey and others for the threshold to at least be lowered. The states also want a lower threshold, because it would boost their GST income.
After fielding reports from the Productivity Commission and a special task force, the Labor government announced in December last year that the threshold would not be lowered.
A cut in the threshold would not be cost-effective until low-value parcels were processed more efficiently, the Productivity Commission decided, and Labor's assistant treasurer David Bradbury agreed, saying the cost of collecting revenue generated by a lower threshold would be greater than the amount of additional revenue collected.
Online sales only accounted for about 6 per cent of total retail sales in Australia, Bradbury said, adding that published data suggested that international online retailers accounted for only 1.5 per cent of total Australian retail sales.
That estimate appears to have been overtaken by the bureau's new number-work, however.
Its $7 billion adjustment for the latest year to June includes newly detected spending of $6.7 billion on consumption goods, for example. On my count, those imports alone are the equivalent of about 2.5 per cent of the total retail trade in Australia, and close to twice as much if food retailing is excluded.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Markets rose partly because investors viewed the partial US government shutdown as possibly preventing a worse confrontation over raising America’s US$16.7 trillion debt limit. There was also optimism from economic signs—US manufacturing grew at its fastest in nearly 2½ years and Europe’s jobs market had stabilised—while locally stronger retail sales and rising home prices helped Australian markets shrug off the Washington brawl for the time being.
The debt ceiling is the legal limit on how much the US government can borrow (about US$16.7 trillion in the article). The mid-October deadline matters because a stand-off over raising it could threaten a US debt default, which would reverberate around global markets; by contrast, the partial government shutdown was seen as having a more gradual effect on growth.
A US debt default would be a far more serious event than a temporary shutdown: the article warns it could reverberate around the world, undermining confidence and potentially disrupting global growth and markets. That’s why investors were closely watching whether political theatrics in Washington might escalate into a debt-ceiling crisis.
The ABS revised trade numbers back to 1998 and added more than A$20 billion to capture international internet shopping that had previously gone undetected. The revisions showed that low‑value online imports—especially parcel-post items—were much larger than recorded, driving a significant portion of recent trade adjustments.
The revisions made Australia’s trade balance and balance of payments look worse: they reduced the surplus on goods and services in 2010–11 by A$7.3 billion, lowered the surplus in 2011–12 by A$6.8 billion, and increased the deficit on goods and services for the year to June 30, 2013 by A$7 billion, largely because previously undetected online consumption goods were added.
Retailers such as Solomon Lew and Gerry Harvey and several states argue that the higher threshold (lifted to A$1,000 per item in 2005) lets international online purchases underreport imports and hurts local retail. Lowering the threshold would widen GST coverage and could boost state GST revenues by capturing more low‑value online imports.
After reports from the Productivity Commission and a task force, the Labor government said lowering the threshold wouldn’t be cost‑effective until low‑value parcels could be processed more efficiently. Assistant Treasurer David Bradbury noted the costs of collecting additional revenue could exceed the revenue gained, given published estimates of online sales at the time.
Investors should note the ABS’s scale of undetected online imports (more than A$20 billion added historically), the A$7 billion adjustment for the latest year—including A$6.7 billion on consumption goods—and the share of revisions attributed to consumption (65% in 2010–11, 80.5% in 2011–12, 95% in the year to June). These figures affect views on Australia’s retail sector, trade balance, GST policy debates and the broader economic picture.
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