Having followed ever increasing debt being issued by the Government, it is probably fair to say that the Government finances appear to be improving. As previously noted, the RBA released Federal taxation figures on the 31st October 2011. Individual, company, and superannuation tax collection is on the rise. Since April 2011, Individual taxes have risen (annualised) $6 Billion, Company taxes $7 Billion, and superannuation $1.6 Billion, whilst only increasing total expenditure by $3 Billion. Increasing tax collection certainly points to higher incomes and a healthier consumer and business sector.
An improving budget position flows naturally to the debt being issued by the Government. The annualised net financial debt issued has fallen from $57 Billion increase in April to currently a $37 Billion increase. Other than the Government debt being issued, the Government maintains a surplus cash account with the RBA. This account has a balance that has increased by $16 Billion in a few weeks, as quarterly tax flows are collected. Relative to most of the developed world, Australia appears to be well placed.
Given the lower inflation outcomes, and the propensity of consumers to pay down debt rather than spend, it is almost certain (in my view) that the RBA will lower rates again in December. The RBA doesn't meet in January, so the next meeting is in February, so next month is the RBA's last chance to respond to Europe's growing credit crisis. The one year bank bill rate is 3.88%, so with cash rates at 4.5% the market is pricing in large interest rate cuts. As with the dramatic rate cuts in 2008/09, the drop in interest rates will flow straight to the consumer.
The overriding macro issue though is what appears to be a growing consensus of a doomed Eurozone. Prior to the Euro currency, each country could depreciate their domestic currency to try and regain their competitiveness. You socially can't drop wage rates, but you certainly can drop the value of your currency. But this option is not available to the members of the Eurozone since each country borrows 100% of its funds in a foreign currency (the Euro). The Euro is not a relationship of a central bank prepared to support debt issued by its member states as the US Federal reserve would support the issue of their Government debt. Socially the debtor nations of Greece, Italy, Portugal and Spain will not support the severe austerity required to have a chance of repaying their debts. Similarly the surplus nations like Germany do not want to give a free kick to nations who spent more than they could produce. In a typical prisoner's dilemma it would appear that co-operation between the member states would benefit everyone, but it is unlikely to happen. If the Eurozone unilaterally guaranteed all member states debts then the yield on bonds would fall to below 2%, giving countries a chance to repay their debts. With Italian yields near 7% and over $2 Trillion in debts, the chance of repayment seems remote. But if the debtor nations default the surplus nations, and the world, will suffer as well. As Churchill said about the Americans, Europe will eventually do the right thing after they have tried everything else.