Population Growth Fuels Property Demand

Australia is experiencing its fastest growth in Net Overseas Migration (NOM) in four years, according to the latest figures released by the Australian Bureau of Statistics (ABS).

These new arrivals need somewhere to live, another factor in the elevated demand for property!

ABS Demography Director Beidar Cho said that in the year ending 30 September 2016, NOM increased by almost 9 per cent, adding 193,200 people to the Australian population.

“This is in contrast to the declines of NOM of over 10 per cent experienced during 2014 and early 2015,” said Ms Cho. “But the current growth of NOM is well short of the record during 2009, when over 300,000 people were added to the population.”

Compared with last year, Queensland had the fastest growing NOM, increasing by 19 per cent. New South Wales and Victoria remain popular destinations for migrants, growing by 11 per cent and 13 per cent respectively. Tasmania was the only other state or territory to see an increase of NOM compared to last year, increasing by 9 per cent.

Overall, Australia’s population grew by 348,700 people to reach 24.2 million by the end of September 2016.

Net overseas migration added 193,200 people to the population, and accounted for 55 per cent of Australia’s total population growth.

Natural increase contributed 155,500 additional people to Australia’s population, made up of 315,000 births and 159,500 deaths.

Over the year, net overseas migration was the major contributor to population change in New South Wales, Victoria and South Australia, whilst natural increase was the major contributor in all other states and territories.

Mortgage arrears trending upwards nationally

Mortgage arrears underlying prime residential mortgage backed securities (RMBS) have increased from 1.14% to 1.15% from the third to fourth quarter last year says S&P, as reported in Australian Broker.

These values are determined through the Standard & Poor’s Performance Index (SPIN), which measures the weighted average arrears of more than 30 days past due on residential loans in publicly and privately rates Australian RMBS transactions.

Analysts at S&P Global Ratings have said this increase is in line with expectations of a cyclical rise towards the end of the year.

While arrears in the fourth quarter were up by 19% year-on-year, levels remain far below the historical peak of 1.69% according to the S&P report, RMBS Performance Watch – Australia.

Reasons for these low levels of arrears include a low interest rate environment, and, for RMBS, seasoned loans with established payment histories, S&P Global Ratings analyst Narelle Coneybeare, told Australian Broker.

S&P predictions, however, indicate that arrears are likely to rise towards the decade-long average of 1.25% which may put some areas at risk.

“Areas where unemployment is high may be facing increasing pressure. The recent trend has, to date, been Queensland and WA facing the most pressure on arrears performance,” Coneybeare said.

New South Wales (NSW) and Victoria experienced low rates of mortgage arrears – supporting the stable SPIN levels found in the report. Together, these states account for around 55% of total prime RMBS exposures.

While the SPIN in NSW and Victoria helped to offset higher levels of arrears in other states, analysts warned that further interest rate rises could still have negative effects.

“The majority of underlying loans in the portfolio are variable-rate mortgages, and a rise in interest rates is likely to exacerbate debt serviceability pressures, particularly for borrowers with higher loan-to-value (LTV) ratios and limited refinancing prospects,” the report stated.

Breaking down by the states, the levels of 30+ day mortgage arrears, as well as the quarterly and annual changes are as follows:

Thirty-day arrears for non-conforming loans also increased from 4.36% to 4.43% from the third to fourth quarter last year, but were down from 4.63% in Q4 2015. The latest figure is also well below the 17.09% peak experienced after the financial crisis.

“The non-conforming arrears trend reflects a few factors, including low interest rates, accompanied by a relatively benign economic environment and stable unemployment conditions,” Coneybeare said.

“We’ve also observed changes in the overall mix of loans/borrower types in the nonconforming space, with more recent vintages having lower exposure to low-doc loans, as an example.”

RBNZ Official Cash Rate unchanged at 1.75 percent

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.

Macroeconomic indicators in advanced economies have been positive over the past two months.  However, major challenges remain with on-going surplus capacity in the global economy and extensive geo-political uncertainty.

Global headline inflation has increased, partly due to a rise in commodity prices, although oil prices have fallen more recently.  Core inflation has been low and stable. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.

The trade-weighted exchange rate has fallen 4 percent since February, partly in response to weaker dairy prices and reduced interest rate differentials.  This is an encouraging move, but further depreciation is needed to achieve more balanced growth.

Quarterly GDP was weaker than expected in the December quarter, but some of this is considered to be due to temporary factors.  The growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity.  Dairy prices have been volatile in recent auctions and uncertainty remains around future outcomes.

House price inflation has moderated, and in part reflects loan-to-value ratio restrictions and tighter lending conditions.  It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.

Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation.  Headline CPI will be variable over the next 12 months due to one-off effects from recent food and import price movements, but is expected to return to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.

Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.

Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation.  Headline CPI will be variable over the next 12 months due to one-off effects from recent food and import price movements, but is expected to return to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.

Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.

Spotting The Bubble

From The NewDaily.

Former Liberal leader John Hewson has openly said what others have been too afraid to: we’re in the midst of a property bubble.

Dr Hewson, who has a PhD in economics, said parts of Sydney and Melbourne (and possibly Brisbane) are in a “bubble” and a “housing crisis” that risks a US-style “big correction”.

“The bubble’s there because of the pace at which prices have risen. The market is now out of reach of so many people,” he told The New Daily.

“We have very strong demand from the natural rate of population growth plus immigration. But we’ve allowed that to be accentuated by investor demand, through artificial, favourable tax concessions; by foreign demand; and by self-managed super fund demand.”

This is a “difficult situation” to remedy, said Dr Hewson, a former Reserve Bank employee and Macquarie Bank director, because the Australian banks are “exposed” to high leverage on mortgages.

So any government intervention to slacken this artificially-stimulated demand risks dire consequences, he said. “There are no silver bullets.”

This followed his very frank comments to ABC Lateline on Tuesday night, where he repeated the warning of a property market “crisis” created by “neglect and drift”.

The former Liberal politician’s comments contrast starkly with those of major bank CEOs, big-name property developers like Harry Triguboff, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison, who have all assiduously avoided the B-word.

An economic ‘bubble’ is when prices rise far above the true economic value of an asset — in this case, dwellings.
Dr Hewson is at odds with many conservatives who believe in the ‘efficient market hypothesis’. This is an economic theory that says ‘bubbles’ cannot, by definition, exist because prices always reflect economic reality.

But he’s in good company with former Commonwealth Bank CEO David Murray, ASIC boss Greg Medcraft and Treasury secretary John Fraser.

The Reserve Bank, tasked by Parliament with preserving the “economic prosperity and welfare of the people of Australia”, recently strayed as close to candidness as is possible for a regulator that can panic markets with a single word.

Its latest coded warning: there has been “a build-up of risks associated with the housing market”.

This was buried at the bottom of the minutes of the RBA board’s March meeting, published on Tuesday. It was the briefest of mentions, but many experts read into it deeply.

The bank noted rising property prices in Melbourne and Sydney, the “considerable” number of apartments coming onto the market over the next few years, resurgent growth in investor lending, and household debt rising faster than household income.

The implicit warning was confirmed later on Tuesday when the Financial Review reported that three regulators – the RBA, ASIC and APRA – have formed a working group to explore tougher mortgage lending rules on the banks.

Whether the word “bubble” passes their lips or not, the experts are worried.

Is OPEC Losing Its Ability to Influence Oil Prices?

From The St. Louis Fed On The Economy Blog.

The Organization for Petroleum Exporting Countries (OPEC) has exerted a great deal of control over world-wide oil production and prices since 1960.1 The figure below shows the percentage of oil production by country for 2015.

OPEC

OPEC member nations made up 42 percent of world oil production, giving their production announcements significant weight. Historically, announcements from OPEC regarding future decreases in production have been accompanied by increases in prices.2

OPEC and Russia Agree to Cut Production

Late in 2016, OPEC and Russia agreed to cut production from 33.24 million barrels per day to between 32.5 and 33 million barrels per day in an effort to increase the price of oil. Prices had fallen from around $105 per barrel in June 2014 to around $30 per barrel in early 2016.

World oil production, on the other hand, increased 3.1 percent from 2014 to 2015. This increase is large in historical context; oil production has increased 1 percent on average per year since 1980.

Oil Prices

The next figure shows the time series of the price of oil measured by the spot price for West Texas Intermediate (WTI) over the past three years. The red lines indicate the timings of the announcement of the production reduction (Sept. 28) and the OPEC meeting to finalize this agreement (Nov. 30).

While prices have risen slightly since the announcement, neither of these events was accompanied by large spikes in oil prices.

Is OPEC Losing Its Impact on Prices?

So, why have oil prices not increased substantially? A combination of factors may have contributed (albeit not equally) to dampening the effect of the announcement.

First, oil inventories have accumulated over the past few years, and these accumulated inventories are preventing oil prices from rising quickly. Inventories dampen the effects of sudden changes in oil supply or demand.

When OPEC cuts production, supply is reduced, and Organization for Economic Cooperation and Development countries draw on their oil inventories to supplement the reduced production. The market price reaction to the production cut is delayed until the inventories are depleted. However, once inventories are drawn down, prices can be expected to rise.

Second, while OPEC members represent a large portion of oil production, a number of other countries—including the U.S.—account for 58 percent of the oil production and are not part of the OPEC agreement to reduce production.

U.S. Oil Production

The U.S., in particular, is projected to increase its production, especially if the price of oil experiences a sustained rise to more than $55 per barrel. In fact, prices above $35 per barrel are high enough to put some rigs into production.3

As prices increased through the summer of 2016, U.S. oil production rose, with the bulk of this increase coming from rigs in the Gulf of Mexico. The increase in production did not originate from the shale oil fields, suggesting that as prices rise, U.S. oil production can further increase.

In fact, U.S. oil production has increased to the point in which the U.S. has become an exporter. The figure below shows monthly U.S. oil exports.

BlogImage_OilExports_032117

Banning U.S. Oil Exports

Before 2015, the export of crude oil was banned in the U.S. The ban was a part of the Energy Policy and Conservation Act of 1975, and was meant to lessen the nation’s dependence on OPEC and foreign producers.

During the ban, the U.S. Department of Commerce could issue special licenses to allow certain producers to export specific types of crude oil, keeping exports just above zero. When technological advances increased the amount of oil production in the U.S., U.S. WTI prices started falling below global Brent oil prices. This gap motivated domestic producers to push back against the export ban, and Congress repealed it in December 2015.

Before the repeal, former President Barack Obama had already begun issuing more special licenses to export. Oil exports increased dramatically, from around 400,000 barrels per day at the end of 2015 to almost 700,000 in September 2016.

As the OPEC production restrictions take hold and global inventories are drawn down, the price of oil is expected to rise. This increase, however, may be gradual and prolonged, especially with non-OPEC countries having the ability to ramp up production.

Notes and References

1 OPEC currently has 13 member countries: Algeria, Iran, Iraq, Venezuela, Saudi Arabia, Kuwait, Nigeria, Qatar, the United Arab Emirates, Ecuador, Gabon, Libya and Angola. Indonesia suspended its membership late last year.

2 Lin, Sharon Xiaowen; and Tamvakis, Michael. “OPEC Announcements and Their Effects on Crude Oil Prices,” Energy Policy, February 2010, Vol. 38, Issue 2, pp. 1010-16.

3 Mlada, Sona. “North American Shale Breakeven Prices: What to Expect from 2017?” Rystad Energy, Feb. 16, 2017.

By Michael Owyang, Assistant Vice President, and Hannah G. Shell, Senior Research Associate

RBA Minutes Touch On Property Risks

The RBA minutes, out today, talks to risks in the housing sector.

Recent data continued to suggest that there had been a build-up of risks associated with the housing market. In some markets, conditions had been strong and prices were rising briskly, although in other markets prices were declining. In the eastern capital cities, a considerable additional supply of apartments was scheduled to come on stream over the next few years. Growth in rents had been the slowest for two decades. Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income. Supervisory measures had contributed to some strengthening of lending standards.

Dwelling investment had rebounded in the December quarter; much of the strength had been concentrated in New South Wales. Even though building approvals had fallen significantly in recent months, the substantial amount of building work in the pipeline suggested that dwelling investment would continue to contribute to growth in coming quarters. Conditions in established housing markets had continued to differ significantly across the country. Over recent months, conditions appeared to have strengthened in Sydney and had remained strong in Melbourne; these cities had continued to record brisk growth in housing prices, and auction clearance rates had remained high. Housing loan approvals and credit growth had picked up for investors, primarily in New South Wales and Victoria. In contrast, housing prices and rents had fallen in Perth for two years or so, and apartment prices had declined in Brisbane.

Rural exports had grown strongly in the December quarter, reflecting strong farm production following favourable weather conditions in many areas over the second half of 2016. As a result of this and the higher prices for bulk commodity exports, there had been a trade surplus in the December quarter for the first time in almost three years. The current account deficit had narrowed to less than 1 per cent of GDP, the smallest deficit since 1980; the trade surplus was partly offset by a widening in the net income deficit as some of the increase in mining profits had accrued to foreign owners.

Household consumption growth, which had been relatively subdued in mid 2016, picked up in the December quarter, consistent with retail sales. Liaison with retailers suggested that recent trading conditions had been around average and household perceptions of their personal finances had also been around average.

The pick-up in consumption growth stood in contrast to the ongoing weakness in labour incomes, with the household saving ratio declining in the December quarter. Members noted that over the past two decades movements in the Australian household saving ratio had been much larger than those in other similar economies. One contributing factor was likely to have been that Australia had experienced a much larger terms of trade cycle than other developed economies with significant commodity exports. Differences in the evolution of household saving ratios across the states suggested that the terms of trade had played an important role in households’ saving and spending decisions.

 

Inequality and the Decline in Labor Share of Income

From iMFdirect.

As discussed in the IMF’s G20 Note, and a blog last week by IMF Managing Director Christine Lagarde, a forthcoming chapter of the World Economic Outlook seeks to understand the decline in the labor share of income (that is, the share of national income paid in wages, including benefits, to workers) in many countries around the world. These downward trends can have potentially large and complex social implications, including a rise in income inequality.

This chart shows that advanced economies that experienced a larger decline in their price of investment goods (such as computers, and other information and communications technologies), relative to consumption goods, saw a larger decline in their labor share of income. Declines in the relative price of investment goods across countries were, to a large extent, driven by rapid advances in technology. But these declines varied across countries depending on their investment and consumption patterns, including their reliance on commodity trade.

For example, the decline was larger in countries with a higher share of machinery and equipment in their overall investment (e.g., US and Germany), while it was smaller in countries reliant on service industries, particularly tourism and finance, such as Cyprus, Belgium, and Sweden, or on commodity exports, such as Canada and Norway.  A larger decline in the relative price of investment goods in turn, presented firms with stronger incentives to replace jobs with machines, more so in countries and sectors with a higher share of so-called “routine” occupations, particularly in the manufacturing sector.

The chapter also looks at strategies policymakers can consider to support displaced labor. Some policies may be temporary in nature, for instance unemployment benefits, or active labor market policies, such as job training or subsidies. However, policymakers need to also consider policies of a longer-lasting duration, including retooling of income policies and tax systems. Further, redesign of education and training policies to prepare people for rapid technological changes will be key.

See recent blog on Maintaining the Positive Momentum of the Global Economy by the IMF Managing Director, Christine Lagarde and the IMF G-20 surveillance note.

The Productivity Conundrum

Andy Haldane, the Bank of England’s Chief Economist, explores possible reasons for why productivity growth has consistently been underperforming in relation to expectations – the so-called ‘productivity puzzle’. He suggests that there should be more focus on the “long tail” of less efficient and productive firms, and that cross pollination with more innovative firms may assist.  “There is unlikely to be any single measure which puts productivity growth back on track. But measures which support the long tail of companies, currently operating at low levels of productivity, have the potential to do considerable good”. Harnessing digital platforms in this context may be important.

He says the slowdown of productivity growth has clearly been a global phenomenon, not a UK-specific one. From 1950 to 1970, median global productivity growth averaged 1.9% per year. Since 1980, it has averaged 0.3% per year. Whatever is driving the productivity puzzle, it has global rather than local roots. It seems to have started in the 1970’s and it impacts both advanced and emerging markets.

Productivity growth has consistently underperformed relative to expectations, since at least the global financial crisis. This tale of productivity disappointment, in forecasting and in performance, has been extensively debated and analysed over recent years. Some have called it the “productivity puzzle”.

With each year that passes, and as each new turning point in productivity has failed to materialise, this mystery has deepened. This has led some to conjecture that the world may have entered a new epoch of sub-par productivity growth, an era of secular stagnation. The secular stagnation hypothesis is striking in its gloomy implications for future growth in living standards.

It contrasts with a second topical hypothesis. This posits that we may be on the cusp of a Second Machine Age or Fourth Industrial Revolution, an era of secular innovation.4 This might arise from the rise of the robots, artificial intelligence, Big Data, the Internet of Things and the like. Because of its impact on future living standards, the winner of this secular struggle – stagnation versus innovation – carries enormous societal implications.

A second issue, every bit as topical and important, concerns the distribution of gains in living standards. Specifically, there has been mounting concern over a number of years about rising levels of within-country inequality across a number of countries.

What are the causes of this trend? Is it mere mismeasurement? A fall-out from the financial crisis? The result of monetary policy? Slowing Innovation? Or slowing diffusion rates of innovation?

Sectoral shifts in the economy could plausibly account for some of the fall in productivity growth. There has been a secular shift over time away from manufacturing and towards services, with the employment share in manufacturing having fallen from 17% to 7% since 1990. Because productivity growth in manufacturing is higher than in services, this shift could plausibly account for some of the fall in aggregate productivity growth. Even if we correct for this compositional effect, however, the slowdown in UK productivity growth remains.

Tackling the Productivity Puzzle

There has been no shortage of public policy ideas over recent years for boosting productivity growth. Reports by the IMF and OECD have suggested measures ranging from increased infrastructure spending to improved education and training programmes.58 Earlier this year, the UK Government issued a Green Paper setting out various pillars to support productivity.

In generic terms, these policy measures fall into three categories. First, there are measures which support all companies, irrespective of sector, region or characteristic.

Second, there are measures which support technological innovation – the creation and growth of frontier firms.

A third category of policy measure focusses on the fortunes, not of innovative frontier companies, but the long tail of low-productivity non-frontier firms. These companies have tended to be focussed on somewhat less historically. Indeed, their large numbers and disparate characteristics may be one reason why this is the case. Yet given their scale, the returns to modest improvements in these firms could be dramatic.

As a thought experiment, imagine productivity growth in the second, third and fourth quartiles of the distribution of UK firms’ productivity could be boosted to match the productivity of the quartile above. That sounds ambitious but achievable. Arithmetically, that would deliver a boost to aggregate UK productivity of around 13%, taking the UK to within 90-95% of German and French levels of productivity respectively.

One practical way of doing so is by pairing up companies, frontier and non-frontier, to enable the sharing of best practices. This is effectively a mentoring scheme for firms, the like of which is already common among individuals. What would be in it for frontier companies? A more productive supply chain is clearly in their interests. The public sector could also play a useful nudging role in its procurement practices.

A more ambitious idea still, which I have been considering with Philip Bond, is to develop a virtual environment which would enable companies to simulate changes to their business processes and practices. These platforms are already used by many frontier firms to assess the impact of new technologies and processes on their business. These tools can be created, and tailored to companies’ circumstances, at relatively low cost. This makes them a potentially cost-effective way of facilitating diffusion to the long tail.

 

 

 

Why Using Super For Housing Is Wrong

Interesting modelling from from Rice Warner Consultants, which shows that extracting money from superannuation to facilitate a property purchase will cost in later life and put a greater burden on state pensions down the track.

Universal superannuation was first provided to most Australian employees through industrial awards from 1986 and then via the SG from 1992. The original benefit “award super” was provided in lieu of a national increase in wages. Many members have wanted to get their hands on their deferred pay and there have been constant calls to allow young members to use their accrued super benefits as a housing deposit. Many of those with vested interests in the property industry have been touting the idea ever since.

The superannuation industry has tirelessly pointed out to various governments that the mandatory employer contribution is not sufficient to provide all Australians with a comfortable retirement. That is why, it is planned to increase contributions from the current level of 9.5% of salary to 12% by 2025. Given this, it is nonsensical to dilute retirement benefits further by allowing benefits to be used for other purposes.

The Financial System Inquiry (2014) recognised this and recommended the government adopt the objective of superannuation as providing income in retirement to substitute or supplement the Age Pension. Last November, the Financial Services Minister Kelly O’ Dwyer accepted the FSI recommendation without modification and it will become law as soon as a Senate committee has finished discussing the finer details of how this simple phrase should be worded.

Despite this clear objective, the Assistant Treasurer Michael Sukkar has ignored his own policy and this week suggested that he is reviewing whether young people could use their superannuation benefit as a deposit to buy a home. Perhaps he will regret this when he realises what such an asinine policy would cost future governments in increased Age Pension costs.

This policy would create higher activity and would push up the price of housing as more people compete for the same amount of housing stock. It would benefit real estate agents and mortgage brokers who would get higher commission without needing to do any extra work – one of the consequences of distorting capital markets. State governments would also benefit from the higher stamp duties on inflated house prices. Again, rewarding an inefficient tax.

Self-sufficiency in retirement

We know that current levels of superannuation savings will not make people self-sufficient in retirement. If we look at people who have attained the retirement age, some 45% are currently on a full Age Pension and 31% are on a part pension. That means only 24% are not drawing a government benefit – and some of these are still working.

In 30 years, we estimate that the higher levels of superannuation benefits and a small increase in the pension eligibility age will push down the numbers on a full Age Pension to 33% with a corresponding rise in those on the part pension to 45%. However, the numbers who are self-sufficient will not change much at all. This shows that people will need to put more of their own money into super to become self-sufficient and they certainly cannot afford to take any out before retirement.

We have modelled the impact on a member aged 35 on average earnings taking $100,000 out of their super account to use as a housing deposit. Our young member now loses the power of compound interest and, assuming they only receive SG contributions and don’t top up their super later in life, they will draw an extra $92,000 (present value) in Age Pension payments in their retirement years.

So, the Federal Government allows someone to draw $100,000 and then pays them an extra welfare benefit of $92,000 later in life!

Some have suggested the super fund would simply lend the money to the member and it would be repaid. This would reduce the pain, though the member would still lose out on years of fund earnings – and investment returns make up a much larger component of a retirement benefit than contributions made throughout a career. The fund administrators would also need to keep records of this new activity which will increase fees for all members.

Clearly, there are far cheaper ways of getting people into home ownership, by looking at addressing the supply and demand for housing in our capital cities. Using super as a piecemeal solution is not the way to fix the housing problem.

US Budget “Deconstructs The Administrative State”

The Economist produced this graphic which shows the radical shift in US budget policy and says it shows a move to “deconstruct the administrative state”.

STEPHEN BANNON, President Donald Trump’s chief strategist, famously promised the “deconstruction of the administrative state”. On March 16th, the Trump administration took its first step toward achieving Mr Bannon’s vision by proposing a budget that makes steep cuts to domestic programmes.

Not all departments would suffer. Mr Trump’s budget proposal, which covers $1.1trn of discretionary spending for the 2018 fiscal year, requests an additional $52bn for the Department of Defence and $2.8bn for the Department of Homeland Security. The majority of this additional spending would go towards what the administration calls “urgent warfighting readiness needs” including fighter jets, drones, missiles and weapons systems. At least $2.6bn would be spent on the construction of a wall on the southern border, a project which could eventually cost as much as $22bn. An additional $1.5bn would go towards the expanded detention, transport and removal of illegal immigrants.

To pay for this build-up in defence and border protection, Mr Trump would slash budgets across the federal government. Under his proposal, with a familar title of “America First: A Budget Blueprint to Make America Great Again,” the Department of Health and Human Services would be cut by $13bn or 16%, the State Department would lose $11bn or 29% and the Department of Education would see its funding fall $9bn or 14%. The Environmental Protection Agency, widely expected to face the steepest cuts under the Trump administration, would be reduced by a whopping 31%, eliminating 50 programmes and 3,200 jobs.

How Mr Trump’s budget would affect the broader economy is still unclear. Despite calling the national debt a “crisis”, the proposal would keep overall spending at roughly the same level. Given Mr Trump’s zeal for tax cuts and frequent promise for massive infrastructure spending, deficits may even increase. The administration will not release its full budget—complete with ten-year spending and revenue projections—until May.

Of course, the president’s budget is only a wish list. It is Congress that ultimately controls the government’s purse strings. And at the moment, many lawmakers are wary of deconstructing the administrative state just yet. When asked on February 28th about the Trump administration’s proposed cuts to the State Department, Senator Lindsey Graham of South Carolina told reporters the president’s budget is “dead on arrival”.