22/11/2011 - 08:44

Analysis: Australia fiddles while Europe burns

22/11/2011 - 08:44


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Is Australia really an island when it comes to the economy? That’s a question with a potentially nasty answer as we fiddle with incomprehensible taxes and the rest of the world burns.

Twice in the past few weeks the Australian Government has rammed through Parliament new taxes which even the smartest people in the country cannot fully explain or justify.

The carbon tax will impose an additional cost on an already hard hit manufacturing sector and, by the admissions of its loudest supporters, make no difference to global carbon pollution or alleviate in any way potential climate change.

The mining tax is more understandable, but an appalling case of a law designed by committee and fiddled at the edges by the independent members of Parliament to the point where it threatens to slow the one good thing going for Australia in a world sliding into a deep recession.

Meanwhile, in Europe, countries other than Germany are crashing into the deepest crisis since the 1930s with serious discussion starting about whether the extreme austerity measures being forced on Greece and Italy will lead to a rise in militant opposition.

If the outlook for the global economy was not so grim, and if Australia could be assured of never-ending demand for its minerals, metals, food and fibre, then we might be able to indulge in the luxury of big new taxes, and the redistribution of those taxes to poor states, and poor people.

But, that’s when two problems emerge, both with the potential to do severe damage in the future.

The first is the timing of the carbon and mining taxes, hitting the economy at precisely the wrong time, when a boom is coming to an end, and demand for our exports is starting to slow as evident in the falling value of the dollar.

Coal and iron ore prices are high today, but they were a lot higher when the mining tax was hatched, and the outlook is for a continued slide in price as new mines come on stream to meet falling demand. Even gold, the next metal in the sights of the mining tax, has been falling sharply, another tell-tale sign that the world is struggling to grow.

The second, and potentially more serious problem, is what the Australian Government does with the money raised by its new taxes, and this is where the European experience should be teaching us a lesson.

Over there, decades of economic mismanagement in the name of political expediency, saw the creation of a social welfare net that cost more than most countries could afford. Quite simply, Greece, Italy, and the rest of the gang, were bankrupted by politicians buying votes through hand-outs and neglecting the real economy.

Australia, astonishingly given the European example in every newspaper every day, is about to do precisely the same thing. Take tax extracted from industry and redistribute it in the form of hand-outs to prop up failed states such as Tasmania, and social welfare recipients in Victoria and South Australia who refuse to move where the jobs are.

What ought to be happening is that the proceeds of the mining tax, and perhaps the carbon tax (if we have to have them), should be heading into a sovereign wealth fund beyond the reach of politicians, and not frittered away in a vote-buying spree ahead of the next federal election.

The core problem for Australia is the same as that which is destroying Europe. In a struggle between politics and economics, politics always wins the first round in a democracy because that’s where the votes are. In time, economics has a terrible revenge.

Which leads back to that opening question – is Australia an island, and while the obvious answer is yes, the correct answer is no, especially in a world where business (especially banking) has become so tightly connected.

Australia, with its hopelessly hung Parliament, is making alarmingly bad economic decisions in the name of politics, a fact which even Blind Freddie (and his dog) can see.


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