10/07/2012 - 09:06

Analysis: waiting for Labor to admit failure on budget

10/07/2012 - 09:06

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It is an odd comparison, but there is a link between waiting for the sun to rise in the morning, and waiting for the Australian Government to admit that it will fail to deliver its often promised budget surplus.

What both events have in common is that without a miracle, they are inevitable.

There’s no point in waffling on about the sun always rising. That’s a subject best left to scientists and theologians.

There is, however, a lot to be said about the budget because over the past few days two significant developments have occurred.

Firstly, the government has accelerated its rate of spending via its Household Assistance Package, and secondly Australia’s all-important resources sector hit a few more speed bumps.

Given that handing out money first requires someone to earn the money and the problem should become clearer, except for readers who subscribe to “cargo cult” economics – a primitive belief that wealth arrives in the belly of a large plane.

On the spending front, which is part of a policy to shore up support for an unpopular government, you would have to blind and deaf to not have noticed the advertising blitz promoting tax cuts, clean-energy advance payments, lump sum family benefits, increased low-income supplements, and other goodies.

On the income front there was a steady stream of bad news which started with confirmation that power costs are rising rapidly, even without the assistance of the carbon tax. Going green, it seems, is a bigger impost on electricity bills than a tax on carbon dioxide emissions.

Overseas, however, is where the bad news is really starting to build, and which will test Australia’s status as an economic island.

Growth in China continues to slow even as our most important export market rushes to adjust its focus from export-led production of manufactured goods, to internal consumption. Growth in the U.S. has also stalled, and Europe is not growing at all. Quite the reverse, actually.

Little wonder then that three fresh items of bad resources news lobbed in a matter of days, consisting of:

  • The “lump” premium for top quality iron ore disappearing, meaning that the best material is being sold at a similar price to the poorest, a hint that a substantial overall fall in the iron ore price is on the horizon.
  • Alcoa, an important business in south-west WA, reported a surprise loss in the June quarter, and
  • Iluka hit the panic button in regard to demand for titanium dioxide and zircon, two of the fundamental building blocks of a modern economy – titanium dioxide in paint, zircon in tiles and bathroom ceramics.

On their own, each of those events might be explained as uniquely applicable to a particular industry. Taken together, and wrapped into the sharp fall in thermal (electricity-producing) coal prices, and it is obvious that Australia’s terms of trade are in for a thrashing.

So far, the wave of grim news as far as minerals demand goes has not broken across the Australian dollar, but that too is probably just a matter of time, or a function of Australia looking good because everyone else looks worse.

The big issue, which has been lost in the political shenanigans in the break-up of the Labor/Green marriage of convenience, is that the Australian Government is indulging in a spending spree just as the rest of the world sinks back into recession, and parts into depression.

Perhaps the only unknown is whether the government will quickly admit that it has a budget problem, or whether the bureaucrats in Canberra will take time to realise that the sunny days of May when the budget was delivered have been blown away by winter storms.

For Australia’s sake it would be good if the government acknowledged the rapid change in world markets which are delivering a sharp deterioration in the country’s trade performance, and did something really sensible – and stopped spending like a drunken sailor.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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