Eventually, the piper has to be paid

‘A man before his time’ isn’t a description many would associate with the prime minister, but the federal budget may put him in that category.

Let the debate begin. Whether or not you agree with the belt-tightening approach of the federal budget one outcome is certain – the truth about the country’s economy will finally be aired, which is not a bad thing for Western Australia.

What the rest of the country will discover, despite the objections of anti-mining protestors, is that without the resources sector of WA and Queensland, the Australian economy would be edging towards terminal decline.

As it is, the financial position of all Australian governments is so poor that if they were privately owned businesses they would be on the edge of insolvency.

The fact that ratings agency Standard & Poor’s last week raised the possible re-evaluation of Australia’s triple-A credit rating is a sign of what the future may hold without a radical change to the way the country is run.

By proposing a crackdown on most forms of social welfare spending, the government has dragged into the open the fact that Australia’s debt levels are rising at a faster rate than the rest of the developed world.

We might not be in the same poor condition as much of Europe, but the trend is obvious.

Without a start being made now to fix the debt issue, the Australian economy will come crashing down at some time in the future, and perhaps sooner than most people expect if the world experiences a repeat of the 2008 GFC.

It is likely that Prime Minister Tony Abbott will pay a high political price at the next election for exposing the debt issue and the fact that most Australians have been enjoying a debt-funded lifestyle they cannot afford.

WA, thanks in part to the way revenue collected by the GST is distributed, is guilty of overspending; though it is the GST situation which best illustrates the extent of the country’s economic problems.

When it was designed as a ‘states’ tax’, the idea was that GST revenue would flow back at roughly the rate it was collected. In other words, when people in WA pay the 10 per cent GST they could reasonably expect a return to the state government of an amount equivalent to that paid in GST.

What’s happened, however, is that the Commonwealth Grants Commission, which dispenses the GST revenue, has found that WA’s economy is performing better than other states, thanks largely to its flow of mineral royalties, and should get back just 5 per cent of the national GST revenue raised.

On one level it is possible to see that this is a way to balance the needs of all Australians by spending tax revenue where it is most needed, which today means allocating a disproportionate amount of GST to weaker states, such as Tasmania and South Australia.

The problem with the GST situation is that it is being used to prop up regions of the country that are showing few signs of lifting their financial performance, thanks to an inability to compete in world markets in the way WA is able to compete.

What WA has done, because it had no choice given its lack of a manufacturing base, is encourage its resources sector to the point where it is able to compete, and win, in global markets.

The Commonwealth Grants Commission is extracting a price from WA for the state’s success, which is an absurd way to run a country because the logical solution is not to weaken the best parts of a business but rather to force the weaker parts to become stronger.

If unchecked, over time, WA will receive back none of the GST paid by its residents, with every dollar going to those states that have not found a way to compete, or have blocked the development of industries that could compete.

The best example of that approach today is the refusal of NSW to permit the development of a coal-seam gas industry, which will force a dramatic increase in power costs in that state and further weaken its industries from competing in international markets.

Mr Abbott’s problem is that he might be a man before his time because most Australians do not yet see the financial troubles ahead, meaning they will only embrace a fix after the crisis hits.

It is possible that in trying to head off that crisis, Mr Abbott has signed his political death warrant.

Nickel speculation

Nickel, which has played a leading role at the start of most resources booms, is showing signs of being another reason for the rest of Australia to envy WA while also ensuring the financial longevity of the country’s highest profile senator, Clive Palmer.

According to some investment bank analysts the recent upward run in the nickel price has just started, with a target price of $US13 a pound in two years-time, more than double the $US6/lb of a few months ago and 45 per cent higher than the latest price of around $US9/lb.

A lot could go wrong between now and 2016, including Indonesia revoking its ban on the export of unprocessed ore, which is the primary reason for the recent strength in the nickel market.

However, Macquarie Bank reckons that even if Indonesia changes its policy, a global shortfall in nickel supply is emerging, with a glut of nickel available during the past three years flipping into a significant shortfall thanks to a global economic recovery.

Macquarie’s latest forecast is for a nickel shortfall in each of the next six years, which could drive the price as high as $US17/lb in 2018, ensuring high levels of profitability for WA’s nickel mines and the survival of Mr Palmer’s Yabulu nickel refinery in Queensland.

Paladin pounded

One local star facing a more difficult future is the uranium producer Paladin Energy, which is suffering from a persistently low uranium price showing few signs of recovery thanks to the world being awash in other forms of energy, including oil, gas and coal.

While true believers in Paladin have stuck with the company on its 96 per cent share-price slide from $10.44 in 2007 to recent trades at 40 cents, they will get no comfort from the 25 cent price forecast by Citigroup, which will take the fall to 97.6 per cent.