More cuts, more credit

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From News today comes the following:

Billions of dollars in spending cuts will be announced when the Government releases the latest official assessment of the national economy before Christmas.

The reductions will be aimed at bolstering the Government’s determination to deliver a Budget surplus in 2012-13.

And it will come in the face of persistent Opposition claims that the Government is driving Australia into dangerous levels of debt.

The trimming will be much narrower in scope than a mini-budget but will involve cuts totalling in the billions of dollars, not the millions, news.com.au understands.

Under this Government, spending adjustments have been made to coincide with releases of the Mid-Year Economic and Fiscal Outlook (MYEFO), the Treasury’s review of national economic performance.

This time the degree of urgency has been ramped up by the economic woes in Europe and to a degree the United States, which are having a global consequences, including on our revenue from trade.

While sources down-played the prospect of a mini-budget, reported in the Financial Review this morning, they confirmed that work had begun on areas for spending reductions, and stressed the task would not be easy.

…”Maintaining our fiscal rigour is absolutely critical at a time when global financial markets are punishing those without discipline. One of Australia’s great strengths is our very low level of public debt – it’s less than a tenth of the average across major advanced economies.

“Our record of fiscal discipline helps underpin confidence in our economy and supports job creation. It also gives the Reserve Bank room to move on interest rates, as we saw earlier this month.'”

Hmmm…there’s a second piece of news this morning that rather clarifies this statement. From Fairfax:

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CBA’s quarterly update follows full-year earnings announcement by rivals National Australia Bank, Westpac and ANZ.

The top four banks raise about $100 billion annually from wholesale debt markets, primarily from Europe and the United States, and are now replacing low cost funds raised before the global financial crisis with funds carrying a margin 10 times higher.

The rising cost of funds thanks to the instability in Europe and falling loan demand is crimping profit growth and pushing banks to cut costs to try and maintain earnings growth.

I would rephrase Swan’s statement to something like ‘our record of fiscal discipline helps underpin confidence in our banks’, given the rating’s agencies open celebration of public support in the form of idled guarantees for the wholesale debt in question. And sadly, there is no sense whatsoever in Swan’s statements that he gives a hoot that by encouraging the RBA to cut rates further, the problem will only get worse as the banks instantly attempt to occupy any available economic space with cheap credit.

Over to you, central bank.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.