Spinning the Budget

The Treasurer has a nice splash across the media today on why the Budget will be painful. The following from Yahoo7 is as good as any:

The second phase of the mining boom won’t produce the “rivers of gold” of government revenue like the former coalition government enjoyed and wasted, Treasurer Wayne Swan says.

In a keynote speech ahead of his fourth budget on May 10, Mr Swan will tell the Queensland Media Club on Wednesday that the consequences of the latest mining boom on the budget will be vastly different than the previous boom.

Unlike between 2004 and 2007 when tax revenues were revised up by a massive $334 billion cumulatively over the budget estimates, the current boom is expected to generate more modest inflows of revenue.

“Mining boom mark two will have all of the pressures of the first boom, without the surge in revenues,” Mr Swan will say.

This is because the current boom starts with an already high terms of trade and, as a greater supply of global commodities come on line, the terms of trade will gradually fall.

This means economic growth rates won’t be anything like those seen during the first boom, and that means revenues won’t grow so quickly.

Also, while the mining sector has accounted for around 20 per cent of corporate profits over the past decade, it has made up only 10 per cent of corporate tax revenues.

This is because the mining sector is highly capital intensive, and with a rapidly growing capital base, it means rapidly growing deductions.

The economy also suffers from a hangover of the global financial crisis, tighter credit conditions, subdued consumer spending, a high Australian dollar that is hurting some industries, and the impact of this summer’s natural disasters in the short term.

“This does not diminish the massive influx of activity in the private sector that will push the economy to its capacity and which will demand an intelligent policy response.”

He doubts that this budget will be popular and he will take “no joy” in making cuts.

An easier alternative would be to put these cuts off until later, but that would result in even harsher cuts down the track.

“We can’t and shouldn’t buy support for this budget, like our predecessors did.

“There won’t be rivers of gold like they wasted.”

Well, that’s got to go down as some new level in failed responsibility. First, the terms of trade are significantly higher now than they were during the first commodity boom, as this RBA chart shows clearly:

Second, it is true that the former government blew the proceeds of Boom I but it’s clearly untrue to claim that this government is doing anything different given it has so far failed to save a single cent of an even bigger boom.

Third, the jibe at the miners is well deserved but coming from the Treasurer prompts a cringe. It was he that was largely responsible for the repackaging of the Henry Review’s resource rent tax proposal. It was he too, therefore, that was responsible for the failed execution of that tax, which as we have seen over the past couple of months, would have boosted government revenue by at least $60 billion over the next decade, and as much as $100 billion. That sounds like a river of gold to me, going elsewhere.

Fourth, you’ll get no argument from me that the Australian economy has a post GFC hangover. But that isn’t a new idea. It’s been promulgated by the bloggers at MacroBusiness (in their former individual roles) for a year and before that in other fora. The Treasurer’s evocation of it now is simply an excuse for getting last year’s forecasts wrong.

All in all, a nice dose of spin for breakfast.

Houses and Holes

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.

Comments

  1. ‘An easier alternative would be to put these cuts off until later,But that would result in even harsher cut down the Track’

    Might I ask what Track are we on….and it doesn’t seem things get better….JR

    • The only Track this government is interested in is the one to re-election in 12/13. Budget surplus or bust!

    • Exactly. The anti-resources sentiment expressed by visitors here at MB has always confounded me.

    • If Ireland had its own currency and independent central bank (which it should) I’d rather run my business in Ireland than Australia.

      I’d have a weak currency and I could afford to buy a house.

      • It is only in recent times that you would have been able to afford a house – Ireland had a pretty wild housing bubble too. And what, you’d rather run a business in Ireland, right now? You jest.

        • I export >95%. So yes, an educated workforce with a weak currency and high unemployment would be ideal.

          • “I export >95%”

            Hmmmmm. The spokesman-for-the-trees’ very livelihood relies on “polluting” the planet.

            “So yes… high unemployment would be ideal.”

            Charming.

            [Wikipedia: The Lorax is a children’s book, written by Dr. Seuss and first published in 1971. It chronicles the plight of the environment and the Lorax, who speaks for the trees against the greedy Once-ler.]

          • David:

            Believe me, my business pollutes nothing apart from the electricity to run a few laptops. I export bits and bytes, not widgets.

            As I stated elsewhere, Ireland created its own problems by allowing its housing bubble to get out of control. Businesses like mine, that can benefit from a weak currency and an educated workforce where skills are (cough) affordable and plentiful, help drive the recovery.

            When Australia’s mining boom bursts there will be nothing but scorched earth in the non-resource tradeables sector. Foreign companies may well move in to take advantage of the weak AUD, and plentiful skilled labour. Sadly, there will be very few Australian businesses left to benefit.

          • Lorax, agree your observations above re Ireland, housing, our mining reliance. Unfortunately though, I doubt that any future national (or global) economy can hope to operate in primary reliance on trading in bits and bytes. People need to eat, for example, else serious civil unrest is the consequence. Just what we’re seeing abroad right now, in fact, and what the IMF and World Bank are saying has the world economy “one shock away from a full blown crisis”.

            The so-called “developed” economies’ increasingly reliance on trading bits and bytes (ie, FIRE industry), requiring trillions in “stimulus” to bail out of their misadventures, leading to commodity bubbles esp. in staple foods etc, appears to me a likely catalyst for WWIII in the not-too-distant future.

          • I have nothing to do with the FIRE industry. Does Google? Does Facebook? Does Microsoft?

            Just because you sell bits and bytes doesn’t mean you’re not selling real products.

    • Exactly.

      Quarry Australia is not the ‘clever country’ I imagined in my youth.

      In 21st century Australia, clever businesses (e.g. COH, CSL) are punished by the currency and told to ‘free up’ their employees so they work in the mines. IMO its a national tragedy that we will pay dearly for in the longer term, but then I’m biased.

      • The Clever Country. Not that hoary old chestnut! I cringe every time I hear it. Sorry Lorax, you fell for Hawkie’s spin.

        • So instead we’ve become the ‘dumb luck country’, where the way to get ahead is to speculate on property or small cap miners. For this the government rewards you with a juicy 50% tax concession.

          Pity the poor fools (like me) who develop home-grown technology and sell it to the world. They just get whacked on the head by the currency and are told to ‘free up’ their employees for the mining sector.

          Yes I’m bitter.

    • Not saying that MB is anti-resources, am saying that a such a sentiment is expressed by several regulars in the comments. Along with a ‘willing’ for the end of the resources boom is the concomitant collapse of China. These are not events to be desired. Same with Australia’s housing bubble. Collapse, no – gradual downward adjustment, yes.

      I’m pro a mixed economy. However, I admit to being somewhat pessimistic at our complacency (at all levels) to achieve anything other than the long established fallback on natural resources.

      A well considered carefully constructed non politically controlled SWF may be a start. Not the hastily cobbled together shambles presented by Rudd/Swan/Gillard. Why a carbon tax, why not generous tax concessions with initial tax free lead-in for science and business involved in the development of green technology. Oh, I forgot, we no longer care to fund scientific research. CSIRO has been a world leader in a number of areas, but it now scratches together an existence fighting bureaucratic budget cuts – and yet, as Mav points out, Swan finds $20 billion for the RBMS market. Recently read of the impact on a segment of the specialised electronic component market, largely out of Japan (post Earthquake). Listed other countries that were key suppliers – all the usual suspects – and Italy. Italy. Why not Australia. Because we are committing economic suicide by the gradual destruction of our manufacturing capabilities.

      I think we’ve a long way to go to establish a long-term effective mixed economy in this globalised world. Thank god for resources!

    • Yes, its totally self-serving, but I didn’t create Ireland’s problems. If Ireland ran its own monetary policy, businesses like mine would drive the recovery.

      Unfortunately for Ireland (and the other PIIGS) they’re chained to the Euro, so their recovery will be slow and painful.

          • I’m pretty much there. Its my very talented group of software engineers I feel for. They’d walk into great jobs in the US, but they all have families, commitments etc. They’ll probably end up doing tech support.

          • U.S may not serve talented I.T. professionals/engineers either, well not all parts. It is still better there than here (I’m told). I have gone from intense software development to mild here and there development for some customers that have ongoing support/further development work from previous projects. Its’ not much. One company has two guys from Arizona that ended up here cause I.T. turned to a dump there. Funny world.

            I’ve started importing goods into Australia and can vouch for what you say for jobs like driving a mining truck, importing pays quite well, can’t say I’d should have done this years ago though, cause I really love intense programming. Such development roles are not too common anymore.

            Think they’ll ever come back? (Rhetorical)