Swan’s unpopular razor

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From AAP this morning:

Deloitte Access Economics director Chris Richardson said the government planned to cut spending when the Reserve Bank of Australia (RBA) had cut its cash rate in early November.

The RBA cut the cash rate from 4.75 per cent to 4.5 per cent to provide some stimulus for a slowing economy.

“What the government is doing here is actually taking money back out again solely to get a surplus next year,” Mr Richardson told ABC Radio on Tuesday.

“It is not clear that it is smart to have the Reserve Bank tipping money but the government then taking it back out when the outlook especially with Europe is somewhat fraught.”

…Mr Richardson said the government’s commitment to return to the budget to surplus could be hit if the crisis in Europe deteriorates.

“If next week Europe blows up, we would have to throw up a sudden U-turn in Australia’s budget.”

I can see I’m going to have to keep saying this until I’m blue in the face. Richardson is making this judgement from an overly narrow assessment of the Australian economy. In my view, the government has no choice but to keep cutting and aiming for surplus. From Bloomberg:

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Yields on bonds of Australian banks reached a record high relative to debt of the nation’s nonfinancial borrowers as Europe’s debt crisis threatens to freeze credit markets.

The average yield on financial bonds was 13 basis points higher than on corporate debt on November 25, after the gap reached 17 last month, the widest premium in Bank of America Merrill Lynch data going back to 1997. Bank yields averaged eight basis points lower than corporate debt in the period. The premium Westpac’s five-year notes offer over similar- maturity securities from retailer Woolworths Ltd. has increased 20 basis points since October 31 to a three-month high of 56, prices from ANZ show.

…Lenders including Commonwealth Bank, Westpac, ANZ and National Australia Bank Ltd., may need to sell about $144 billion of bonds in the 12 months ended June, 2012, according to a July research report from Deutsche Bank.

…Trading conditions in the euro area have deteriorated this month as the region’s sovereign debt crisis deepens. Germany failed to get bids for 35 per cent of the 10-year bonds offered for sale on November 23 and traders were left seeking prices in the aftermath of a Spanish debt sale on November 17.

“Immediately after the auction, screens went blank,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam, referring to trading platforms where dealers post bids and offers for government bonds.

I mean, come on, if this continues, the Budget will have to guarantee bank borrowing, sooner rather than later. Do you really want to go into that with a Budget that can longer illustrate a convincing path to surplus when we’ve still got decent growth driven by reasonable spending and wild levels of capex?

Yes, stimulus may come but let’s wait until it’s required. And it’s not going to be as big as many think, either.

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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.