The rude awakening has finally started. Five years late it appears that Canberra has discovered that the commodity super-cycle upon which our future was hung was a passing fad, that its commodity-dependent Budget is a picture of volatility, and that Australian growth – which was to enjoy decades of smooth prosperity in its structural adjustment to greater commodity intensity – is instead entering a lost decade of super-bust struggle and strife.
Delivering the message is, ironically, Glenn Stevens, one of the great champions of Australian exceptionalism, from the AFR:
The Abbott government has abandoned the search for big May budget savings, will not meet its forecast 2018 return to surplus and is privately acknowledging collapsing revenue means it is highly unlikely to offer tax cuts at the next federal election.
The dramatic dumping of long-standing goals came as a two-day meeting of the federal cabinet heard a gloomy update from Reserve Bank of Australia governor Glenn Stevens and Treasury secretary John Fraser.
…Senior sources conceded to The Australian Financial Reviewthat tightening fiscal policy when the central bank was easing monetary policy made little sense. Both the RBA and the government are now focused on doing whatever is possible to bolster confidence.
…Goldman Sachs Australia chief economist Tim Toohey released a bleak forecast that Australia may lose at least $500 billion in revenue in the next decade as a result of collapsing iron ore and liquified natural gas prices.
…The price rout is expected to wipe at least $40 billion from the federal budget revenue over the next four years.
The Australian adds more:
Mr Toohey noted that late last year, Mr Abbott had expressed the view that the fall in commodity prices was simply a “cyclical” downturn, suggesting they would bounce back up.
“Treasury and the Reserve Bank have come to the realisation that it’s a structural event, and to reflect that you have to think about the impact of a nominal event (a fall in prices) cascading back into the real economy with weaker profits, weaker tax revenue and weaker investment outlook.
Well, at least they’ve discovered part of the truth now. It could have been another five years given the track record.
But there’s another half to the story that still lies beneath. Remember that the miracle economy has two halves to it. The first half is that we make our way in the world via commodity income. The second half is that that income is then leveraged using offshore debt and channeled almost exclusively into mortgages and house price inflation. It’s been a beautiful pro-cyclical punch bowl for thirty years.
Nobody yet is talking about the second part of the miracle and its great hangover in hugely leveraged banks and household debt. The Budget is only the first step in the unwind. Next will be the great deleveraging as the monetary and fiscal tanks run dry. This is not just a commodity cycle bust we’re headed into. It’s a total unwind of Australia’s extant economic model.
Sadly, it is too late to fix it. Our only options now are to manage best through the bust. Had we concluded that the mining boom was a cycle (even as late as 2010) then the savings would have been much higher, the price inflation in the economy much lower, asset prices far less bloated, productivity much higher, the dollar much lower, the adjustment a lot smaller and our future much brighter.
It wasn’t just bad luck, it was bad management, and a lot of people in power deserve to be given the arse.
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.
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