Wednesday, May 11, 2011

Australia's economic conundrums

Like many Australians, I listened to the Treasurer's budget speech last night. Those who are interested can find the full budget papers here. I then browsed some of the reporting and budget material.

From the viewpoint of an interested observer, I found the speech hard to follow. I also found some of the budget material almost eye glazing. Because of my background, I have a special interest in regional issues. On the busy person quick scan test, the regional document failed.

This is really a criticism of words and presentation; public policy rhetoric - investing in Australia's regions, building Australia's future work force: trained up and ready for work etc - plus the usual pictures doesn't really help understanding. 

Outside broad parameters, the devil with budgets is always in the detail. So I will look at that and come back. For the moment, I want to stand back from the detail and look at some of the underlying issues, for Australia's present economic position is remarkably complicated for a Government trying to manage the politics as well as the economics.

The Government's approach aims to return the budget to surplus in 2012-2013. To my mind that's prudent. One of the reasons Australia came through the global financial crisis so well lay in the Australian Government's sound financial position. The Government could spend on stimulatory measures without incurring the debt levels found in so many other countries.

The global economic outlook remains uncertain. Australia's growth is heavily dependent on growth in China in particular, and there are uncertainties and risks there. So a return to budget surplus gives us a greater measure of security.

Two linked issues now arise.

The first is the extent of what economists call a structural deficit in the budget.

Start from the premise that current expenditure over time should be balanced by current income. I say current because capital expenditure raises different issues. During downturns, the budget goes into deficit, during upturns into surplus. These balance over time.

A structural deficit means that current income and expenditure do not balance over time. In the longer term, we have to borrow to fund current consumption. Alternatively, we suddenly have to cut basic expenditure in the way that Greece is doing.

Some economists argue that Australia actually has a structural deficit that has been concealed by the mining booms. I haven't done the detailed analysis required to check their arguments, but I suspect that there is some truth to the view. However, I also suspect that it's not as bad as sometimes presented.

However, this brings me to the second linked issue, the assumptions built into the budget.

Just at present, the Australian Government is in a bit of a pickle.

The projections suggest a mining investment boom. However, the domestic economy is presently flat, leading to lower revenues now with prospective revenues later. The Government wants to free up resources to avoid later problems, but that affects present activity.

Pretty obviously, the budget is vulnerable because of the nature of the assumptions involved. If the mining boom mark II is less than projected, then the deficit will be higher and more extended than projected. Beyond that, the Government faces real immediate difficulties because of variations in the Australian economy across space and among groups. The term patchwork economy has been coined to describe this.

The averages used to describe Australian economic performance conceal variation. Many Australians are hurting in economic terms. This is reflected in the Government's low opinion poll ratings.

The consumer price index may still be within the Reserve Bank's target range, but increased rents, food and utility prices are hurting lower income Australians since they bulk large in spend. The high Australian dollar flowing from the mining boom is hurting manufacturing and tourism. Flat retail sales hurt that sector. Nominal unemployment may be relatively flow,  but it varies greatly among groups and over space.

One simple measure of business pain is the sharp rise in the number of corporate insolvencies.

If we accept that the broad parameters of the budget are okay, if we accept that resources need to be freed and re-directed to meet the needs of mining boom mark II, then another issue comes in. To what degree will all the Government's measures actually do this.

This issue has nothing to do with the budget per se, everything to do with the validity and likely impact of the specific measures in question. This can only be answered by a detailed individual analysis.

I have yet to attempt this.             

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