Budget Pain or Not – Why the Australian Economy is Still Set for a Collapse

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Last night, Tony Abbot gave a speech at the Sydney Institute which was all about softening the electorate up for some budget pain. He made the comment, not unreasonably, that the budget was a time to think about how fiscal policy changes affect not just you, but the country as a whole. Not exactly JFK, but the sentiment was there.

But it was a hollow remark. It’s a message the government would do well to heed itself. Instead of making some ballsy attempts at tax reform, the government will simply aim to target savings in the most politically palatable way. It’s pretty standard stuff from weak leaders.

Middle class welfare in the form of Family Tax Benefit B looks like the first victim, followed by the Disability Pension and the Carers Payment. And in three years’ time, changes to pension eligibility and indexation will come into force.

Rorts like negative gearing, which sees taxpayers subsidising property speculators in the billions, look too hot to handle from a political perspective. And the costly and extravagant paid parental leave scheme looks like remaining in place.

But this budget just looks like it will be more tinkering at the edges. The problem facing the Australian government is that its projected revenues could well fall short of expectations in the next few years. Treasury has forecast a mild decline in the terms of trade (which have a big bearing on the tax take) but the risk is that China’s economy slows quicker than expected, pushing down bulk commodity prices and lowering the government’s revenues.

And then there’s the drop off in mining investment (set to have its full impact on the Australian economy in 2015) which will also crimp government revenues. Meanwhile, spending promises (including some still left over from the Labour years) continue unabated.

The bottom line is that governments find it all but impossible to make deep spending cuts. Come next week, they will put in place a ‘plan’ to get back into surplus, but it will be so far into the future as to make it meaningless.

We’ll continue churning out deficits as long as foreigners keep lending to us. And while the big central banks keep printing money, it will provide the liquidity to lend to ‘less bad’ government credits like Australia.

The problem with this happy state of affairs though is that at some point the market will pull the pin on us. Due to some problem back home, or a loss of confidence in the system somewhere, our overseas creditors will demand a higher return in order to keep the funds flowing.

That’s pretty much what happened in 2008. The higher return came in the form of a lower dollar and higher interest rates. The Reserve Bank of Australia and the government had to step in with guarantees to lower the perceived risk and get the foreign flow of money to continue.

Regards,

Greg Canavan+
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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10 Comments on "Budget Pain or Not – Why the Australian Economy is Still Set for a Collapse"

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ram
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The Australian economy already has collapsed. Only the real-estate bubble remains, but most of those loans are already bad.

David
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What is irritating with government (local, state and federal) is that doing less governing and letting people engage in trade, services etc. on a basis that suite the individual parties is never an option.

They all act as if the pie is only able to be so big and they have to divide what is there.

Scott
Guest

Abbott should regulate bank mortgage lending by putting a cap on lending of say 4x household income. That would knock out most new investors wanting to get in to the property market, forcing them to look at alternative investments in order to save for their retirement, and reduce the governments future negative gearing liabilities.

At the moment, banks will lend at insane levels approaching 7x or 8x household income at 90% LVR if the borrowers can put up the other 10% , knowing they will be 110% secured within the first year.

slewie the pi-rat
Guest

very astute page, here.
oh, please don’t pull the pin, Brer Market!
oh, PLEEEEASE don’t pull the pin!

Ross
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Harquebus
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Such is life post peak oil. We ain’t seen nuttin’ yet.

Jason
Guest

Wait until the Australian vassal state and its Chinese master have to face declining world oil production and massive oil price rises,then the bureaucrats, politicians and media will have a ‘budget’ crisis.

richard osborne
Guest

I find your comments regarding chinas stockpiles inventory interesting. the figures quoted dont even equate to a single shipload. everyday here in dampier there are four ships berthed[parker point]two loaded simultanesly seven days a week, average tonnage 160 /180,ooo tons.Ok not all bound for china however most are. RIO are still pushing for 300 mill plus this year. all efficiencies are geared for this. obviously they know something.

Stephen
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Re:Budget Pain or Not. Please be aware there will be no shortage of oil in the world. Other than those artificially created to raise prices. Similar to the 1973 Oil crisis. Yes, we have passed peak oil production of natural crude’s being extracted from the ground, no doubt. However the new car, you may now drive probably has a synthetic oil in the engine crankcase & sump. Probably produced, via a modenised Fischer/Tropsch process. Yes, you can make Diesel,Petrol,ULP,Gasoline and synthetic lubricant Oils from coal. If this were not possible the Germans would have had to surrender at the end… Read more »
ian
Guest
Stephen, Lets get something straight. There is no shortage of oil in the World. It is a shortage manufactured by greedy oil companies. My brother has worked in the oil business all his life (67 years of age)drilling exploration and he says that they are finding huge reserves in all parts of the world. RUSSIA has more oil than the arabs could ever dream of and CHINA and MONGOLIA have huge reserves but are buying everybody else’s oil while it is cheap.(Smart Move)South America has hardly been touched but already has reserves as large as the Arabs.The list goes on… Read more »
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