15-October-2010
Portfolio Media Releases, The Economy, Community, Funding
THE government must curb spending and interest rates.
A PRE-CHRISTMAS mini-budget is necessary to reverse the reform malaise that has gripped the Gillard government.
The new government is already asleep at the wheel. It is simply sitting back letting higher and higher interest rates, and a record high exchange rate, do all the heavy lifting in taking the inflationary steam out of the Australian economy. And industry and mortgage holders are paying for it.
There is a global currency war going on and Australian manufacturers, farmers, tourism and education operators are highly vulnerable to unfair competition.
Major competing countries, including the US, China, Europe, Japan and Brazil, are printing money or intervening in other ways to keep their exchange rates low to boost their exports and trade their way out of recession.
As exchange rates are relative, if competitors are artificially devaluing their currency by one means or another, other currencies, such as the Australian dollar, appreciate more than they should.
Tellingly, the Gillard government has been silent on the effect and causes of the 12 per cent rise in the Australian dollar against the US dollar in the past six weeks.
The Coalition is not suggesting that Australia moves away from, or intervenes in, our market-based exchange rate. But there are policy actions that can help if there is political will.
Instead of Wayne Swan trumpeting that our high exchange rate is simply a by-product of a strong resources sector, Australia's Treasurer needs to understand that our dollar has reached its highest level in 27 years not only because of very strong coal and iron ore prices but also in response to the currency war, and in response to Australia's relatively high interest rates, exacerbated by loose fiscal policy.
While there are things the government can't influence, there are things the government can do, and now. Swan could significantly reduce some of the cost-price pressures confronting Australian businesses and households.
Cutting their reckless spending and $100 million-a-day government borrowings and pushing ahead with critical productivity reforms would take some pressure off interest rates and the exchange rate. Yet this government appears to lack the political courage to act.
The director of Access Economics Chris Richardson said this week: "The rough rule of thumb in economic models is that you have to cut by about $13 billion a year to achieve maybe a 1 per cent reduction in interest rates, which might, in turn, make maybe a cent or two difference to the level of the Australian dollar."
This confirms that Australia's interest rates, and exchange rate, would be lower, saving households thousands of dollars a year if the government's reckless spending and waste had been reined in during the past 12 months.
And chief executive of the Australian Industry Group Heather Ridout told The Australian the government needed to "vigorously assess the quality of its spending and of its spending promises".
If we do not act, further increases in interest rates will drive the Australian dollar higher, hollowing out our trade-exposed tourism, manufacturing, farming and education sectors.
There is still a lot of stimulus spending in the pipeline. Last year Treasury advised a Senate committee that there was still $31bn in stimulus money to be spent this year (2010-11) and next (2011-12).
The decision to spend this stimulus money was taken in last year's budget. It was taken in the expectation that by the end of the recent financial year (three months ago) there would be large-scale unemployment, a negative yearly growth rate and an economy nowhere near capacity.
The Rudd-Gillard government clearly underestimated the underlying strength of the economy they had inherited.
At the end of the recent financial year, unemployment was 5.1 per cent, not 8.5 per cent, annual economic growth for 2009-10 was 2 per cent not -1 per cent and the economy is near capacity.
If the government's huge stimulus spending for 2010-11 and 2011-12 was right, had the parlous economic state forecast by Treasury eventuated, then the dramatically healthier economic position we actually find ourselves in today must surely require a big reassessment.
Government spending should be a lot tighter at this stage of the cycle. Capacity constraints are compounded by the stimulus spending, fuelling inflation. This further forces the hand of the Reserve Bank on interest rates, leading to serious cost of living pressures on millions of families and a cost-price squeeze on small and medium-sized businesses.
The world is not secure. The future is not clear. That is why the government needs to be financially very prudent. It should do all it can to restore the economic resilience it inherited in 2007.
The Treasury Red Book was apposite in noting that the Gillard government has a "reduced appetite for further reform".
Labor must stop living off the fat of new taxes and borrowings by stopping its reckless spending, ending the waste, repaying its $90bn debt and urgently introducing productivity improvements.
The case for a mini-budget is compelling.
Andrew Robb is acting shadow treasurer and opposition spokesman for finance and debt reduction.