Now that the major stock markets around the world are falling the Australian media have become obsessed with the concept of a “two speed economy”. I am not sure who first started using this term, maybe it was the gurus at the Treasury or the Reserve Bank, but in my view there is no such thing as a two speed economy. The situation we have now is that the economy has simply been mismanaged.
As I have stressed many times, the Australian economy has so far avoided a major a recession because it is unbalanced. If the nation had a significant manufacturing exporting sector we would have seen GDP contract similar to what happened to our friends in Canada.
So we don’t have a two speed economy, we just have an economy being propped up by mining, housing and public sector spending. The two speed economy talk is just a convenient way for policy makers in Australia to avoid any criticism regarding the mess they have created.
The government also helped keep the GDP numbers in positive territory by blowing the billions they inherited from the previous government and then by borrowing and spending billions themselves. So it appears that the people managing the Australian economy reckon the way you deal with a debt crisis is by getting into more debt.
Now this may not be such a bad approach if the money that is spent will help the nation be more productive in the future. But as the media has finally realised and as I wrote about more than year ago, the economic stimulus spend-a-thon in the lucky country has been a colossal waste of money. In 10 years time we won’t be getting any productivity gains from outdoor covered learning areas or imported sub-standard roofing insulation.
There were plenty of other ways the economy could have been supported without the need to borrow as much. For example back in December 2008 in Actions to stimulate the economy in 2009 and beyond I wrote:
“There is no doubt that companies would benefit from a tax cut so let’s do it. Who cares what the average OECD corporate tax rate is unless we want to be an average OECD country. I am not sure by how much the rate should be cut, but let’s say around 5% and make sure we encourage companies to invest serious money in R&D so we do not become the thickheads of Asia. In addition if a company meets certain “green” criteria such as reducing pollution and recycling water, then they should be entitled to an additional reduction in tax.”
Now some 18 months after I wrote about cutting taxes the government has decided that in a few years time something like that will be implemented. But they cannot cut taxes enough and encourage R&D because they now need to pay down debt.
So rather than Australia being a smarter nation in the years ahead, it is likely we will be importing even more technology and fall further behind our Asian neighbours in terms of R&D spending.
In fact I would argue that the government cannot really afford the planned company tax cuts and this is one reason they are trying to hit mining companies with another tax. Don’t be fooled by the argument that the mining tax will help fund the extra money going into Superannuation, because that is complete nonsense.
The mining tax is being implemented because there will be a big hole in the government budget without it and actually I reckon there will be a big hole in the government budget even if the ming tax is implemented, simply because it is borrowing and spending too much.
This leads me onto the 2010 fantasyland budget handed down by Wayne Swan, the man who once claimed he had put the inflation genie back in the bottle.
Well Swanny the inflation genie is out of the bottle and doing just fine. The state governments are cranking up charges wherever they can, interest rates are climbing and house prices got a nice boost upwards thanks to your cash handouts to first home buyers.
Swan might not be the sharpest economic mind of our time, or any time for that matter, but he is a determined fellow and despite a string of failures and a record of under achievement, he has bounced back to promise he will balance the books in just a few years!
His claim is backed up with lovely charts and figures from The Treasury, the same folks who were surprised that the increase in the luxury car tax delivered less money to the Government than they thought because the demand for luxury cars decreased.
Yet the same twisted logic that they applied to the luxury car tax is at work again with the super profits mining tax. The Treasury reckon that they can crank up the tax on successful miners and that these companies will simply be happy to take it on the chin.
What the bureaucrats have not factored into their spreadsheets is that the companies that would be paying the new mining tax make large profits because they are good at what they do. This means they can take their expertise and funds to anywhere on the planet and that is what they will do if they feel they cannot get good enough returns in Australia from their investment.
There is no doubt that some planned mining projects in Australia will be shelved as a result of this tax and some mining company executives have already stated that this will happen. I wonder if the cancellation of projects was factored into the new mining tax modelling?
But let’s leave the mining tax grab alone and look a little more into how the government will balance the books.
In Swan’s world (and the world of the Treasury) China will keep buying our iron ore and coal etc. in vast amounts at the crazy high prices the miners are currently charging. The budget does make any provision for falling demand from China and assumes commodities prices will remain at record high prices.
So in Swan’s fantasyland budget, China’s economy keeps growing at least 5% a year, the economic problems in Europe don’t impact Australia at all, the Government keeps spending and company taxes are cut.
But wait, there’s more! Not only will the budget be balanced in just a few years but the government will also start to pay down debt, give people more money for their retirement and then at some point get back to saving the planet by implementing the delayed Emissions Trading Scheme! Hooray for Swanny!
Supporters of the budget will say I just don’t have a good grip on how strong demand is from China, but a quick look at the stock & commodities markets today suggests that I am not the only one not buying into Swan’s optimistic view of the economy.
Maybe the budget forecasts are correct, but I doubt it and the repercussions for the Australian economy if they are wrong will be severe.