May 16th 2009

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Articles from this issue:

COVER STORY: Impending collapse of Australian agriculture

EDITORIAL: Implications of the budget black hole

CANBERRA OBSERVED: Kevin Rudd backs down on climate change

GLOBAL FINANCIAL CRISIS: IMF's global outlook: expect the worst

MANAGED INVESTMENT SCHEMES: Behind the collapse of Timbercorp

INTERNATIONAL TRADE: Re-inventing the wheel of international trade

CHINA: China sees US as dying Roman empire

INTERNATIONAL AFFAIRS: Taiwan's WHO entry breakthrough

UNITED NATIONS: UN anti-racism conference blames Israel

ARTIFICIAL REPRODUCTIVE TECHNOLOGY: Does family matter? Ask the kidsÂ…

POPULATION: One-child policy for Australia, says green group

ABORTION LAWS: Further threats from pro-abortion fanatics

RUSSIA: Russia faces catastrophic population decline

AS THE WORLD TURNS: Ageing population adds to financial crisis / Turn back the clock / Obama axes school voucher program

CINEMA: Shielding one's eyes from the truth - 'Good'

BOOKS: HEAVEN AND EARTH - Global Warming: the Missing Science, by Ian Plimer

BOOKS: WORLD WAR II: BEHIND CLOSED DOORS: Stalin, the Nazis and the West, by Laurence Rees

BOOKS: WAR AND MEDICINE, by Thuyavan with John Whitehall

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Implications of the budget black hole

by Peter Westmore

News Weekly, May 16, 2009
The Rudd Government's budget blow-out, on top of Australia's high level of private debt, risks jeopardising our economic recovery.

Statements by the federal Treasurer, Wayne Swan, that Government revenue would be cut by $50 billion next year as a result of the global recession, coupled with expected increases in government spending, have raised the prospect that the Budget bottom line will move from a $20 billion surplus to a $70 billion deficit in just one year, an unprecedented collapse.

Most people, whether they are enjoying the benefits of the federal government's recent cash hand-outs, or looking forward to the promised increases in pensions and perhaps the introduction of a maternity leave scheme, are unaware of how vulnerable Australia's economy is to a meltdown later this year and in 2010.

In any event, a huge deficit in 2009-10, following a high deficit in the current year, will curb the government's capacity to fund a recovery in future years, and undoubtedly inaugurate a period of rising taxes.

Increased taxes are already on the agenda, including new taxes on high-income earners which have been foreshadowed in the Budget.

However, higher taxes will damage business and increase unemployment, which the government itself now expects to rise from the current 5.7 per cent to more than 8 per cent. If the economy continues to slide, unemployment could well hit double-digit figures over the next two years.

Increased borrowings

The deficit will have to be funded by increased borrowings, which must be sourced from either domestic or international sources. Both are problematic. The collapse in international lending during the global financial crisis has already caused a credit crisis for many businesses.

Governments have not been immune. Last January, a German government bond issue for €6 billion ($12 billion) failed, prompting London's Financial Times to comment that investors had "shunned one of the most liquid and safest assets in the world ... in a warning for governments seeking to raise record amounts of debt to stimulate their slowing economies". (Financial Times, January 7, 2009).

It is unlikely that the increased government spending will be sourced from within Australia. To do so would threaten higher unemployment by making it even harder for businesses to borrow, because the available capital is limited and government bonds are a safer investment than lending to the private sector, particularly during a deep recession.

The increased government spending is of a recurrent character, so next year's deficit will be repeated in subsequent years.

The consequence will be to worsen Australia's foreign debt, with rising government debt added to the mountain of private sector debt, which is now over $650 billion.

The massive deficit risks driving Australia into an economic black hole which will cripple attempts to lift Australia out of the deepest recession since the Depression of the 1930s.

The deficit will also have foreign policy implications. The principal lenders in global financial markets are countries which run substantial trade surpluses — principally the oil-producing countries and large manufacturing nations in Asia.

Currently, China is bankrolling Australia's deficit, potentially giving it the whip hand in negotiations with Australia over issues such as 1) China's attempt to gain control of Australian resource companies such as Rio Tinto, 2) the proposed free trade agreement with China, and 3) possible conflicts with Australia's allies in Asia over the massive growth in China's military machine.

Unfortunately, many of the government's major decisions seem to be driven by the desire for favourable media headlines, rather than the long-term future of Australia.

Last year's budget surplus was blown on two failed attempts to massage Australia's GDP figures. Despite the cash hand-outs last December and in February, Australia has slid into deep recession, with many thousands of jobs lost in manufacturing, services and the mining sector.

The planned $43 billion high-speed fibre-optic broadband network is another example. As Kenneth Davidson, senior business columnist with the Melbourne Age and a staunch advocate of public infrastructure spending, pointed out recently, universities and businesses which require high-speed internet can already get it, at a price. For most others, it is a costly extravagance.

The government's multi-billion dollar housing package has kept the housing industry afloat; but it is due to end on June 30 this year. After that, most observers expect the housing industry to implode.

The billions earmarked for school-building upgrades will in many cases be a waste of money, and make no contribution to either children's education or the economy.

On the other hand, there is an almost complete lack of attention to the long-term development of Australia, particularly increased funding for ports, electricity-generating capacity and reservoirs.

These should be the first priority for the government; they seem to be the last.

— Peter Westmore is national president of the National Civic Council.

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