Australian government warns of budget cuts

by Mark Benson on March 29, 2012

in General Information

Where does all of the money go?

Wayne Swan, the Australian government Treasury Minister, has today issued a statement suggesting that economic turmoil around the world is beginning to have an impact upon Australia. On the back of the some damaging opinion polls it seems that the Labour government is attempting to ratchet up the pressure on opposition parties ahead of next year’s election. This is a very important period for the Labour Party which is quite literally on the verge of losing office with support across Australia now at record lows.

These comments with regards to the Australian economy come hot on the tails of a Conservative statement regarding future economic policies. So what does the Labour government have planned and how long will this take to execute?

Austerity measures hit Australia!

Despite the fact that Australia is the only developed economy in the world to escape the secondary recession being felt around the world it seems that all is not rosy in the Australian garden. The Labour Party has now placed the budget deficit at the head of its “to-do list” and already warned of significant spending cuts over the next two years. Indeed it seems as though a number of projects which have already been announced may well be cancelled or downgraded with funds possibly being used elsewhere.

We are due for a budget update fairly soon although a quick look back at the last budget in November 2011 saw the government forecast a $1.5 billion surplus for 2012/13 against a $37.1 billion deficit in the 2011/12 tax year. When you bear in mind that the Australian economy has fared far better than most, it is a little surprising to see such a large deficit. Is this hiding problems below the surface?

A two tier economy

There are growing concerns that the Australian government is “putting all of its eggs in one basket” in the shape of the mining industry which has and continues to lead the economic boom. It is becoming apparent that tourism, manufacturing and education are suffering because of the relatively high exchange rate of the Australian dollar yet the export orders for the mining and natural resource industries continue to flood in.

One of the major concern going forward is that the government, and indeed the business arena, has placed all of its hope on the mining industry and it is now too far down the line to turn back. If the government was to increase taxation yet further on the mining industry then this would take valuable income out of the economy and there is no certainty that sectors such as tourism, manufacturing and education would immediately take up the slack. We also hear talk of various green policies and green taxes which are basically yet another assault on the mining industry which is now mushrooming in size.

What of the short-term future of the Australian economy?

It is becoming more and more evident that as the mining industry continues to boom other sectors are been hit very hard below the surface although overall economic performance has remained positive. This is giving the impression that the whole of Australia is benefiting from the mining boom when in reality this is not the case. Tourist groups and manufacturing companies have for some time now been crying out for financial assistance and policy assistance from the government but to no avail. Is the government spending too much time with the mining magnates?

It would be interesting to take away the performance of the mining industry in Australia because most definitely we would see an Australian economy which is struggling. Even the government has confirmed a “structural change” in its revenue base which basically means that yet more income is coming from the natural resources sector. The trick for the current government, and indeed future governments, is to transfer the prosperity and the profitability of the mining industry across the whole of Australian to give a more balanced base for the future.

The short-term situation in Australia is on balance still very positive because of the extreme strength of demand from China and India for materials such as iron ore and coal. This is expected to continue well into the next decade and in many ways Australia’s location, on the outskirts of Asia, is perfect. Whether or not we will see a recovery in other areas of the economy in the short term remains to be seen because they are struggling from similar issues to the worldwide economy.

Are austerity measures the way forward?

While the current government has little choice but to try and balance the books in the short to medium term, how will the Australian population feel when austerity measures begin to hit home? They will see a reduction in investment and a possible downgrading of some services while at the same time the mining magnates will continue to pile up their riches. There is a danger that this will lead to a “them and us” scenario and a growing backlash against the mining sector.

The government has already confirmed that recent funding commitments are likely to change and some projects will be postponed indefinitely. This postponement of some investment policies will lead to reduced economic activity in areas such as construction and could well lead to further problems in the short to medium term. The idea of milking the mining industry for as much as possible in the short to medium term may well become the only option for the current and future Australian governments.

Conclusion

On the surface there is no doubt that the Australian economy as a whole is moving forward at a pace which is relatively fast compared to the rest of the developed world. However, once you dig below the surface there is a need to introduce austerity measures and balance the budget with a $37 billion deficit expected in the current tax year. These austerity measures will need to be introduced at a time when the mining industry is “rolling in cash” and there are concerns about what kind of impression this will give the general public.

Mining magnates across Australia have seen a massive increase in their personal and cumulative wealth over the last decade and this is likely to continue for some time to come. The government has already introduced the controversial “mining tax” although if the two-tier economy continues to diverge and split then we may see further calls for a “milking of the mining industry”. This is not an easy situation to resolving in the medium to longer term although in the short term any Australian government has no option but to continue to feed the mining boom.

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