Tight budget may not be best approach right now

IF you are a borrower you probably breathed a sigh of relief last Tuesday.

Governor of the Reserve Bank Glenn Stevens announced that the official interest rate would remain at 2.50%.

You've got two months at least as the RBA's next meeting is February 3.

In delivering his news, Stevens signalled - I think - that the next announcement will be more of the same, likely a further cut and definitely not an increase.

His concern is that significant declines in commodity prices mean "a lower exchange rate is likely to be needed to achieve balanced growth."

Consider this: In just a year iron ore prices have fallen an incredible 48%, coking coal 39% and Brent Oil (North Sea benchmarking) 34% - and that will impact on LNG prices going forward as those are immutably linked to the Brent Oil barrel price.

Last Tuesday, the dollar measured against the US dollar had dropped from around parity a year ago to US85.16 cents, about 15%.

That's the "exchange rate" that troubles Glenn Stevens.

As the vast majority of manufactured goods and processed foods are imported, it's obvious that this is a disaster waiting for a curtain call.

Even before the end of the commodities export boom, the balance of trade numbers were a worry - Australia was spending more on imports than it was earning from exports.

So what's the risk to Australia if the situation doesn't change? Put simply, the R word - recession.

And how can Australia dodge the bullet? As Stevens intimates, encourage a dive in the exchange rate.

So how do we encourage a dive in the exchange rate?

Stevens has in his kit bag monetary policy tools, primarily the control of interest rates.

Abbot and Hockey have in their kit bag, fiscal policy tools - the control of revenue and expenditure throughout the economy starting with the Federal Government.

If fiscal policy and monetary policy are pulling in opposite directions, then nothing Stevens can do or say will work.

I fear that to be the situation. As Australia's avoidance of recession during the Global Financial Crisis demonstrated, a Keynesian approach is what is needed - stimulatory spending by government.

That notion is obviously an anathema to the Abbot-Hockey show because it means borrowing to spend, the continuation of an unbalanced budget.

Forgetting for a moment the Senate's rejection of the more dreadful parts of Hockey's May Budget, the biggest problem facing the coalition right now is that the fall in export revenues will mean a fall in taxation receipts - one side of the balancing effort in strife anyway.

To persist with cutting expenditure to track the inevitable fall in the tax take is wrought with problems that Stevens, with limited room to move in using interest rates to stimulate the economy, won't be able to solve.

At 20% of GDP, the bottom line is that our national debt is a lot better than most of the developed world.

A pity we don't have politicians with the calibre of Glenn Stevens to lead us through.

"Don't let Santa down, go out there and spend for Christmas," thus spake Saint Joe Hockey as his solution to a problem he obviously lacks the wit to appreciate. On imported goods?

Bob Lamont is director of Corporate Accountants situated in Gladstone. He can be contacted on boblamont

Topics:  bob lamont economy gladstone business opinion

Teen students on arson charges over school fire

A building at Biloela State High School was totally destroyed in a fire last night.

TWO teens charged after school block is 'completely destroyed'.

Owner of iconic Gladstone motel checking out

FAMILY TIME: After years of service to Gladstone's tourism industry, Mary Moore has put her iconic motel on the market so she can spend more time with her family.

ICONIC hotel with celebrity guests is put on the market.

Abandoned mine sites could create 6000 jobs

NEW LIFE: Could abandoned mines bring thousands of jobs?

AS MANY AS 30 high-risk mines could create thousands of jobs.

Local Partners

REVIEW: Season 7 premiere of The Walking Dead disgusted me

I'm disgusted by The Walking Dead premiere.

SPOILERS: The Walking Dead premiere disgusted me.

Flick teases intense and entertaining Survivor grand final

Felicity 'Flick' Eggington in a scene from the TV series Australian Survivor.

GOLD Coaster's elimination leaves Lee, El and Kristie in final three

Priscilla concerned people will forget about Elvis

Priscilla Presley source Bang

She says she feels responsible to keep his legacy going

Taylor Swift files lawsuit over alleged groping

Taylor Swift source Bang

Swift has commenced legal action against a DJ over the incident

Kanye West threatens to boycott Grammys

West says he won't go to the Grammys if Frank Ocean's not nominated

Why this actress wasn't embarrassed by nude photo leak

Leslie Jones source Bang

'If you wanna see Leslie Jones naked, just ask,' she said

Coles to pay new owner of Tannum servo $320K

UP FOR GRABS: Expressions of interest in Tannum's new service station, which will house the new Coles Express, closed this month.

INVESTORS bid for new Tannum service station under construction.

Look at me! Kath and Kim home up for sale

Kath and Kim from the iconic Aussie TV series.

'Crack open the Baileys and grab a box of BBQ Shapes'

How to fit 100,000 new homes on the Coast

Property, real estate, housing, suburb,  August 2016

Fitting 2m extra people in south-east Qld in 25 years a balance

Hinterland horse stud passed in for $8.25 million

UNREAL: This Maleny estate is incredible.

12-bedroom hinterland horse stud still available

Hit songwriter's Noosa mansion on market

SPECIAL PLACE: The Cintamani estate is going to tender, marketed by Tom Offermann Real Estate.

Is this Queensland's best property?

Kiwi siblings snap up Dotcom mansion for $32.5m

The new toy company owners of the Coatesville mansion want replace any controversy with positivity and fun. Photo / Barfoot and Thompson

The trio paid $32.5 million for the property in June