Business

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 1947@gmail.com.

Topics:  bob lamont, economy, gladstone business, opinion




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