Business Leaders Urge Action On Problem They Do Not Want Solved, And Treasury Does Not Understand

6 Aug

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There must have been something in the air last night.

While I was writing today’s blog on Treasury’s epic fail in its analysis of Australia’s structural budget deficit, it seems that our business elite were bending the ears of the nation’s journalists on the same topic:

Call to tackle deficit as business blasts budget

AUSTRALIA’S failure to prepare for the end of the mining boom is damaging the nation, business leaders warned as they expressed “zero” confidence the election campaign would deal with the structural budget deficit.

…business leaders also questioned Labor’s reliance on Australia’s AAA credit rating to bolster its economic credentials.

Former Future Fund chairman and Commonwealth Bank chief executive David Murray said some states that later suffered credit ratings downgrades or had been told a downgrade was possible had “done this for years – tell everyone it’s OK”…

Commonwealth Bank director and former AMP chief executive Andrew Mohl attacked politicians because they “don’t want to do anything structural” and warned that “current tinkering is doing nothing but creating uncertainty”.

“The chance of the structural deficit being addressed in this election campaign is zero,” he said. “I have no doubt the budget policy over the past five years, given the resources boom, has been too loose. There has been wasteful expenditure, policy formulation has been dysfunctional. If we face a fiscal shock, the economy is more vulnerable than it was. We have spent our ammunition and we don’t have much to show for it.”

The comments come after the government on Friday revealed a $33.3 billion revenue writedown in barely 10 weeks – a situation that Brambles and BlueScope chairman Graham Kraehe described yesterday as “incredible”.

“My fundamental view is that economic policy at the moment is absolutely ad hoc from day to day without any long-term cohesive, integrated plan,” said Mr Kraehe, who is also a former Reserve Bank board member.

“We have a history of increasing government spending throughout the resources boom and now that the resources boom is tapering off, there is no suggestion that we are planning to reduce government spending, instead of which we are just increasing taxes.

“To have a credible economic strategy, government of either persuasion needs to tackle government spending in a serious and co-ordinated way. That’s spending in the commonwealth budget and the overlaps in commonwealth and state. Unless we do that, with an ageing population we are going to continue to build on deficits.”

Last night, Mr Hockey said that on Mr Rudd’s logic, the European and American economies “with virtually zero per cent interest rates would be doing well, but they are not”.

Some business figures also said interest rates had been cut as the economy softened.

Aussie Home Loans founder John Symond said: “You’ve got to remember that the reason for the RBA dropping is because the economy isn’t performing as well as we would like.

“That’s on the back of some poor government decision-making – some has been fine, some has been awful.”

We really are screwed, when the loudest voices in calling for action on budget mismanagement are our business elites.

Especially when they — like Treasury — fail to correctly identify the cause/s of the structural budget deficit.

But then, this is to be expected.

Every .. single .. one .. of those “business leaders” quoted in the above article — yes, including Graham Kraehe — either are now, or were formerly, senior executives in the finance industry.

Merchants of Debt.

They are hardly likely to tell us the truth.

That the reason for Australia’s structural budget deficit, is not the mismanagement of the mining boom.

The prime cause of our structural budget deficit is exactly the same as Ireland’s:

While part of the revision to the IMF’s pre-crisis estimates of the structural budget balance is due to a lower estimate of potential GDP, the main reason for the change is that these estimates failed to capture the dependence of the fiscal position on an unsustainable boom in the housing sector (Kanda 2010). With residential investment and house prices soaring, property-based taxes grew at a pace well above GDP growth. Failure to recognise at the time that the bulk of these revenues were cyclical led to significant tax cuts and expenditure increases, which created a large structural hole in Ireland’s public finances.

At Business Spectator, leading business commentator and ABC presenter Alan Kohler also has a go at the structural deficit problem today. And he too, fails to identify the real cause:

What neither party will admit: budget heading for large structural deficit

What does all this mean for Australia, as it starts the first post-boom election campaign?

It means any promises based on confidence about knowing the future are meaningless.

The economic statement issued on Friday was both recognition of how rapidly the world is changing and a stab in the dark about government revenue between now and 2016-17. In truth no one has any idea, and least of all Treasury.

What we do know is that there is a structural budget problem related primarily to the ageing population and the growing cost of health care.

Sorry Alan.

Epic fail.

That’s a problem. Sure.

But it’s a coming problem.

The structural deficit is here, and now. It was caused in the past.

Interestingly, Mr Kohler flatly contradicts the Treasury in their working paper Estimating The Structural Budget Balance Of The Australian Government.

Their brilliant economic modellers are convinced that:

The key point to draw from the analysis is not the specific year in which the budget returns to structural surplus, but the steady improvement over time…

The estimates over the forward estimates and the projection periods suggest a steady improvement in the structural balance over time, reflecting over the forward estimates, the Government’s structural savings measures and, over the medium term, its commitments to limit real spending growth and allow tax receipts to recover naturally.

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6 Responses to “Business Leaders Urge Action On Problem They Do Not Want Solved, And Treasury Does Not Understand”

  1. bushbunny August 6, 2013 at 1:30 pm #

    Are you telling us the Treasury can’t do its sums? My G – please help us, as this ALP government can’t.

    • The Blissful Ignoramus August 6, 2013 at 1:46 pm #

      No, what I’m saying is that they are too busy doing sums to notice the bleeding obvious.

      • bushbunny August 6, 2013 at 2:00 pm #

        LOL Blissful. I fear for our future and my two sons. Caught in the poverty trap is not nice and harmful to mine and others health.

  2. mick August 6, 2013 at 3:28 pm #

    “The estimates over the forward estimates and the projection periods suggest a steady improvement in the structural balance over time, reflecting over the forward estimates, the Government’s structural savings measures and, over the medium term, its commitments to limit real spending growth and allow tax receipts to recover naturally”

    Better know in the burbs as bullsh**.

    If you thought trusting business was the way forward then look at the 3 monkeys to get a clue of how this sector works in Australia. Big business in Australia could not manufacture a mouse trap without snaring itself. That is why everything of any value is now owned by foreigners. Even our vast LNG deposits are foreign owned whilst Australians face a gas shortage. If there is any doubt about the big business sector one only needed to listen to ABC 24 The Business last week when the top 100 CEOs had its spokesperson make a presentation for a drop in the company tax rate from 30% down to 25% paid for by the following taxes of hand to mouth wage and salary earners who would fund this from:

    1. an increase in the GST
    2. property tax on the family home

    Apparently CEOs have not thrust their greedy snouts into the feeding troughs deep enough over the past 2 decades.

    So if you can’t trust big business then maybe you can trust government. From what I can see you have Labor which hands out money like candy and Liberal which is the mouthpiece for big business whose palms it will grease as soon as elected (first 3 promises there for all to see). And of course both sides will fix any problem by selling off the rest of the nation’s farming land (that which is still left) to China. She’ll be right. Steady as she goes.

    I have to agree with you Bushbunny. Future generations are facing bleak times. I am beginning to search for somewhere to go in a leaky boat lest all that I own is stolen by the state. Coming to an election near you…….

  3. Tomorrows Serf August 6, 2013 at 5:48 pm #

    Seems to me our economic and budgetary problems (read Debt problems) arise from a multitude of issues.

    First and foremost is the crappy and corrupt monetary system we’ve been foisted with. Debt based thanks to our Central Bank, since 1959. and exponential in growth by its’ nature. (why should we pay interest on our own currency, anyway), Combine this with a Fractional Reserve Lending system and it only gets worse. Who the hell designed this system?? Oh yes, Banksters and politicians!! The whole system seems designed to fail from the start, but not before it has looted the planet for the benefit of its’ designers.

    Then we have other forms of corruption to deal with. Corruption of politics, media, business, science and education, to name a few.

    Then we have incompetence and greed, laziness and indifference. A general “something for nothing” mentality seems to have become commonplace in our society, which wasn’t prevalent in years gone by. Could it stem from the corrupt financial and monetary system?

    “If the currencies are corrupt, everything they touch also becomes corrupted”
    (James Dines)

    I wonder if a sound monetary system, or a more honest system of money might alleviate some of the problems besetting the world at this time. I guess we might find out soon, given the way the Chinese govt., et al, is buying gold.

  4. Barry August 7, 2013 at 3:24 pm #

    They will continue to scramble around trying to make sense of it all in vain, until they make that big leap into reality and understand that it is not about money at all but it is energy that drives everything !

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