Posted: February 06, 2005

Budget deficits needed ... now

More signs that the credit-led consumption-driven fiscally-dragged GDP growth is slowing faster than previously thought have emerged. First, a number of middle-sized corporates in the building, transport and light manufacturing sectors have failed in the past few weeks. Latest to collapse is the large building contractor Walter Construction Group which Recently, textiles manufacturer Lincraft, NSW transport operator Westbus, Great Western Regional Airlines (WA) and mining contractor Henry Walker Eltin have all closed doors unable to continue trading. The question is whether these collapses are indicative or coincidental. It is common for building companies to lead the decline because they are heavily dependent on constant cash flow and increasing volatility in revenue can quickly bring them down. Their hardships then multiply throughout the industrial chain and then reverberate generally as workers are laid-off and lose incomes. There is also evidence that Walter and Westbus have been hit by slowing world activity which has damaged their parent companies. But the collapses are signalling that spending is slowing and overcapacity is appearing.

Second, the latest Australian Bureau of Statistics figures show that Australians are spending less and started the inevitable process of rebuilding their 'balance sheets' (by increasing saving). Josh Gordon writes in Australians save more, spend less published in The Age, February 5, that "Australia's debt-fuelled shopping binge" is winding down. He also says that "consumers were unusually restrained over Christmas ... [and the ABS] ... said retail turnover fell by a seasonally adjusted 0.3 per cent in December, after a 0.2 per cent dip in November and a 1.2 per cent fall in October." See also the DNB survey which also documents worrying trends.

Gordon writes that while "households are spending more than they earn, bureau figures also reveal that the savings ratio is slowly heading for positive territory for the first time in more than two years." Meanwhile the Government Treasurer said that this was "not unwelcome ... we have been seeing strong employment and we have been seeing real wages growth, so it is interesting that retail trade moderated somewhat ... We would actually like to see savings increase ..." Well the way to allow private savings to increase is if the Government budget goes into deficit. It is a matter of accounting that if the government balance is in deficit the non-government balance is in surplus. The problem with this slowdown in private spending is that the Government is unlikely to react in the necessary way to fill the spending gap and ensure that unemployment does not rise. The ALP, the alleged alternative government, were reported by Gordon as saying the drop in retail sales figures "represented one of the first cracks in the economy ... This Government has squandered the Hawke-Keating inheritance on the economy ... It's an economy which they inherited in good order from the Labor Party and which they have pushed in the direction of consumption rather than investment ever since, and now there are a few problems appearing, and that (the retail sales) is one of them."

While the failure of the Government to run necessary deficits to ensure there are enough jobs for all has pushed the private sector into the credit-binge with an emphasis on consumption, it is untrue that the previous Labour administration left the country in 'good order'. They also ran destructive budget surpluses, reduced protection for workers via industrial reforms, failed to develop a sound regional development strategy and set up the punitive reforms to the welfare system that the current administration has merely intensified. Neither of our major parties understands their fiscal responsibilities in relation to the goals of full employment and equity.

Third, the latest National Bank monthly survey reported earlier this week that business confidence is waning and that export performance is declining. Manufacturing production across all sectors is slowing if not declining.

Meanwhile, in Tax cuts for high-earners on the cards written by Louise Dodson and John Garnaut (Sydney Morning Herald, February 4) we learn that the neo-liberals are planning more benefits to the high-income earners in the form of tax cuts which will be accompanied by "changes to the welfare system to encourage people into work". The Government is going to provide tax cuts to the top income earners but the Treasurer stuck to his mindless budget mantra saying that "he would not let the budget fall into deficit". Meanwhile, the most disadvantaged Australians surviving on the pitiful welfare payments and being prevented from working by this ill-conceived Government policy fetish to avoid deficits (except when an election is due!) will have to undergo toughter work tests (when there is no work). Disability support recipients are also likely to face benefit cuts and Dodson and Garnaut report that "150,000 recipients could be moved into the workforce" (that is, into official unemployment given the lack of jobs). On the other side of politics, the ALP is still at it, showing once again how little they know about macroeconomics. Their shadow treasures said that to 'pay for the tax cuts' they would "cut fat from the budget ... [and] ... would improve work incentives ... We're not scared; we've done it before and we'll do it again."

Well let me tell you with this sort of nonsense parading as the alternative economic managers of the country, I am very scared.

Blog entry posted by bill