Tuesday, November 23, 2010

Hurt by the dollar? Don't expect support. Henry.

Treasury boss Ken Henry has painted the bleakest of futures for firms hurt by the sky-high Australian dollar.

He says it will remain high for years. And the best thing to do for the firms that will suffer is nothing.

In what may be his last appearance before a parliamentary committee Dr Henry told Senators examining the mining tax yesterday Australia should "avoid the temptation to offer support" to business whose future the high dollar will ruin.

Instead decision makers should support the transition of workers away from those business "to other businesses which do have a long term future with the sorts of terms of trade we are confronting".

Underlying his message is a belief that the mining boom will last for years and transform the economy...

"It is likely we will see an Australian economy characterised by unprecedentedly strong rates of growth in some sectors of the economy, particularly in mining, in mining investment, in mining-related construction; and other sectors of the economy growing somewhat slower than their historical rates as labour and also capital move away from the slower-growing sectors to the faster-growing ones," he said.

Assistance to industries "finding the going tough" could mean "even higher interest rates and an even higher exchange rate," endangering other industries struggling but surviving.

Few people appreciated the scale of the shock to the economy from the mining boom and soaring buying power as measured in the terms of trade.

"It started in 2003 and 2004 and maybe because it started then, people don't see it as a shock. But the increase in our terms of trade is of the order we experienced in in the wool boom of 1951. Everybody who was alive then remembers it. This has taken more years to build up but we are now at the terms of trade we had then."

"Everybody in Australia alive in the 1970s recalls 17.5 per cent inflation. We got that from a terms of trade boom one quarter to one third as big as this one."

Unless the proceeds of the mining boom were shared across state borders through taxation there was a risk the Federation would break up.

"That is partly a political judgement, but it is also an economic judgment and I think there is evidence in the Eurozone right now of the difficulties of managing a common currency without a comprehensive system of horizontal fiscal equalisation."

"You wouldn't want to see those sorts of tensions play out in the Australian federation. It's a point about national economic performance in a vast land area that happens to share the same currency."

Dr Henry's term as Treasury Secretary expires in April. If is not known whether he has sought reappointment.

Published in today's SMH and Age

Related Posts

. Going up, there's a boom on. The Governor says so

. Tuesday Column: Learn to love the higher dollar

. We will be pressured to respond to policy proposals that are, frankly, bad.


The Lorax said...

OTOH, our future might look like this...

Australia's credit-rating outlook was lowered to negative by Standard & Poor’s, spurring traders to buy protection on the nation’s debt and snapping a three-day rally in its currency

Australia is in danger of a “prolonged” struggle to recover from the global recession due to diminished prices for its commodities, central bank Governor Guy Debelle said last week. S&P highlighted the danger of a widening current-account deficit that leaves the country increasingly dependent on foreign capital.

“It’s a very slow, fragile recovery,” said Credit Suisse AG in Singapore. “It’s just another warning shot for the government."

Australia’s currency fell to 44 U.S. cents as of 5:07 p.m. in Sydney, having reached as high as 44.2 cents earlier today.

Finance Minister Andrew Robb said S&P’s move highlights the need to reduce the nation’s reliance on foreign debt.

“This is a long-standing problem for Australia and has left us vulnerable as a country,” he said in a statement. “The government is taking steps to reduce this external vulnerability and to move the economy towards savings and exports.”

Australian policy makers are looking to exports, which make up 15 percent of the country’s $1.5 trillion economy, to boost growth as domestic spending and housing remain sluggish.

And remember, the man who shorted Enron is now shorting Australian mining companies.

mOOm said...

The government needs to cut the budget so that the Reserve Bank doesn't need to hold interest rates so high. It's pretty simple really...

The Lorax said...

mOOm, what utter nonsense. What effect does the Australian government's budgetary position on China's manic construction boom? Nil. Zero. Nada.

The government could be running a surplus of 10% of GDP now, and the AUD would still be strong, and Australian interest rates would still be higher than just about everywhere.

While I agree its insane that the stimulus wasn't wound back faster in the face of RBA tightening, the govt can do SFA at the moment to weaken the dollar.

For better or worse, we've hitched ourselves to the China bubble and we're gonna ride this boom and (inevitable) bust.

Julian said...

So instead of the government taking a fiscal position in selling the AUS dollar, by supporting exporters. Henry recommends buying the AUS dollar, by supporting workers transferring out of exporting.

Makes me feel better about my AUS dollar shorts. Talk about nuff nuffs buying the top.

And how is he comparing Australia to the Euro zone? Because Australia has a large 'land mass'? I'm all for uniform fiscal policy across one currency, but comparing Australia to the Euro zone in this regards is ridiculous.

Anonymous said...

this is what Henry says
"But consider the orders of magnitude here. Over the past decade, world prices of our non-rural commodity exports have increased, on average, by about 300 per cent. Exports of
these products represent about 10 per cent of GDP. Clearly, offsetting the full income boost from higher non-rural commodity prices on aggregate demand through a fiscal contraction would require an implausibly large reduction in government spending, possibly equal to, or even greater than, the total current level of government spending in Australia. That is, to completely sterilise the terms of trade boom through fiscal policy, we may have to abolish all government spending. Note that we would, however, have to keep raising the same level of taxes as presently.
As I have said, I don’t have time today to go through all of the other policy ideas that might be thought to avoid any real appreciation of the exchange rate. All you need to know for present purposes is that none of them is going to happen either."

in other words when people say all you have to do is cut government spending they know buggerall

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