US economist Paul Krugman uses a catchphrase to describe the misfortune that often befalls economic planners that achieve their goals. “No good deed goes unpunished”.
The Nobel Laureate uses it most to describe what happened to Japan in the early 1990s after it raised interest rates to prick an asset bubble.
But it also applies to Australia’s May budget in which Wayne Swan will wear the consequences of some of the successes he had been praying for.
Obscured by talk about the soaring dollar and the hole it is said to be punching in budget revenues is a more complex chain of events, harder to explain in public, but nevertheless painful.
The forecasts for the last May budget were based on the technical assumption the Aussie could stay at around 90 US cents for years to come.
After the Aussie sailed through 100 US cents in October, the November budget update used an assumption of around 98.5 for years to come.
This week the Aussie marched north of 105 and leading economists such as Shane Oliver of AMP were talking about 110 by years end with it staying that high until the next global economic collapse.
Treasurer Wayne Swan said this week the high dollar was “weighing heavily on government revenues”. A leaked Treasury document briefing identified the high dollar as one of the reasons non-mining revenues had all but stopped growing.
But this doesn’t sound right to Oliver... He says if you graph the currency and the budget position going back decades you will see the budget position usually improves as the Aussie climbs rather than goes backwards.
“When the Aussie climbed from 48 to 98 US cents from the year 2001 the budget balance kept getting better.” So big were the surpluses, Howard government handed out a record run of tax cuts to try to keep them down. As the Aussie slid during the 1980s budget deficits grew.
“It’s obvious if you think about it. The high dollar is almost always the result of high commodity prices, so much so that former Fed chief Alan Greenspan used to consult the Aussie for a quick guide to the strength of global demand.”
The high dollar will harm the profits of trade exposed industries unconnected with mining. “Around 30 per cent of listed company earnings are sourced overseas,” says Oliver. “So a 10 per cent rise in the Aussie will cut earnings by about 3 per cent.”
But the iron ore and coal miners whose massive and unexpected earnings increases are driving the dollar will by definition be raking in much more.
The effect on the budget tax takings should be ambiguous at worse, and more likely positive.
But there will be budget problems nonetheless -- not directly because of the rising dollar but because of another much-wanted development happening for the same reason.
Miners are responding to the higher iron ore and coal prices driving the dollar in exactly the way we would want them to. They are bringing forward plans to expand and develop new mines.
The latest capital investment intentions survey show an increase in investment plans this financial year of 24 per cent and an increase next financial year of 38 per cent. It’s exactly what Wayne Swan would want. It’ll help set up budget revenue for years to come.
But it’ll cost the budget bid-time in the year ahead. As mining companies invest they write off profits for tax purposes meaning that for at least the next year (the ABS hasn’t surveyed investment intentions beyond then) not only will the non-mining corporate tax take be flat, but tax from the big miners will be weak as well.
And Australians are borrowing less. More sluggish credit growth is another thing Wayne Swan would have wanted a few years back.
But it means hits the profits of financial sector firms, normally the only really bright spot apart from mining.
The gods are looking kindly on Wayne Swan.
They’ve given him what he wanted.
On May 10 his budget will wear the consequences.
Published in today's SMH and Age
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