Wednesday, January 12, 2011

Does Gillard mean what she says? If so, should she be in charge?

As estimates of the financial damage wrought by the Queensland floods climb Prime Minister Gillard has ruled out loosening the budget purse strings to cope with economic shock.

"We will bring the Budget to surplus in 2012-13, and yes that will entail some tough choices," she said.

"We do not even know yet and can not know - it’s not possible for anyone to know - what the damage bill is going to be, we are only going to know as floodwaters subside," said. "There may be some tough choices."

Her determination to cut in other areas to fund relief and rebuilding in Queensland was labeled "dangerous" by Reserve Bank board member Warwick McKibbin as news emerged of tumbling export earnings and a stalling of the Queensland economy.

"Look at the size of the Queensland economy relative to Australia. At the moment a fair chunk of it has just stopped," Professor McKibbin told The Age...

"If you look at the infrastructure damage and all the networks that have been broken, a hit to the economy of 1 per cent is not out of the question."

A 1 per cent hit to the economy would cost $13 billion.

Trade figures released yesterday showed coal exports slid 5 per cent in November as the wet weather gathered pace.

More than 40 mines have been affected by flooding and the Port of Gladstone has abandoned exports.

ANZ economist Katie Dean said much worse was to come with about 75 per cent of Queensland coal production already stopped.

"Our initial estimate is the floods could drive a 25 per cent fall in coking coal export volumes and around a 9 per cent fall in thermal coal export volumes in January," she said. "This could see exports alone strip 0.5 percentage points from GDP in the quarter."

Australia's trade surplus is expected to slip into deficit.

Forecasters at Rabobank sliced 8 per cent off projected cotton exports. Australia is one of the world's biggest producers. Cotton price futures jumped a further 2 per cent after earlier jumping by the maximum of 4 per cent permitted on the Chicago exchange.

Petrol price commissioner Joe Dimasi warned of soaring prices for ethanol, traditionally a cheap additive to fuel.

"Motorists may find that fuel pumps which carry ethanol-blended fuel are closed or out of order," he said.

Professor McKibbin said the entire economy would be weakened by the floods and would need government support.

"Queensland is not a little island sitting out there somewhere north of Newcastle," he said.

"It's integral. People in Queensland won't be buying as much from the south as they otherwise would, so there will be a decline of trade within Australia and there will be a decline in our exports to the rest of the world - there will be a permanent loss of wealth."

"The impact will be like that of an earthquake. When Japan's Kobe earthquake struck the wrong response was to tighten government spending. What was needed was more spending to support demand and confidence. Europe made that mistake after the financial crisis."

"Sure it's important not to have too much debt, but the idea that you have to have a particular surplus at a particular point in time no matter what is dangerous."

"Down the track the government can withdraw stimulus when demand has returned, but not first just in order to achieve a target."

Published in today's SMH and Age

Related Posts

. The big wet - as Westpac sees it

. Before the flood. How 2011 was shaping up

. Astonishing vision of Toowoomba's rising water