A gentler, more understanding RBA

While export earnings forecasts soar:

The Reserve Bank has pulled back from the brink, declaring there is now no urgent need to lift interest rates and pointing to Australia’s “subdued” non-mining economy and the Greek debt crisis.

The Bank’s changed position outlined in board minutes released yesterday came as the nation’s chief commodity forecaster substantially boosted forecasts for export income in the coming year, led by an upgrade in iron ore sales and prices.

“We have just witnessed a fairly significant Reserve Bank back-flip,” said ICAP Securities economist Adam Carr. “In May the board minutes were firmly eyeing a hike. The June minutes show the board has taken a step back. Its finger is no longer on the trigger.”

The Reserve Bank board minutes point to a weaker than expected domestic economy saying while there has been a strong pick-up in mining investment, activity elsewhere remains “quite subdued”.

Away from mining, investment intentions were “considerably weaker” with “little evidence of a pickup” in non-residential building construction. Households were “cautious,” the housing market “soft” and retail sales growth “moderate”...

The high dollar and the Reserve Bank’s own action in raising rates in November were acting as a drag on the economy as well as the withdrawal of budget stimulus measures which was set to “exert a significant contractionary impulse on aggregate demand over the next two years”.

The board expressed its strongest concern to date over the Greek debt crisis saying “whereas in earlier months the debt problems of Greece, Ireland and Portugal had been largely reflected in the interest rates of those countries, over the past month they had spilled over to long-term rates for some other European countries”.

The minutes say while “further tightening in monetary policy would be necessary at some point” the flow of data in the past month has “not added any urgency” to that need. Downside risks to the global economy had become “a little more prominent”.

The quarterly forecasts released by the Bureau of Agricultural and Resource Economics and Sciences have mineral exports reaching a record high of $218.3 billion in 2011-12, revised up from $214.6 billion.

Total commodity exports are expected to hit $256.3 billion, an increase of 18 percent on 2010-11.

While the Bureau has slightly downgraded its forecast of iron ore earnings in 2010-11 largely due to cyclone activity, it upgraded next year's forecast by $2.2 billion to $65.3 billion.

Coal export earnings have been revised down but are forecast to be 31 per cent higher in 2011-12 due to both higher volumes and prices.

Income from live cattle will be down 17 per cent in 2010-11 due to the ban on exports to Indonesia and also due to earlier restrictions imposed by the Indonesian government itself on the weight of cattle and the number of permits.

Published in today's SMH and Age


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ABARES AUSTRALIAN COMMODITIES

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Drought assistance is wrong and done badly

So says the Productivity Commission in a new report. Hallelujah!

The summary is well worth reading.

Existing drought assistance measures would be swept away and no new areas drought declared under a radical new plan prepared for government that would replace drought assistance with a Centrelink payment set at the level of the dole.

The recommendation forms the centrepiece of a draft Productivity Commission report that finds the existing measures encourage dependence and are beyond public scrutiny.

The Commission says that weeks before the 2007 election the Howard government declared 14 areas eligible for interim drought assistance without receiving applications from the communities or state governments concerned.

Despite “stringent criteria” that limit the declaration of exceptional circumstances drought assistance to areas to those suffering from a once in 20 to 25 year drought “as at June 2008, more than half of the country was declared and some areas had been declared for 13 of the past 16 years”.

“When compared with rainfall records, it would appear that a generous interpretation of the criteria, rather than protracted low rainfall, is mainly responsible for such widespread declarations,” the Commission says...

It notes that the Coalition lifted the maximum drought interest rate subsidy payable over 5 years from $300,000 to $500,000 in 2006 and then a year later ahead of the 2007 election lifted it again to $700,000.

It finds that the entire process “lacks transparency” and that deciding who is and who is not eligible for assistance on the basis “lines on maps” is “divisive within and between communities”.

It quotes farmers who have written to it saying that the process promotes “worst practice farming, ie to overgraze and overspend in good times, knowing the criteria for subsidy will be met in the drought.”

The draft report proposes ending all drought-specific assistance schemes from mid 2009 and replacing them with assistance available to all farmers in difficulty set at the level of the dole and delivered through Centrelink rather than agricultural departments.

The payment would be subject to an assets cap, more generous than that applying to NewStart recipients and would be conditional on the farmers seeking independent financial advice about the viability of their business and developing and carrying out an action plan to improve their self-reliance.

Their eligibility for the plan would be reviewed every six months.

No farmer would be able to stay on the plan for more than 3 years out of 7.

No new areas would be drought declared and all existing declarations would end on June 30, 2010.

The National Party’s agriculture spokesman John Cobb described parts of the report as “garbage” and said that “not even the best farmers” could have prepared for the current drought.it.

“No-one would miss the Productivity Commission but people would miss the cheap, clean, environmental friendly and safe food provided by the worlds’ best farmers,” the Shadow Minister declared.

The National Farmers Federation said it supported the idea of moving the criteria for farm support away from drought but that the Productivity Commission appeared to be putting nothing in its place.

“The Commission didn’t even support HECS-style loans,” said the Federation’s President David Crombie. “Does it want to remove every support other than time-limited income assistance and support for R&D and training?”

The Commission has asked for comment on its draft report and will deliver the final version to the government in February.

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