TOP ECONOMIST WARNS QUEENSLANDER’S – DON’T GET YOUR KNICKERS IN A KNOT
Written on the 2 March 2011
ONE of Australia’s leading economic commentators Saul Eslake, questions whether Queensland has lost its economic mojo in light of recent floods, cyclone Yasi and the Global Financial Crisis (GFC).
Former ANZ chief economist Saul Eslake describes the Australian economy as in ‘good condition’, despite some lingering consequences behind as a result of the global downturn.
“Many Australians suffered significant losses in net worth during the GFC, but they’ve responded to the loss of wealth by discovering the fine art of saving – Australians are now saving between 7 and 9 per cent of their disposable income,” he says.
“Indeed, it would seem as though Australian households have had a sea change in their attitude towards borrowing and spending,” he says.
Interestingly, there’s been a significant pick up in employment over the last 15 months, which now sits at 5.1 per cent.
“The decline in average hours worked was one of the main ways that employers sought to cushion the impact on their employees - there’s still some underemployment in the Australian workplace, but the unemployment rate is declining,” says Eslake.
The economist, speaking in Brisbane this week, says one problem we don’t have, compared to other Western countries, is public debt.
“We should be returning the budget to surplus as soon as we can, but I don’t believe we need to be getting our collective knickers in a knot over the possibility that it might take 6 – 12 months longer as a result of the major events over which we have no control, like the floods and cyclone Yasi,” he says.
Australia’s public finances would be the envy of almost any other finance minister and there’s no way in which the task of returning to surplus and eventually paying off a net public debt that’s expected to peak at just 6 per cent of GDP could be achieved.”
Eslake says Australia sells about 55 per cent of our exports – the biggest proportion of any other Western country.
“A consequence of our strengthening engagement with the emerging and developing world is that Australia’s economy is now more closely correlated with China’s than it is with the US,” he says.
“Therefore, we need to pay more attention to the announcements that come out of Beijing and Shanghai, than we do to those that come out of Wall Street or Washington DC.
“Obviously at the moment, this correlation is working in our favour, but should anything go wrong in China, then we’re going to be caught up in that to a much greater extent and to our great cost.”
He defines Australia’s high levels of coal, iron ore and LNG as major drivers of our commodity exports.
“Australia’s one of the only countries in the world with all three of those resources, and its really about coal, iron ore and LNG – this not only drives a bigger export income, but it also creates a huge surge in mining related investment,” he says.
“So even though investment might be declining in sectors like manufacturing and some parts of the service sector, the share of our economy represented by mining investment, is by some accounts higher than the gold rush during the 1850’s.
“This boom in export income and business investment in the resources sector is happening at a time when there’s not much spare capacity in the Australian economy to absorb the demand pressures.”
Eslake says the damage caused by the floods and cyclone Yasi isn’t counted as a negative GDP, because it’s a balance sheet item, not a loss of economic activity, where a building is destroyed.
“The loss of economic activity occurs because coal can’t be shipped, because crops have been wiped out, people can’t get to work or because business premises are unusable, that does get measured in GDP as a loss of income and employment.
“The Queensland treasury released estimates that that loss of production due to the floods would amount to $4 billion – it’s certainly enough to ensure that in the March quarter, that Queensland’s GDP growth will be negative.
“The floods and cyclone will also boost inflation because Queensland accounts for such a large share of CPI factors like groceries – it will boost the CPI by at least a quarter of a percentage point in the March quarter.”
He says the Federal Government’s estimated cost of recovering and rebuilding Queensland after the floods and cyclone will be $5.6 billion.
“The Federal Government has chosen to fund two thirds of that $5.6 billion by cutting spending and the other third will be raised through an increase in taxation they’re calling a flood levy,” he says.
“These were not things the Federal Government had to do in order to be judged as good economic managers, they’re the result of political choices.”
Eslake believes there’s no need for the Federal Government to impose a levy.
“Of the $1.8 billion the Government plans to raise from the levy, $1.7 billion is going to be collected in 2011/2012 – a year in which the budget is estimated to be in deficit by $12 billion.
“Only 200 million of the amount is going to be collected in 2012/2013 - the year in which the Government’s currently forecasting a surplus of $3 billion.
“The Queensland Government has decided to fund its share of additional costs, including the loss of coal revenue that it gets from royalties by boosting its own borrowings by a total of about $4.8 billion in 2011/12 and 2012/13.”
Eslake says that in the past three years, Queensland’s per capital growth rate has been below the national average due factors including slow population growth and a downturn in the tourism industry.
“The lynchpin holding Australia’s long term economic strategy is broken, so there’s an enormous amount of challenges facing the Queensland economy in the year ahead and in the period beyond that,” he says.
“The challenges go beyond recovering and re-building the damage caused by nature’s wrath and responding to some of these other challenges I’ve raised will require great thought from both leaders and voters.”