Hockey will inherit none of Swan's luck

The end of the commodities boom should be good news for Australia's non-mining economy, but likely treasurer in waiting Joe Hockey faces a much unhappier revenue reality.

Just when we’re getting used to one reality, everything changes. At the time of writing, yesterday’s sell-off in Australian equities due to poor economic data from China looks set to be exacerbated today by global uncertainty flowing from the shocking news of the bombing of the Boston marathon.

If our bourse does take a sharp tumble, it will return to more sober valuations within days. However, the China data – lower than expected GDP growth, and lagging retail sales and industrial production – mean that valuations will disappoint those who celebrated the 5000-plus highs of the ASX 200 in recent weeks.

Yesterday the Australian dollar fell 1.13 cents against Friday’s US dollar price (to $1.0433) – a reminder that, as economist Ross Garnaut told the ABC a couple of weeks ago, we can expect “a fall, probably a big fall when it comes, in the dollar”.

Garnaut was talking about the prospects of competitiveness returning to beseiged sectors of the economy – sectors such as agriculture and food processing, other manufacturing, tourism and education services.

In essence, 2014 is going to be a very interesting year for Australia, as the winner of the September 2013 election – most likely an Abbott Coalition – tries to adjust to the reality of falling terms of trade, struggling asset prices (particularly mining stocks as China’s fixed investment frenzy, which has driven record iron ore and coal prices, cools) and a lower dollar.

If Wayne Swan has been the luckiest Treasurer in Australia, Joe Hockey may end up being the unluckiest.

I do not wish to detract from a number of Swan initiatives that have helped Australia make its own luck through the GFC – including most of the stimulus spending that kept tens of thousands of small businesses open during the darkest days of the crisis.  All the griping about an average 6 per cent cost blowout in school halls, for instance, missed what Labor was trying to achieve – namely shovel cash into the pockets of productive small business owners and sole traders, whose financial collapse would help nobody.

But come on Mr Swan – admit you’ve also been bloody lucky with the China-driven mining boom. Labor piled up debt to achieve its current set of beautiful numbers, and Hockey will face the opposite task.

If a coalition government is formed, it will face the task not of propping up tradies while the GFC storm front passes, but rather of assisting the economy through a medium-sized structural adjustment.

Time is of the essence – all the struggling sectors listed above have withered on the vine during the terms of trade boom, but the businesses that have made it through will be looking to restart investment and capture the upside flowing from export opportunities offered by a lower dollar.

And this is where Treasurer Hockey will struggle. Labor was able to borrow freely to deal with the imminent threat of a financial collapse, but Hockey will not have this option - not least because his own side of politics has stirred up ‘debt and deficit’ fears in the electorate. 

Worse, the revenue side of the federal budget will be hit by the junking of the mining tax (for what that was worth) and falling corporate tax receipts among the miners.

Meanwhile, all the dollar-hit sectors will be wanting to invest, but will be told by their banks that the period of low, low interest rates is over – even at 95 US-cents (the Australian dollar currently buys 104 US cents), Australia would be importing significant inflation via every consumer good and production input stamped 'made in China'. This will put pressure on the Reserve Bank to raise rates as dollar-pegged yuan price tags are increased.

The background to all this is Australia's infrastructure deficit. The Rudd and Gillard governments have achieved much in lifting infrastructure spending, far above Howard-era levels. That is to be commended. But there is still growing list of physical and social infrastructure that needs to be funded.

On the social side, Labor is happy to announce massive increases in schools funding, and promote it still-high level of university funding – despite ‘stripping’ $2.8 billion from that sector to help fund an additional $14.5 billion in schools funding over the next six years.

On the physical side, more, not less, money needs to be spent on catch-up for the lost years of underspending on road, rail, port and freight facilities.

The opposition’s infrastructure spokesman, Warren Truss, says the Coalition will be looking at copying successful PPP models (and avoiding like the plague the collapsed models seen in many toll projects – see Abbott’s do or die infrastructure play, April 12), to help superannuation funds pour money into badly needed infrastructure.

If the coalition can do that, they will preside over a new miracle - the removal of infrastructure-based productivity constraints to assist the reinvigoration of the non-resources sectors.

And that must all be done in a time of imported inflation, slackening commodity prices and a federal budget that’s a shadow of its former rosy-cheeked, debt-fed self.

The end of the China-led commodities super-cycle, and the macroeconomic shifts that flow from them are Australia’s new reality. There must be moments when Joe Hockey gulps at the prospect of standing in the shoes of our luckiest Treasurer, Wayne Swan, and realising that all the luck has gone.