THE DISTILLERY: A try for NSW

Jotters deliver a mostly positive verdict on the NSW government's state budget, while others question the timing of Echo's capital raising.

Australia’s business commentators have handed down a somewhat split verdict on the latest budget from NSW Treasurer Mike Baird. On the one hand, journos from the Fairfax stable appear to be reasonably content – if not blown away – with what the NSW government is doing, given the circumstances. By contrast, in the News Limited tent, commentators feel the O’Farrell government could be cutting harder and lament the handouts to the property sector.

Firstly, The Australian Financial Review’s economics editor Alan Mitchell does ask whether O’Farrell is doing enough to clean up the state’s balance sheet, but also describes the plan to cut spending growth as "impressive”.

"As a result, the budget balance is to be turned around from an underlying deficit of $1.1 billion in 2011-12 to a surplus of almost $1.2 billion in 2015-16. Net debt is to be kept low enough for NSW to keep its AAA credit rating. The government is off to a good start. It has more than met its last budget, which is an unusual achievement in NSW. But for all that, the budgeted operating surplus in 2015-16 will be only $1.17 billion or 0.2 per cent of gross state product. That is no more than a rounding error. A serious setback for the world economy, a slower recovery in the NSW property market, and some unanticipated slippage in achieving the $4.3 billion in savings that the government has projected for 2015-16, could easily combine to wipe out the budgeted surplus. With that would go a significant chunk of the funding for the government’s future infrastructure investment program.”

The Australian Financial Review’s Jennifer Hewett says this budget was partially a make up for last year, where Baird could have cut a bit deeper.

"NSW blames part of this on the Gillard government fiddling with the timing of grants to the states to ensure its own 2012-13 bottom line remained pristine. All true – but more a useful excuse for a steady-as-she-goes state government. Barry O’Farrell is willing to do a few asset sales but he’s not about to risk voter wrath by going much further on privatisation. And NSW is also getting its own back on the federal government by increasing coalmining royalties to counter the impact of the carbon tax. As part of the mining tax to start on July 1, Canberra is supposed to reimburse companies for state royalties – meaning it would bear the cost of increases. There will inevitably be plenty more argument to come over that. But it only reinforces why the NSW budget estimate for next year and beyond can be no more than a best guess. Like the federal budget, it is also heavily laced with optimism about present conditions – globally and domestically – improving rather than deteriorating. The prediction is a return to surplus by 2013-14. We’ll see, won’t we?”

The Australian Financial Review’s property editor Robert Harley sums up the NSW government’s plan to encourage the recovery along in the recently battered state.

"New houses, and lots of them, have become a top priority for the O’Farrell government. And it does not matter where. Unlike his Labor predecessors, or their colleagues in Canberra, O’Farrell is not attempting to corral or curtail the growth of Sydney. The need to build more homes is so important that the premier and his cabinet will invest wherever they can to boost construction. The maximum benefit for first-home buyers announced in the budget, at $35,240 the most generous in the country, will go a long way to overcoming the disincentives of buying new housing in Sydney’s west.”

But The Australian’s economics correspondent Adam Creighton argues against the handouts, adding that Premier Barry O’Farrell is wasting a historic mandate on short-term politics.

"The ‘centrepiece of the budget’, Treasurer Mike Baird told journalists yesterday, was a plan to double first-home owners grants to $15,000 from October. These grants are a populist waste of public money, ending up largely in the hands of wealthy sellers of homes and developers, not first-home buyers. And, even if they did, what is remotely fair about taxing renters, a far poorer group on average than first-home buyers, to help other people buy homes worth up to $650,000.”

And The Australian’s economics editor David Uren says the NSW government might have correctly identified housing as a crucial downer on the Australian economy, but the budget is based on a fantastical recover in housing turnover.

"The housing industry is in a parlous state in NSW, with barely 30,000 dwelling units built this year, less than half the number needed to match population growth. The level of new home building is as low now as it has been in the past 30 years. Housing investment has fallen from a peak of 7 per cent of demand during the boom ahead of the 2000 Sydney Olympics to less than 4 per cent now. The policies selected to turn around the decline – a boost to the new first-home buyers grant and more money for housing infrastructure – will be deployed at a time when the government is midway through reviews on the infrastructure costs of housing and planning guidelines.”

While we’re talking about the local economy, The Sydney Morning Herald’s Ross Gittins faces the question of why Australians are so gloomy when our books are so strong. Gittins points to two sources of frustration. Firstly, structural changes in the economy are weakening some industries, which some participants have mistaken for a cyclical downturn. Secondly, other industries aren’t being eroded by the mining boom, but by a fundamental change in consumer behaviour – more savings.

Meanwhile, The Sydney Morning Herald’s Michael Pascoe looks over the Reserve Bank’s plan to crack down on credit card charges, finding a big problem. In a separate piece, Pascoe previews an upcoming economic summit that the prime minister will address – the writer has high hopes, but low expectations. In international matters, The Age’s Malcolm Maiden raises serious doubts about Europe’s current plan to ease pressure on Spain.

In company news, The Australian’s John Durie argues that Echo Entertainment is taking a risk by raising $400 million in the wake of losing a chairman, as does The Australian Financial Review’s Chanticleer columnist Tony Boyd.

The Age’s Adele Ferguson points out that billionaire James Packer is likely to see a less generous discount on the new Echo Entertainment shares he’ll be offered compared to the Ten Network issue last week. The Sydney Morning Herald’s Elizabeth Knight suggests that the first companies to sure up capital were the financials, while the latest batch have tended to be industrials.

The Australian’s Bryan Frith suspects that institutional shareholders at Alesco Corporation that sold out to suitor DuluxGroup might be forgiven for thinking they acted a little hastily. However, Fairfax’s Insider columnist Ian McIlwraith suggests that Dulux is showing signs that it will withdraw its offer for Alesco Corporation, rather than increase it.

The Australian’s Barry Fitzgerald concludes that the reason Ivanhoe Mines shares have dropped so severely in recent months is investors fear new majority owned Rio Tinto is concerned only for the copper-gold Oyu Tolgoi in Mongolia, and little else.

And finally, in a separate analysis, The Age’s Ferguson heralds a comeback for the Australian real estate investment trust (A-REIT) industry.

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