THE DISTILLERY: Budget backdown?

Jotters look at the effects of the RBA's rate decision on the federal budget, while one suggests the Austar-Foxtel merger may win from leadership changes.

At the beginning of the week the question was whether the national accounts would undermine the Reserve Bank of Australia if the kings of Martin Place decided to keep interest rates on hold. To some extent, it did. But The Australian Financial Review’s Alan Mitchell and The Australian’s David Uren have shifted the focus to Canberra and the likely impact on the budget – it ain’t looking as pretty as the government would like. Elsewhere in this morning’s Distillery, the change of leadership at both the consumer watchdog and Foxtel could have helped bring a sense of pragmatism to the Austar merger talks, says one commentator, while another finds bank bashing emerging in China.

But first, The Australian Financial Review’s Alan Mitchell directed his sceptical ears towards Treasurer Wayne Swan, who used the disappointing national accounts data to warn the electorate that the budget has been made that much harder to compile.

"Still, he promised, the government would stick to its promise to bring the budget back into balance. To those who have spent their careers listening to treasurers cry poor in the months before their budgets, this sounded suspiciously like an attempt to soften the resistance of the spending ministers and the expectations of the public. But if the government really is struggling with the budget, it raises the question of why Swan did not insist on bigger cuts at the time of the mid-year review. Had he done so, the RBA could have offset any contractionary impact on the economy by cutting interest rates.

Meanwhile, The Australian’s David Uren says if tax receipts come in as poorly in the second half of the financial year as the first, the government will be staring at a deficit of $50 billion.

"It would be beyond the reach of the creative accounting evident in last November's budget update to turn this into a 2012-13 surplus. Treasury secretary Martin Parkinson yesterday underlined the serious weakening in the structural budget positions of both commonwealth and state governments. Tax has fallen as a share of GDP by four percentage points since the global financial crisis, equivalent to a shortfall of about $60 billion a year."

The Australian Financial Review’s Chanticleer columnist Tony Boyd suspects that the changes in leadership at the top of Foxtel (Richard Freudenstein for Kim Williams) and the Australian Competition and Consumer Commission (Rod Sims for Graeme Samuel) aided rather than hindered the merger talks over Austar United Communications.

"New Foxtel chief executive Richard Freudenstein has shown more pragmatism than his predecessor, Kim Williams, who appeared to suffer from what could be called "special undertaking phobia”. Freudenstein’s pragmatism resulted in Foxtel agreeing to make concessions to the regulator in relation to content deals to get the takeover across the line … Samuel was worried that IPTV players would be disadvantaged and competition lessened if the combined power of Foxtel, Austar and Telstra was allowed to be the most powerful participant at sporting rights auctions. However, Sims made it clear yesterday that, to the extent that Foxtel’s ownership of exclusive sporting rights may raise competition concerns, these concerns existed independently of the merger proposal.”

And fourthly, The Age’s Asian affairs reporter Peter Cai says bank bashing isn’t just confined to the western world. Thanks to the arrangement in China where the government regulates interest rates to deliver strong margins at the expense of depositors, from which the profits are then driven into inefficient arms-length state-owned companies, bank bashing is emerging there as well.

"HSBC chief China economist Qu Hongbin calculates the skewed interests offered by China's banks have contributed a staggering 1.5 trillion RMB, or $225 billion to their coffers. The return for depositors, averaged over the last ten years was 3 per cent and, after adjusting to inflation, was a miserly 0.3 per cent a year. No wonder that one senior Chinese bank executive was embarrassed to reveal his bank's profit, or rather, the money his firm had fleeced from depositors.”

Backtracking to the Reserve Bank for just a moment, The Sydney Morning Herald’s Malcolm Maiden says deputy governor Philip Lowe believes his institution’s task is to keep the economy on an even keel amid an economic restructuring driven by the mining boom. However, by declining to cut interest rates the RBA is quickening the deterioration of struggling non-resources sectors and speeding up that restructuring. Is that what even keel means? The Sydney Morning Herald’s Ian Verrender says the Reserve Bank’s decision to keep interest rates on hold, only to be followed by a string of bearish announcements around the world amounts to poor timing but it’s hardly disastrous. The Herald Sun’s Terry McCrann says it’s the Australian dollar, not interest rates, that is behind Australia’s stalling jobs market.

Elsewhere in economics, The Australian’s Robin Bromby finds the controversial Austrian School of Economics arguing that it’s not Iran that’s behind the rise in oil prices, but central bankers.

In company news, The Age’s Adele Ferguson finds that the gender ratios on Australian boards have improved slightly, but not in a convincing fashion. The Sydney Morning Herald’s Elizabeth Knight finds the big institutional shareholders at Echo Entertainment unconvinced by a recent appearance from billionaire James Packer. Fairfax’s Insider columnist Ian McIlwraith says Bendigo and Adelaide Bank shareholders appear to be in the rare position of getting a better deal on the latest share issue than fund managers.

In further comments on the Foxtel news, The Australian’s John Durie says the pay TV company must be pretty confident about the eventual shifting emphasis of the market with the advent of IPTV, given the undertakings it has made to the consumer watchdog. The Australian Financial Review’s Matthew Stevens notes the clear arse-covering at the consumer watchdog with the letters to "interested parties,” but says Sims wouldn’t have let this announcement go without being supremely confident that he’s kept Foxtel to conditions that will be acceptable.

In his Criterion column The Australian’s Tim Boreham says David Jones is a long-term buy, Austar United Communications is a speculative buy for those with a strong nerve, Australian Foundation Investment Company and Argo Investments are both long-term buys, while Continental Coal is a speculative buy.

And finally, The Australian’s Rowan Callick explains how new foreign minister Bob Carr should distinguish himself from predecessor Kevin Rudd.


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