The Distillery: Cash barrier

One jotters says companies are stuck in an investment cul-de-sac, and another scrutinises the Commission of Audit.

The focus on the Abbott government is intensifying as the Labor leadership issue dies down. Commentators are looking into economic progression over the next few years, worried about how Australia’s new government can tackle the twin problems of a weakening mining sector and a long suffering non-mining sector.

Two scribes point to the need for reform, while another peers deeper into the Commission of Audit and spots a glaring deficiency.

Meanwhile, the battle for Warrnambool Cheese and Butter continues to draw attention, while the departure of David Jones chief Paul Zahra has one jotter pondering the retailer’s future.

First, on the economy, The Australian’s David Uren highlights the problem for the Abbott government: risk aversion.

“Companies have been paying out most of their earnings because they cannot see profitable avenues for new investment and are focusing instead on cutting costs… The level of investment is at or below its pre-crisis level in 16 of the 18 non-mining industry sectors, with utilities and agriculture being the only corners of growth.”

This will lead to a surge in unemployment if the dollar doesn’t start falling again soon, Uren contends.

The Australian Financial Review’s economics editor Alan Mitchell agrees that the non-mining sector is still crippled by the strength of the dollar, with a flow-on effect causing ripples through the economy.

“In real terms, the exchange rate appears to be between a quarter and a third above levels built into most manufacturing business models… But the dollar is not just making life difficult for trade-exposed industries. It almost certainly shares responsibility for the difficulties of “non-traded” services such as retailing. Trade-exposed manufacturing and service industries employ a lot of people, and when their employers are struggling, these workers start worrying about their jobs, and that affects their spending.”

So how can it be addressed?

Mitchell sees a need for reform of the product and labour markets, while Terry McCrann, writing in The Australian, argues for tax and labour reform. He adds, however, that Tony Abbott needs to find a sense of urgency and his pre-election promises leave him in a bind.

Indeed, his positions on GST changes and WorkChoices mean finding a way to tackle tax and IR issues will be particularly tough.

“The first (move required is) to build in the workplace flexibility fundamental to delivering jobs-friendly growth, especially outside the resources sector; the second as part of real tax reform that could produce cuts in both personal and especially corporate tax rates. Bridging the gap is by no means impossible. But it is going to require great political and policy-making skills.”

Helping the government pursue reform will be the Commission of Audit, which was announced amid much fanfare by the government this week. The Australian’s Adam Creighton believes the audit offers a remarkable opportunity, one that our treasurer needs to grasp.

“The federal government's taciturn approach to public affairs gave way to a flurry of major announcements. One of these, a Commission of Audit, could lay the groundwork for huge economic reforms that, if carried through, would guarantee Hockey's place among Australia's best treasurers.”

Fairfax’s Peter Martin isn’t convinced the opportunity will be snapped up. For starters, the most recent audit largely served to call for more inquiries and given the short timeframe in play, the same result is likely.

“If there's one lesson Hockey might have learnt from the last time the Coalition asked a commission to examine its entire financial operation, it's not to give it only three months. Hockey has listened. He has given it 3 and a half.”

Hockey wasn’t just in the news in relation the Commission of Audit, with the treasurer also making headlines through a decision to deliver $9 billion to the Reserve Bank of Australia. The move, according to Fairfax’s Michael Pascoe, was a “cunning plan” designed to pave the way to receive much more in dividends from the RBA in the years ahead. It’s a political game, the AFR’s Mitchell agrees, but it’s more dangerous than it appears.

Moving to company news, The Australian’s John Durie examines the latest bid for Warrnambool Cheese and Butter and contends the games have just begun. The arrogance of one contender, however, is “breathtaking”. Terry McCrann, meanwhile, opines in the Herald Sun that the battle for control of WCB is an inflection point in the future of regional and rural Australia.

Elsewhere, Fairfax’s Eli Greenblat weighs up the next move for David Jones in the wake of Paul Zahra’s exit. Would a new chief executive go back to the drawing board or persevere with Zahra’s path?

Finally, the AFR’s John Kehoe dissects JPMorgan’s $US13 billion settlement with the US Justice Department and Fairfax’s Adele Ferguson outlines the circumstances that have Commonwealth Bank caught up in a spying scandal.