The Distillery: Cutting cynicism

Day two of the election campaign is likely to be marked with an interest rate cut. That might make for a good day of press for Prime Minister Kevin Rudd, but Opposition leader Tony Abbott has a wide range of material to draw from in today’s newspapers to smash the government with on its economic management.

Let’s get started.

The Australian’s Henry Thornton laments that there’s been no word from Reserve Bank governor Glenn Stevens on Australia’s biggest problem, the double-digit cost disequilibrium (our stuff costs a lot).

“This is surely not because Stevens fails to recognise the problem, more likely because doing so would throw a spotlight on the major dilemma facing the Reserve Bank. Cutting rates further will relieve cost pressures for some, but will do nothing to reduce, and may worsen, Australia's generally high-cost structure relative to competitor nations. Put crudely, Australia has pissed the proceeds of the mining boom up against a wall of gullible voter expectation. In the process, mining companies allowed their cost bases to expand to unsustainable levels. Cost bases expanded in sympathy in the non-mining parts of the economy in a climate of easier than desirable monetary policy and encouraged by those vainglorious spending programs of the Rudd and Gillard governments. Restoring Australia's economy to robust health will require massive effort by all Australians.”

Fairfax’s Michael Pascoe notes a speech by Stevens from last week didn’t contain any big revelations about where interest rates might be heading today, although economists are almost unanimously predicting a cut.

“The speech was credited with helping the dollar fall through the psychological 90 US cent level even though, again, Stevens didn't say anything the Reserve Bank has not said before about the currency. Nonetheless, I imagine the bank would not be displeased with the exchange rate outcome. Aside from its blunt monetary instrument, it has only one other weapon: Glenn Stevens' jaw bone. If the jaw bone works, it can help conserve the interest rate lever. And there's a less measurable factor to weigh: at the start of a month of electioneering with the polls saying it's a 50-50 bet, does anyone think trimming 25 points tomorrow would really make much difference to demand or confidence? It would barely be noticed. Even if you are a monetary dove wanting another rate cut or two from the RBA, you might consider it worth waiting until it will be noticed.”

The Distillery is a little bemused as to why some pretty basic questions about the coming interest rate decision aren’t being asked this morning. Like, will the simplistic politics of interest rates (where up is always bad and down is always good) play out? Or, will the spotlight of an election campaign force the banks to pass on every last basis point to borrowers? Might one of the banks hang on to some basis points to highlight the government’s coming deposits tax?

Elsewhere, Business Spectator’s Stephen Bartholomeusz reports on how the Australian automaking industry, which sells about 1 million cars a year in this country, was not overly impressed with the Rudd government’s announcement of $200 million in unspecified support.

“The Australian Salary Packaging Industry Association has estimated that about 21 per cent of those vehicles are employee-benefit vehicles. ASPIA also says that the local output of the Australian manufacturers – Toyota, Holden and Ford – is over-represented in the employee benefit segment, with about 40 per cent of locally-manufactured vehicles sold each year ending up as employee benefit vehicles. That disproportionate reliance on the salary-packaged vehicles means the local manufacturers will be hit harder by the siphoning off of the $1.8 billion than the rest of the sector – 40 per cent of their output effectively faces a new tax. The $200 million of assistance unveiled today won’t go close to alleviating the loss of volume and the financial impact that will have on the local industry when the fringe benefits tax change is ultimately legislated. The Coalition has promised that it won’t implement the changes (although it has also said it will cut $500 million from the industry’s funding).”

The Australian’s contributing economics editor Judith Sloan makes the rather astute point that the government has calculated that it’s easier to attack smokers than it is miners.

“In the next four years, the government expects to raise nearly $39 billion from excise on tobacco products. By contrast, the minerals resource rent tax will bring in $5.5 billion across the same period. For every dollar extracted from mining companies in the form of the MRRT, the Labor government expects to collect $7 from smokers. And don't be fooled that the government wants smokers to give up their habit. The estimates of future excise revenue are firmly predicated on the basis that most smokers will not quit.”

The Australian’s John Durie reports that Virgin Australia boss John Borghetti is dealing with increasing government charges and some believe a capital raising could be on the cards.

“Borghetti ruled out the latter, but obviously to some extent it is out of his control because it depends on what happens on the macroeconomic scene. Tony Abbott made clear yesterday that, if he gets the top job, scrapping the carbon tax would be his first step which, other things being equal, would almost guarantee the Coalition Borghetti's vote.” 

The Australian Financial Review’s Chanticleer columnist Tony Boyd is in the same camp as Durie – that Borghetti has a “legitimate case” for blaming the carbon tax on this sudden drop in fortunes.

“Borghetti’s natural disposition is to be optimistic and upbeat. That has served him well in the difficult task of transforming Virgin from a discount airline into a full service operation that can better compete with Qantas. But it seems his optimism got the better of him when forecasting business conditions as well as implementing important internal changes at Virgin. His profit outlook statement issued in May obviously included the assumption that Virgin would be able to recover the $50 million cost of the carbon tax through higher airfares. But that proved to be a false hope. An attempt to recover the money would have impacted on yields.”

And Fairfax’s Elizabeth Knight reminds her readers that if Virgin is hitting rough air, chances are its larger competitor will do the same.

“Investment market eyes will now be trained on Qantas and what it might produce for its full-year earnings given the tough domestic environment outlined by Virgin on Monday…Engaging in this kind of ruthless competition is particularly painful when the economic backdrop is at best weak and consumer confidence is even worse." 

Still in company news, Fairfax’s Adele Ferguson is riding the Commonwealth Bank trading scandal. One of the whistleblowers that tipped off the corporate regulatory says that the submission to the Senate inquiry into the matter by the Australian Securities and Investments Commission is “inadequate”.

Fairfax’s Michael West reports on news that Newcrest’s investigation into the briefing to analysts earlier this year that preceded a writedown “will deliver a head on a platter, a scapegoat”. 

Elsewhere, The Australian Financial Review’s Matthew Stevens picks up on comments from Deutsche Bank’s Paul Young about the balance that mining companies need to strike between their future growth ambitions and shareholder demand for dividends in the wake of recent mistakes.

And finally, Fairfax’s Tim Colebatch pleads with readers to see the truth that the crucial factor for the budget’s bottom line is the degree of economic growth, not the spending levels of the government of the day.