THE DISTILLERY: Debts and Dr Doom

The tone of the macroeconomic commentary this morning is noticeably negative. Two Australian business writers are focusing on the US fiscal cliff scenario, where simply driving over the edge could prove to be the best option. There are some parallels between the US debt situation and the debate in Australia, says one commentator, with another focusing on a big correction prediction from a notable market bear.

Firstly, The Australian's Judith Sloan argues that the best option for the US in regards to the fiscal cliff is to jump.

"Rather than add to the debate about the supposedly dire implications of going over the cliff – I say: get on with it, there is never a good time – what I want to talk about is the lack of discretionary spending in the US federal budget. There are some strong parallels with the situation that is emerging in Australia. It is estimated that nearly two-thirds of the US federal budget is essentially non-discretionary, in the sense the spending is locked in, mainly by statute. There are no available means, at least in the short term, to alter the yearly amounts expended. Chief among these non-discretionary items are social security and health. On the face of it, the budgetary position of the Australian government looks in much better shape – obviously in terms of the deficit and government debt, but also in terms of flexibility. Social security and welfare make up more than one-third of Australian government general expenses; health another 16 per cent and education 8 per cent. Of course, large slabs of spending on other functions are also effectively locked in, but there is some scope to reduce spending at the margin.”

The Australian Financial Review's Washington correspondent, Ben Potter, doesn't so much say that diving off the fiscal cliff would be a wise move, but does lament the focus on revenues when the budget is in a structural spending deficit.

"America's trillion dollar deficits and $US16 trillion debt were primarily a spending problem, said former Federal Reserve chairmen Paul Volcker and Alan Greenspan, Obama fiscal commission chairs Alan Simpson and Erskine Bowles, and Clinton White House budget chief Alice Rivlin. "Spending is the crux of the problem,” Volcker told the forum at the Newseum. It was "going to take years” to get spending back to a sustainable relationship to gross domestic product, he said. That's in stark contrast to how newly re-elected President Barack Obama is approaching the challenge – primarily as a revenue problem, with Medicare and Social Security entitlement spending reform as afterthoughts. There's more agreement on how to resolve the fiscal cliff – the tax rises and spending cuts that would drag the US economy back into recession next year – but not on how much long-term tax and entitlements reform should be locked in to a short-term deal to level off the fiscal cliff.”

While much of the focus on the Australian economy's outlook is shaped by global events, The Australian's economics editor, David Uren, says the economic headwinds for Australian governments are actually coming from within.

Meanwhile, in a morning where the aggregate tone of Australian business commentary is unmistakably bearish, Fairfax's Adele Ferguson touches base with a renowned pessimistic that's tipping a big market correction.

"Earlier this week, investment adviser Marc Faber, often referred to as Dr Doom for his contrarian views, turned up the doom dial with a prediction that the markets are set for another meltdown that could see at least 20 per cent wiped off their value. He argued that the recent fall in markets – the US S&P 500 Index is down 7.5 per cent and Australia's ASX/S&P 200 Index is off almost 5 per cent – was not because of the so-called fiscal cliff facing the US, but because corporate profits would begin to disappoint. ‘The global economy will hardly grow next year or even contract, and that is the reason why stocks … will drop at least 20 per cent, in my view.' Faber's views are extreme, but given the stream of bad news that has enveloped 2012, they are hard to dismiss outright, particularly if applied to the growing number of Australian companies that have issued downgrades less than seven weeks before they are due to close off their books.”

Meanwhile, The Australian Financial Review's Chanticleer columnist Tony Boyd says the International Monetary Fund's recommendations for the Australian banking sector have come 20 years too late.

The Australian's John Durie says the relationship between the federal government and business is at all-time lows. The writer argues that Prime Minister Julia Gillard could generate some dialogue via the Australian in the Asian Century white paper as a starting point.

Fairfax's Clancy Yeates looks over the predictably unconvincing arguments against raising or expanding the GST.

And finally, Fairfax's Michael West looks back at some coal exploration approvals in New South Wales, awarded without tender, to a company with a union boss on its register.