The dollar's fall reveals a budget mess

The Australian budget gave currency traders a clearer view on the medium term prospects for the Australian economy. It seems they don't like what they see.

In discounting the Australian dollar, the global currency markets are telling Australians something no one wants to hear – our local economy is in for a much tougher time than most are predicting.

And that certainly applies to the Canberra bound money buffoons in Treasury who have a score of nil out of ten in their decade of Australian revenue forecasts. (BUDGET 2013: Who framed the budget bloopers? May 14).

On the bullish side I believe that there will be a surge of confidence if the Coalition achieves a big majority in the next election and the lower Australian dollar will help a great many key employment-creating Australian industries like education, tourism agriculture and manufacturing.

But the reasons behind the fall in the currency are not pleasant. First we are currently basking in an orgy of mining capital investment, which is going to stop suddenly around 2015. It has taken a long time for the currency markets to understand the severity of this sudden halt and its looming dramatic effect on the Australian economy. It is now sinking in.

Tony Abbott is instituting a fast-tracked infrastructure program, which will help, but not eliminate the problem.

The budget illustrated to currency traders just what a tight corner Australia has put itself in and the forecasts of higher company tax revenue look to currency traders as yet another Treasury joke.

Australia is forced to cut at a time when ideally it should be spending. And in purely economic terms, to be funding more payments to disabilities and education when you are getting into trouble makes no sense.

Of course the change in the Australian dollar is more about the rise of the US currency than a global fall in the Australian dollar. But that rise in the US currency is partly about its increased production of a commodity that is an Australian cornerstone – gas and oil liquids. And that increased US energy production also affects our coal industry.

China will continue to underpin demand for our minerals but the Chinese economy is moving away from energy and iron ore intensive industries toward boosting consumer spending. And with world production of iron ore rising the Chinese (and Japanese) are looking forward to a decade of lower iron ore and energy prices.

And of course the slump in Europe continues which further crimps demand.

Because of the mistakes made by the Gillard-Rudd governments and poor management of Australian resource extraction we have become one of the highest cost mineral producers in the world. Combine high capital and operating costs with long-term lower prices and you have a tough time for corporate taxation revenue.

But don’t slash your wrists. We can get out of this problem and the first step in finding the solution is recognising the problem. Tony Abbott, Joe Hockey and Andrew Robb understand the issues as do a large number of government ministers.

However, so does the currency market. 

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