Three dangers keeping Abbott up at night

The new government could be derailed by three danger zones. Land shortages in major cities, another possible rise in the Aussie dollar and infrastructure spending are all potential economic threats.

What are the most dangerous forces that could derail the forward momentum that the change in government has so far given the Australian economy?

Last night a group of business people asked me that question and, unhappy with my answer, I spent some time thinking early this morning about surprise danger points. I have isolated three.

Overall, the government is off to a very good start. It was important to put the public service on alert that there are fundamental changes in direction ahead, so those wedded to the previous government’s ways are better to seek opportunities elsewhere. The most careless move was the quick appointment of a top military person without doing a routine due diligence check via the DLA Piper report on our defence management (A trap is being set for Abbott, September 23). 

I think party whip, Phillip Ruddock, will alert Tony Abbott of the enormous dangers of not doing due diligence on new appointments and both will now be on the alert to make sure that it never happens again.

I think the key pillars of the opposition’s transformation of business in Australia, including ending the cartel-style agreements in commercial building; massive deregulation to lower the costs of conducting a business in Australia; rationalisation of the public service; the boost to independent contracting; the requirement for fair contracts for large organisations in dealing with small enterprises and carbon direct action have all been carefully thought out. They will face hazards and things will go wrong but these are polices that Australia badly needs and they should work.

My first candidate for a major Australian danger point is the ‘shortage’ of land and some building components in Sydney – both in inner city and outer suburbs. The shortage is not as acute in Melbourne or Brisbane. Those involved in property regulation plus banks reluctant to lend to developers/builders cause the land ‘shortage’. Demand is very strong and one up market appliance supplier tell me that envisaged orders from new Sydney projects are set to rise by 30 per cent (Melbourne is up 7 per cent). In both big cities labour shortages are developing in parts of the building industry because struggling builders are hanging onto their people and the skills being employed in the mining projects have not yet returned home to the major centres of population. In some areas building material suppliers have cut back production capacity and shortages are possible.

The ingredients are all there for a property price jump in our largest city, which will be hard to handle and could easily derail the revival because counter measures could involve higher interest rates, restrictions on some buyers (such as superannuation funds) and other nasties.

My second fear is that of our property problems will give an upward pressure to interest rates at a time when the US may prolong quantitative easing. That’s a recipe for a rise in the Australian dollar, which will devastate our employment creating industries.

My third candidate is the problems Tony Abbott faces having to live up to his self-appointed title of “Mr Infrastructure”. We need a rise in infrastructure spending but there is simply not enough government money to undertake the task given the limitations to borrowing and pressures of other spending.

So we must use superannuation funds and other private capital to fill the shortfall. There is no shortage of capital – particularly in self-managed superannuation funds in pension mode – but that capital requires a return. The Australian population has not been told that if they want better roads and rail services plus hospitals, they are going to have to pay higher tolls, rail fares and other charges. We are moving to a user-pays society but the politicians on both sides find it very dangerous to try and explain this to the Australian population.

Finally we have the usual threats from abroad, particularly a possible slowdown in China and another crisis in Europe. But the Australian threat I am watching is the apparent change in attitudes in Iran. If these changes are real (and the person I have spoken to from Iran says they are) we will see much more Iranian oil on the market. At the same time the enormous new reserves of gas and oil in Iraq may be easier to develop. Add that to the huge shale oil and gas in the US and we have an explosion of hydrocarbon energy, which will adversely affect both our natural gas and thermal coal exports.

I am sure readers will have different views as to our danger points.