Australia cannot rely on its resources boom to ensure better living standards over the next decade and the government needs to tighten its budget to create room for interest rate cuts, Australian Trade Minister Craig Emerson said.
A government commitment to restore the budget to surplus this fiscal year after four years of deficits will be achieved through spending cuts and possible tax increases, Emerson said in an interview yesterday with Sky News television.
While the Reserve Bank of Australia lowered the cash rate by 1.25 percentage points from November last year to June, the benchmark borrowing cost at 3.5 percent is still the highest among major developed economies.
“We can’t just be reliant purely or primarily on minerals and energy. This government recognizes that,” Emerson said. “It would be a good thing if the government gave the Reserve Bank the capacity, if it so desired, for further interest rate reductions.”
Australia has managed to avoid recession for 21 years as China’s infrastructure-led economic stimulus fueled demand for commodities such as iron ore and coal, driving the country’s trade balance to a 40-year high in 2010.
Australia now has one of the developed world’s lowest debt burdens, at just 27 percent of GDP, and its highest interest rates at 3.5 percent.
A warning last week by economist and government adviser Ross Garnaut that the country would face declining living standards as prices of exported commodities fall was wide of the mark, Emerson said.
“The mining boom still has a long way to run,” Australian Treasurer Wayne Swan said in his weekly economic note yesterday.
While “commodity prices have remained lower than what we factored into the budget forecasts,” stimuli to growth from mine investment and export volumes “have a way to run” and the government will deliver “responsible savings,” Swan said.
Australia risks a “deflationary shock” that will start to be felt in about 18 months as commodity prices are weighed down from growing supply as a result of current investments, former Reserve Bank board member Bob Gregory said on Wednesday.
The effect “will become increasingly evident quite quickly,” Gregory added.
The pace of China’s iron ore demand has slowed by more than half, said Alberto Calderon, chief commercial officer of the world’s biggest miner, BHP Billiton Ltd, at a conference in Canberra the same day.
BHP last month delayed an estimated US$68 billion of projects, including an iron ore port expansion at Australia’s Port Hedland, the world’s biggest export harbor for the commodity, amid a price slump that’s driven a key iron ore benchmark down 39 percent over the past year. Thermal coal at Australia’s Newcastle port, the biggest coal export harbor, is down 25 percent over the same period.
The fall in commodity prices will cause Australia to have “a very difficult time adapting to the decline in living standards that’s going to be a necessary part of the adjustment,” Garnaut, a former chairman of Lihir Gold Ltd who was senior economic adviser to former Australian prime minister Bob Hawke, was cited as saying by the Australian Financial Review on Thursday.
“Living standards aren’t going to decline, that’s the truth of the matter,” Emerson said. “Prices have come down but anyone 10 years ago, to look at current prices and prospective prices, would dream about these prices.”