David French | 15/06/2011 11:37:40 AM

This article was first publihed in The Morning Bulletin dated 21st May 2011. Federal Budget Undoes Our Buffer Against GST

Is the recent Commonwealth budget boring? Perhaps, but it is important because of what it has failed to do. It is an embarrassment to the party that through Whitlam, dragged Australia kicking and screaming into the 20th Century, and into a liberal financial mainstream through Hawke and Keating. In fact, it seems to sow the seeds of undoing much of the great work that has led to Australia’s ability to withstand the GFC, and the nation’s current prosperity.

As already discussed in this column, Australia’s booming mining industry is (through no fault of its own) sapping resources from other sectors. Shortages of labour and capital equipment add to inflationary pressure. In an attempt to limit these pressures, the RBA puts measures in place to limit the money supply, and correspondingly interest rates increase. Higher interest rates attract capital inflows from overseas, forcing the value of our dollar higher. Higher interest rates and the high dollar affect everyone, but non-mining businesses suffer disproportionately because they are not shielded by correspondingly high commodity prices.

According to the RBA, and others, the current state of affairs is likely to persist. The use of monetary policy in such a situation does nothing to address the underlying cause - high levels of overseas demand. Michael Stutchbury, writing in The Australian says “if the share of mining investment doubles, other parts of the economy such as consumer spending, manufacturing, housing construction and tourism have to make room”. Such a statement totally ignores the supply side of the economy – measures that can be implemented to increase productivity, thereby reducing inflationary pressures by producing more with less.

The hallmark of the Hawke-Keating Government, the recent budget all but ignores them. The nod at increased skilled immigration, and getting (supposed) loafers back to work are a drop in the ocean. Government spending needs to be reduced, and resources freed up for other endeavours. Whole departments manage climate change, terrorism threats, and all manner of perceived risks. No doubt an OAP (Office for Abolishing Planking) will soon be established. Vast sections within departments manage outsourcing contracts, but don’t actually do the work. It’s not all the Government’s fault. The undermining of organized religion (for all its faults), the dumbing down of education, and the focus on money rather than broader social good has resulted in vastly diminished responsibility and ballooning legislation. The cost of this is decreased productivity and the risk of 1970’s style stagflation.

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