Rarely has an Australian treasurer put before the people a financial outlook as strong as Australia’s at a time when much of the world is struggling. And, although he can take a worthwhile share of the credit for this remarkable achievement, Wayne Swan may have blown it.
The enormous investment Swan predicts for mining in coming years depends on overseas and local banks funding at least half of every major project and that backing depends on detailed cash-flow estimates. However, in the last week bankers have told scores of miners not to bother asking for funds until they know the cash implications of Swan’s resource super profit tax. And depending on when the election is held, miners will not know how their business will be affected for another six months, or more, which effectively delays the projects. Thousands of skilled engineers and geologists will be retrenched our employed on a part-time basis.
If the Swan tax is left as it is, a number of projects will still go ahead after the delay, but a large number will be mothballed because most miners and their bankers believe that any so-called super profits tax should not start when there is a return of just 6%.
If the states are prepared to forgo their royalties or if the profits trigger point is raised to 15% or a genuine super profits tax is introduced in some other way the industry damage will be minimised. But if there are major changes along these lines then the amount raised will be slashed, causing serious problems to the budget forward estimates that have been boosted by a projected enormous rise in GDP and tax revenues.
Swan is predicting that household consumption will rise by 3.5% in 2010-11 and 4% in 2011-12. He may be right but in the last week there has been a fall in job advertisements which maybe a statistical variation but the decline coincides with the government’s effective suspension of new mining projects and the higher interest rates. And, retailers and food suppliers tell me people are going for cheaper products. These are not good signs for household growth.
Treasury expects growth in dwelling investment to more than double from 3% to 7.5% in 2010-11 and then fall back to 4% in 2011-12.
There is enormous momentum in the dwelling industry, and hopefully that will not be interrupted by bad state and local governments.
Conversely treasury is very downbeat about the outlook for non-residential building outside of the mining sector, which they expect to fall by 6.5% as the education revolution money passes through the system. They are hopeful of a recovery in 2011-12.
Despite this fall in non-residential construction, total business investment is expected to rise by 7% in 2010-11 and a massive 12.5% in 2011-12 (it fell in 2009-10).
So we are banking on the mining industry really kicking off over the next two financial years. A lot of the investment in areas like the North West Shelf are locked in but a vast number of the projects that were likely to go ahead in 2010-11 will be delayed while the bankers a wait for the Australian election and the final legislation.
Treasury says that in the long run the resource super profits tax is expected to lead to an increase in resource sector investment. They simply do not understand what they have done — which is alarming.
One of the important lynchpins of the budget is treasury’s expectation that China will continue to power ahead. It grew 8.7% in 2009, and Treasury is expecting growth of 10% for 2010 and 9.5% for 2011. India, meanwhile, is expected to grow by 7% in 2010 according to Treasury estimates.
They expect the US, Europe and Japan, which all suffered economic declines in 2009, to be in the black in 2010. Indeed, Australia’s overall buoyant outlook is dependent on a strong set of numbers for the rest of the world. According to Treasury, the overall outlook for global growth is 4.25%.
If Treasury is right then about global growth it will underpin global share markets including Australia’s. Until then, we must hope that their mining mistakes are not duplicated on the world stage.
As a professional working in the Mining Industry, I cringed while reading this article.
“Thousands of skilled engineers and geologists will be retrenched our employed on a part-time basis.”
I can assure the readers that this just aint’ going to happen. It didn’t occur when the world economy walked off a cliff (of which the mining industry nosedived before finding it feet some 6 months later), so I doubt that it will occur due to the new tax arrangements. The very same tax arrangements that the Australian mining industry representative bodies lobbied argued and pushed for around 18 months ago.
What a weird world we live in!
I used to like watching Gottliebsen’s finance reports when I was a kid…
Now, just like with the CPRS, Gottliebsen is acting as a mouthpiece for rent-seekers. So disgusting and disappointing.
Jeez. I reckon Julian Watson is talking tosh but what do I know?
He’s a “professional working in the Mining Industry”.
Presumably if mining projects are put on hold engineers and geologists will work for government in the major infrastructure projects like laying optical fibre to single mum Sheree’s fibro in Kangaroo Flat.
I too work in the resources sector. If someone can tell me where we can find even a dozen of those skilled geologists we would gladly snap them up. At the moment it is very expensive and exasperating sourcing them from overseas.
When ever I read Gott’s pieces these days, I imagine him reading it in that wide-eyed and breathless style he employed on free to air TV back when.
As to whether Treasury “simply do not understand what they have done — which is alarming” I would want to see the scenarios considered.
When building a business case, I’m used to creating 3 scenarios: optimistic, pessimistic and likely. In review, the optimistic scenario is put aside as fanciful — if the planets are in alignment and the business god is smiling it comes off and we get bonuses and have a party.
The reality is almost always somewhere between the likely and pessimistic scenarios.
On a related question, when requesting estimates from people, I have learned that the person giving the most pessimistic prediction is the generally expert. Optimists abound, because it’s natural for people to tell you what they think you want to hear. Only those who have been around, seen a lot and earned their stripes are prepared to tell it like it is, or will be, without fear of being seen as “negative”.
So, when we look at those Treasury growth figures quoted above, my question is: which scenario do they represent? My guess is the optimistic one (i.e. the one the Government wants to see), in which case show me the other two (i.e. the expert positions) and let me ponder those instead.