Aussie gov't urged to achieve budget surplus as election looms

Australian central bank governor Glenn Stevens last week issued a dramatic pre-election call for the government to achieve a budget surplus as soon as possible, and for the first time since 2008, a step he said would help restore economic confidence.

Stevens is not in the habit of giving gratuitous advice to politicians, which is why it was highly significant that he issued a reminder to both parties that the importance of the commitment to returning to a federal budget surplus will be "heightened in the future."

In reacting to fears expressed by some economists that the budget may deteriorate further than forecast in May, Stevens urged both sides of politics to support efforts to bring the federal finances under control in an election year likely to be dominated by expensive policies.

The remarks suggest that the Reserve Bank of Australia (RBA) is not comfortable with the cost of Labor's promises on education and the national disability insurance scheme as well as the Coalition's generous parental leave proposal.

In his speech, Stevens went out of his way to cut through the pessimism that has pervaded much of the political commentary this year. He stressed the important role the dollar plays as a shock absorber in times of economic transition.

He noted, however, that the decline in Australia's GDP growth rate was not out of step with what has been happening in Asia. Growth rates in Malaysia, Korea, China's Taiwan, Singapore and China's Hong Kong have declined at least as much as that of Australia, Stevens said.

Stevens also explained why there has been a misunderstanding on the true drivers of the country's economic growth, particularly at a time when many are asking which sectors of the economy would pick up the slack left by the end of the mining boom.

For example, Stevens said, in the 21 years to mid-2012, real GDP rose by 100 percent but only 3 percentage points of that came from the manufacturing sector. The largest contributions came from financial services (13 percentage points), mining (10 percentage points), construction (9 percentage points professional services ( 8 percentage points) and healthcare (7 percentage points).

Over the two decades, the number of jobs increased by 50 percent, with about two thirds attributable to household and business services.

Strategists and analysts from global investment banks have pointed to the likelihood that markets like Australia, which are dominated by upstream extractive industries, will be most vulnerable in case of a prolonged global economic downturn.

Analysis by Nomura Group shows that Australia has 18.6 percent of its market capitalization exposed to upstream sectors, making it the most vulnerable stock market in Asia to a rising U.S. dollar.

Newly installed Treasurer Chris Bowen, highlighted that Stevens used his speech to praise the government's commitment to prudent financial management. But Shadow Treasurer Joe Hockey accused Bowen and the government of insincerity in telling the public about the real situation.

Australian Chamber of Commerce and Industry economist Greg Evans said Stevens had fired a warning shot to the government about complacency."The RBA is doing its job in assisting interest rate sensitive parts of the economy, but clearly other areas of economic management are falling well short of the mark and dragging on confidence," Evans aid.

"The RBA appears to be saying, 'we can only do so much through monetary policy to spark confidence and it doesn't help when all the other levers may be pulling in an opposite direction' ," Evans said.

Budget expert Stephen Anthony, from the consulting firm Macroeconomics, said the government had "populist instincts and we are in an election year."

"There is no framework yet in place to move the budget structurally back into surplus and the government, whether it be ( Kevin) Rudd or (Julia) Gillard, has shown no real commitment to that objective," he said.

Anthony said that if he were RBA governor, he would do exactly what Stevens has been doing: trying to achieve a monetary easing supported by fiscal policy and putting the brakes on spending.

He said the falling dollar was a potential "circuit breaker for the economy" but any benefit could be quickly unraveled by a "government that keeps spending."

"Governments should get out of the way of monetary policy and as quickly as possible get back to surplus, and that means more belt-tightening measures," Anthony said.