Prime Minister Tony Abbott and Treasurer Joe Hockey during question time on Thursday. Photo: Andrew MearesCollapsing iron ore prices and an apparent U-turn by the Abbott government on tough budget repair have rung alarm bells in Australian business circles with leaders warning the problem of Commonwealth debt is growing and cannot be wished away for reasons of political convenience.
But some business voices have also welcomed the prospect of a bit of extra stimulus in the short-term via small business tax cuts and money for childcare, which is set to provide a fillip in the next budget.
Iron ore fell to $54.50 a tonne over Wednesday night, a six-year low and nearly $10 below Treasury’s mid-year forecast price of $63 a tonne – a price Treasurer Joe Hockey said was more conservative than previous benchmarks.
It is understood that each $1 fall wipes more than $200 million off revenue flowing into Canberra.
Prime Minister Tony Abbott came under intense pressure in Parliament on Thursday after his comments on Wednesday were interpreted as suggesting that the hard work of reining in spending had been done and that a four-fold increase in the nation’s net debt-to GDP ratio was a reasonable outcome compared to other countries.
Mr Abbott had said the budget due in seven weeks would contain little of the harshness of the first budget because the main spending restraint had already been done.
This was despite the fact that only around half of the roughly $60 billion in future savings sought by the government had been approved by the Parliament.
Mr Abbott said a projected quadrupling of the debt ratio as set out in the government’s recent Intergenerational Report, while not ideal, was better than it would have been under Labor and was “a pretty good result looking around the world”.
But Labor said the blow-out would see the nation’s triple-A rating downgraded.
Mr Hockey also claimed credit for savings agreed to so far, arguing the rate of growth in projected borrowing is lower.
“What we’ve done is we have halved that trajectory,” he told Parliament.
“So we’ve halved, in our first budget we halved the amount of net debt that is going to exist in 2055.
“But there is much more to be done.”
The combination of declining revenue and a government that looks to have already shifted to a pre-election softly-softly approach, has fuelled concerns that promised budget surpluses will never materialise.
But some businesses have also welcomed the prospect of new spending with Innes Willox, the chief executive of peak manufacturing organisation the Australian Industry Group, telling Fairfax Media, it was a mixed picture.
“The economy needs a modest degree of fiscal stimulus now given the below-par conditions we are facing, but at the same time, the government needs to continue to introduce measures to fortify the national budgetary position over time,” he said.
“To its credit, in last year’s budget the government attempted to introduce measures, mainly on the expenditure side that had the potential to make very substantial headway in the critical task of longer-term fiscal fortification. Many of these measures have, however, lapsed or appear to have a low prospect of passage through the current Parliament. Further, many failed to attract the backing of the broader community.
“This highlights that the task of fiscal strengthening is undoubtedly a very difficult one politically.”
Business Council of Australia chief executive Jennifer Westacott, however, urged the government to stay the course and not to go weak on structural changes to the burgeoning expenditure areas of health-care, pensions and superannuation rules.
Economists warn the Intergenerational Report projection of an average of 2.8 per cent annual growth continuously for the next 40 years was a pipe-dream because Australia had already broken records for 24 years of uninterrupted growth.
Ms Westacott noted that with $245 billion in debt, a deficit of more than $40 billion and an interest bill of more than $11 billion, there was no time to waste because “unless you do structural corrections, the problem will get bigger and bigger”.
“We have to start now so people can make adjustments,” she said.
With James Massola
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The original release of this article first appeared on the website of Wuxi Plastic Surgery Hospital.