Access Economics’ foray into the budget surplus predictions game earned a savage rebuke from Treasurer Wayne Swan this morning. Before making his way to the first sitting of the 43rd parliament, Swan popped up to sledge the Chris Richardson-led firm as “professional pessimists” for claiming the budget will plunge back into a $1.8 billion deficit in 2013-14, following a brief burst of surplus sunshine in 2012-13.
In its latest Budget Monitor, Access says that while commodity revenues will benefit the bottom line in the short term by a total of $6 billion — outstripping Treasury’s predictions — things could turn sour as prices inevitably tail off towards the middle of the decade.
Swan was responding to a colourful turn of phrase from Access, which branded the campaign slanging match over which party would return the country to surplus fastest as “hoo-ha by politicians”. In another zinger designed to generate headlines (and presumably Crikey items), Access said that if China’s economy stumbles badly, and the supply of minerals begins to outstrip demand, “then the revenue landscape will resemble that of the Somme in 1916”.
As Glenn Dyer notes elsewhere in today’s edition, Access has a history of bold predictions which later turn out to be spurious — raising the question of why a respected group of former APS pointy-heads feel the need to stick their neck out in the first place. If you believed the Access bears in their Canberra bunker a few years back, unemployment should be spiralling out of control and the mining boom should have already turned to bust.
But in the case of the decline of China, they could be on more solid ground, according to leading economists contacted by Crikey this morning. The industrialisation of the country’s urban centres can only last so long, and even on the most positive estimates only a fraction of the nation could expect to be living in high rises in 10 years’ time. At that point, supply from the Pilbara will outstrip demand, Australian tax revenue will suffer and Joe Hockey will have a potent weapon to assail the government in 2013 (if it lasts that long).
Leading economists agree. Crikey‘s resident expert John Quiggin from the University of Queensland backed Access’ assessment, but hesitated when asked to make a bold prediction on the specific financial year the budget would run back into the red.
“The projections depend very heavily on Chinese demand remaining strong; obviously the basic point is that they’re right. But the nature of these things is that the end comes quickly and unexpectedly, so who knows when that will be. But their numbers sound about right in terms of the orders of magnitude,” he said.
Quiggin says China could be headed for a “period of dislocation”, that would then affect revenues: “I believe you can assume in the long run that there’s plenty of growth left, but on the other hand looking at Chinese urbanisation and the housing boom there that could run into a shock quite rapidly, that won’t be the end of Chinese growth but the instability could certainly transmit to Australia.
“Predication is risky business particularly about the future. Anybody who makes predictions is going to be wrong from time to time. If you can find someone who successfully predicted the GFC and successfully maintained their run then good luck to you.”
Chief economist at BIS Shrapnel, Dr Frank Gelber, says the next stage of projects is locked in and, in terms of its stimulus on the economy itself, strong. But the real question he says is what happens in the second half of the decade — where will the next boom come from?
“Profitability is current running at about 40%, and it’s a no-brainer for mining companies, tax or no tax. At the end of the day they’re making a squillion. But the big risk to Australia is that at some stage supply will catch up with demand and we’ll see a turn in minerals prices that will undercut our ability to do the next round of projects,” he said.
“In terms of minerals we’ll still be exporting the stuff, but the big question is how government revenues will be obtained and I’m not sure how that’s going to work yet. They’re getting a lot out of minerals at the moment but when prices fall, if they fall, then tax will be reduced.
“Some of those revenues will dry up. It’s much more important than just the budget from the point of view of the Australian economy if we don’t have minerals investment going on. But it’s not just about mining or a question of the price that we’ll be pulling out of the ground. The thing that’s stimulating the regions is investment in new projects. The withdrawal of that is a huge risk to the Australian economy, and not just the federal budget.”
Like Quiggin, Gelber says the soothsaying game is fraught with danger.
“We don’t know when this is going to happen,” he said. “To assume that the mining boom will last forever is crazy. To put a date on the downturn is a real dilemma for a forecaster. When we do this now we don’t put a date on it.”
But former Access Economics employee and current JP Morgan chief economist Stephen Walters takes a different tact, saying any slack from China could be taken up by India and Korea.
“It’s certainly not our view. We agree that commodity prices aren’t going to stay at these levels indefinitely, particularly the big bulk commodities. These prices will be coming off, and they’re not going to stay at the record highs coal and iron have reached in the last couple of years. But offsetting that, we think volumes will stay pretty high,” he said.
“We think this is 5-10 year story. We certainly don’t think the boom’s tailing away. Demand from China will stay pretty firm but when it starts to come off a bit other markets will step in.”
And echoing one of Swan’s famous predecessors as Treasurer, Walters remains buoyant: “I think we’re more true believers in the longer term story.”