Monday, 9 May 2011

A budget preview - a patchwork economy means not everyone's a winner

Tomorrow night, Australia's Treasurer Wayne Swan will announce the Federal Budget. It will show that Australia's economy is the envy of the developed world.

Overall, the economy is doing very well because of China and India's huge need for our coal and iron ore.

But a key theme will be the "patchwork" nature of the economy. This is Swan's preferred phrase to explain that whole the resources sector is in a once-in-a-lifetime boom, manufacturing and tourism are suffering.

So, how should Treasury respond to a patchwork economy?

Free marketeers would say the economy will take care of itself. If that was allowed to happen, everyone who has suffered from the floods would be left to rot. Surely that's not an economically rational approach, as these people who could return to being productive would take much longer than if they were given a helping hand.

On the other hand, protectionists would want the old, struggling manufacturing industries to be supported. They would add tariffs to imports in the name of protecting jobs. All that would do is produce an environment of complacency. Rather than encouraging product innovation and increased efficiency, it would create a culture of laziness. No, that is not an option either.

Instead, the budget will seek to strike a balance between these two extremes. And as the Treasurer said in his most recent economic note, "you often have to choose between what’s right and what’s popular".

Australia has been blessed with a series of excellent Treasurers on both sides of politics for many years. Striking the continuing balance to achieve a stable economy allows each of us as individuals to strive to achieve our economic potential.

Let me know what you think

Mark S

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