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Wednesday 21 Feb 2018 | 16:18 | SYDNEY
Wednesday 21 Feb 2018 | 16:18 | SYDNEY

Australia's budget looks at a turbulent world



14 May 2008 09:20

The new federal budget tells two international stories. One story is of the US economy falling over. The Treasury Budget Outlook at first uses the phrase 'a sharp slowdown in the US economy.' But Treasury then twice states its expectation of 'a mild recession' in the US. The word 'mild' is the Treasury hope, while the word 'recession' is the looming fact. The headline views of the US, then, brings those phrases together: 'sharp slowdown' and 'recession'.

Japan is dismissed in a terse paragraph. Japanese growth is 'expected to slow over the next few years', with Japanese consumer spending only partially offsetting the problems confronting Japanese business investment and exports.

When Treasury turns to the rest of Asia — especially China and India — it tells the second story: the Asian boom that is carrying Australia.  Or, to use Treasury language, growth in the world's advanced economies is expected to slow significantly this year while the emerging economies are forecast to grow robustly. In fact, the budget papers give a figure for what the boom has been worth to Australia — $260 billion over five years.

Wayne Swan grouped China and India with the key demographic and environmental issues Australia must confront as it looks out into the century.The Treasurer told Parliament that Australia 'faces longer term challenges and opportunities, in the form of an ageing population, the economic effects of the rise of China and India, and, of course, the consequences of climate change.' The Asian boom means rising coal and iron ore prices will drive the largest increase in Australia's terms of trade in a generation — the highest in more than 50 years. Australian coal contracts have recently been settled for US dollar price increases ranging from 125 to 240 per cent. Iron ore contracts are expected to increase by at least 65 per cent.

Those changes in Australia's terms of trade (the relative prices of exports to imports) will be worth an extra $260 billion to Australia in the five years to next financial year. Treasury gets that $260 billion figure by taking 2003-04 as the base year, and looking at the direct gain from higher export prices. Using the same approach, it calculates that the resources boom has lifted employment by two per cent — creating 200,000 Australian jobs.

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