As we begin 2009, there is no doubt the global financial crisis will continue to be a dominating factor. With predictions that things are likely to get worse before they get better and the daily bombarding by mainstream media of increasing doom and gloom, it is easy to overlook some definite positives for Local Governments and their communities.
In recent months, interest rates and petrol prices have fallen, which is a major help for businesses and families.
Warnings over a number of years about rapidly escalating household debt had had little effect during the heady days of escalating sharemarkets and the resources boom but talk of recession and potential job losses has hit home, with many people more careful about their borrowings, as are the banks with their lending practices. This has had an impact on our automobile and retail sectors, and, in spite of falling petrol prices, tourism is feeling the brunt of people curtailing their discretionary spending, which is adversely affecting many regional areas.
Yet the 2008–09 State of the Regions report, prepared by National Economics for the Australian Local Government Association, says that approximately ten per cent of total household consumption is still being financed by new debt acquisition. The report states that this level and spread of debt has no historic precedent in our nation.
For the past decade the State of the Regions reports (SORs) have argued that the only logical outcome of Federal Government policies since the 1990s – weak government economic involvement in the economy, financial deregulation and a laissez faire approach to monetary policy – would be a major economic crisis.
Around the world, we have seen governments stepping up to the plate as the market sector went into free fall and various major financial institutions faced bankruptcy.
In Australia our banks have largely weathered the storm better than their counterparts in the US and UK, however the Rudd Government has moved quickly to increase government spending to stimulate our economy and minimise job losses. This has included providing substantial financial stimulus for our car industry, the $300 million package for local infrastructure projects to Local Government to stimulate local economies, and lump sum payments to pensioners and families prior to Christmas to assist the retail sector.
In releasing the State of the Region report last December, Dr Peter Brain from National Economics said that unless things are managed very carefully, Australia may well fall over the precipice of economic meltdown.
“Falling over the precipice would mean a further major plunge in the exchange rate complemented by a banking crisis and credit freeze of the type currently being experienced in the US and UK, and in turn a reduction in our GDP, which will take three to four years to recover from,” Dr Brain said.
He advocates that the current account deficit should be held as close as possible to four to six per cent.
“Once a degree of short term stability has been established, the task will become one of working out a strategy of kickstarting growth using the public sector balance sheet as a core driver.
“To stabilise household debt to income ratios, household savings ratios will have to increase by four to eight per cent of GDP, which in turn will require corresponding falls in the public sector savings ratio to compensate. This will require the public sector borrowing requirement to return to three to six per cent of GDP, as was the case before the mid 1990s.”
However, Dr Brain says that the silver lining for Australia is taking a proactive stance on addressing climate change.
To significantly cut emissions of greenhouse gases, he says, a wave of investment will be required in low carbon electricity sources, transport infrastructure, retrofitting of households to improve energy efficiency, and assistance to industry to reduce carbon emissions. This investment will have to build up to between $10 billion and $20 billion a year depending on the near term CO2 targets.
He says that with Federal and State Government support there is a great deal Local Government can contribute to a national program of emissions abatement.
