by: Matt Chambers and David Uren From: The Australian November 29, 2011 12:00AM
BHP Billiton and Rio Tinto - the giant miners feeding the enginerooms of the global economy - say the eurozone crisis has entered a dangerous new period, and warned of global contagion and frozen credit markets.
As Wayne Swan prepares to hand down the government's mid-year economic and fiscal outlook today, BHP chief executive Marius Kloppers warned the world was "entering into the next phase of this whole contagion".
Rio chief executive Tom Albanese said that, while conditions had not suddenly worsened, the prolonged crisis was "reducing prospects for economic growth in Europe and that's having knock-on effects around the world".
The government's economic statement will reveal that the Treasurer is relying on a rebound in Australia's economic growth as well as tax rises and spending cuts to deliver its promised budget surplus next year in the face of a global downturn.
The mid-year outlook will forecast Australia's growth to bounce back from about 2 per cent this year to more than 3 per cent in 2012-13 and will include fresh savings measures of more than $5 billion to offset falling tax revenue caused by the downturn.
The forecasts will be consistent with a new economic outlook issued last night by the Organisation for Economic Co-operation and Development, which said Australia's economic growth next calendar year would hit 4 per cent.
But the OECD said this depended on Europe being able to "muddle through" its crisis and warned there remained a severe risk of a "highly devastating" outcome. Australia would be exposed to a loss of business and consumer confidence, and a sharp fall in export revenue as commodity prices fell, it warned.
Despite a rebound in the stockmarket, which closed up 1.9 per cent at 4058.20 yesterday on hopes of a political solution to the eurozone crisis, Mr Kloppers was sounding the alarm.
The head of the world's biggest miner described funding between banks as "dead" and said last Friday night's downgrade of Belgium's debt rating by Standard & Poor's and a poor Italian debt auction added to the worries.
"It does feel to me that the world is entering into the next phase of this whole contagion," Mr Kloppers told The Australian.
"All of the bankers I talk to think so (but) . . . it's not playing into the newspapers as hard as I thought it would. The big thing we are going to look at very closely this week is whether the events of Friday start feeding through."
Mr Albanese said there had been a steady decline in conditions in recent months and it was getting to the stage where lending would be restricted outside Europe.
"This has been a steady deterioration that is in its third or fourth month," he told The Australian. "As it goes longer and longer, it's having the effect of reducing prospects for economic growth in Europe and that's having knock-on effects around the word. But more importantly, it's having a crisis-of-confidence effect on the financial markets in Europe, which is going to certainly have lending restrictions on a global basis."
The Treasurer last night called for trust in his push for additional budget savings at a time of global economic turmoil.
"We've got the big calls right during turbulent global times -- avoiding recession, unlike all of our peers -- and we'll keep getting the big calls right as we navigate the current global uncertainty," Mr Swan said.
"We recognise that . . . we need to strike the right balance between fiscal discipline and continuing to support job creation and growth, between those who say we should take an axe to the budget and those who tell us to forget about the surplus."
The budget update will show a $20bn fall in revenue across the next four years since the May budget. This would be enough to wipe out both next year's budget surplus of $3.5bn and the $3.7bn surplus expected in 2013-14 unless there were additional savings.
About a third of the revenue shortfall is the result of weaker-than-expected capital gains tax revenue, reflecting the 15 per cent fall in share prices since the budget. Employment growth has also slowed since the budget, and this has resulted in less revenue from personal income tax.
Finance Minister Penny Wong said Labor's values would "underpin our economic decisions", suggesting that low and middle-income earners will be spared the pain in the government's budget savings.
The government has acknowledged there is likely to be tightening of the tax treatment for living away from home allowances for executives travelling overseas, which has blown out from $160 million to $740m in the past six years, and there may be some cutbacks in industry assistance.
Canberra's public service is bracing for staff cuts.
For the Coalition, Tony Abbott and his Treasury spokesman, Joe Hockey, were at odds yesterday over the government's planned economic statement.
Mr Hockey said the European crisis had wiped out next year's budget surplus and was unlikely to be resolved soon.
"The new forecast must now properly reflect the growing anxiety about Europe," he said.
However, the Opposition Leader said it was not good enough for the government to blame the loss of its surplus on Europe. "This is a government that's always blaming someone else," Mr Abbott said.
"It is not Europe's fault that Wayne Swan has a problem."
Mr Swan justified sticking to his return to budget surplus next year despite the downturn, saying financial markets were passing harsh judgments on countries that failed to keep their budgets on a sustainable footing.
The OECD supported continuing budget restraint.
"Stringent spending control, consistent with the government's plans, is still necessary to offset the revenue declines induced by the financial crisis and natural disasters," the agency said.
It said the boost to income and investment from the mining boom would offset the negative effects of the government's budget tightening and the high exchange rate.
The OECD has downgraded its forecast for growth in the developed world from 2.8 per cent in 2012 to just 1.6 per cent, while the forecast for world trade growth has been slashed from 8.4 per cent to 4.8 per cent.
Cheers
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