Australian Mining Boom Risks Inflation, Costello Says

Australia’s surging rates of mining and energy investment and record commodity prices pose a threat to inflation and are complicating the government’s budget plans, Treasurer Peter Costello said today.

“We’ve got to be very careful that the increased prices we’re getting for mining products, with the demand for construction we’ve got going at mining sites, doesn’t put pressure on wages that comes back and bites the whole economy,” he told television station Channel Nine today. “It’s a difficult economy to manage at the moment.”

Asian demand has buoyed resource prices, fueling a mining investment and employment boom that’s outweighed the effect of a severe drought on exports. The central bank, which raised interest rates three times in 2006, has said higher commodity prices and a 31-year-low jobless rate could stoke inflation, just as Australia enters an election year that may prompt the government to cut taxes.

“There’s economic uncertainty, so if the drought ends and the government has increased spending or cut taxes, that could end up over-stimulating the economy and putting upward pressure on interest rates,” said Shane Oliver, chief economist at AMP Capital Investors in Sydney. “The best way to avoid that would be to remain relatively cautious in the budget.”

The contrasting effects of a booming mining industry and a drought-hit farm sector, combined with a global environment of rising interest rates, makes framing this year’s government budget challenging, Costello said.

Election Budget

“We’ve got to make sure that price pressures in profitable areas of the economy don’t come through the whole economy, because they will push up inflation,” Costello said.

The budget, due on May 8, is the last before an election due by mid-January next year, prompting speculation the governing Liberal-National party coalition may offer income tax cuts for a fourth straight year.

Last year’s tax cuts, which totaled almost A$37 billion ($29 billion), offset the effect of at least one of the central bank’s three rate increases on the finances of an average wage- earner with an average mortgage.

The Reserve Bank of Australia raised rates in May, August and November to stem inflation, which has breached its target of between 2 percent and 3 percent for three straight quarters. The overnight cash rate target is at a six-year high of 6.25 percent.

Only two of 24 economists surveyed by Bloomberg News on March 9 expect another interest-rate increase this year. Eighteen say rates will remain unchanged and four predict a cut, after prices fell 0.1 percent in the fourth quarter from the previous three months on falling fuel costs.

`Risk of Inflation’

Still, Reserve Bank Governor Glenn Stevens told a parliamentary committee last month that low unemployment and rising labor costs could stoke inflation.

“Most of the indicators we have available still suggest a very fully employed economy,” he said. “So there would be some risk of inflation remaining uncomfortably high were demand growth to be unexpectedly strong in the near term.”

Asked today whether the government would use the May budget to boost spending or cut taxes, Costello said the budget would only increase spending on areas that “will build towards meeting the great challenges of the next couple of decades.”

The Treasurer cited the ageing population as a key challenge, and said the government will next month release its second intergenerational report on the ageing population, following an initial study in 2002.

The graying population “is still a massive problem, but in small ways we’ve begun to prepare for it,” Costello said.

He said further measures were required to encourage older people to remain in the workforce, lift the country’s fertility rate, boost retirement saving, and ensure health care was sustainable as demand increases.

Information from: www.bloomberg.com