End of mining boom will leave Australian economy “with no clothes”: Frank Gelber

Australia’s economy will stay soft for “another year or two” as the mining investment boom peaks and begins an orderly decline leaving the economy "with no clothes", says BIS Shrapnel chief economist Frank Gelber.

A turnaround, he writes in his weekly column in The Australian, will only occur when first residential and then non-mining business investment rises to stimulate the economy.

Gelber does not expect non-mining profits to pick up and add to budget revenue until the 2014-15 tax year.

As a result, he says, “the miracle economy" supported by "transitory" revenues from the mining sector "has no clothes” - a reference to the Hans Christian Andersen fairy tale, where an emperor is swindled into walking around in the nude, thinking the fine clothes he is wearing are "invisible to anyone who was either stupid or not fit for his position".

Everyone goes along with the charade out of fear until a small child points out the emperor has "nothing on".

In the context of his column, Gelber is pointing out an obvious truth about the economy that many continue to deny: that the mining boom investment miracle is at an end.

Gelber expects there will be no easy fix to the budget deficit, with whoever wins power in September unlikely to take the extremely unpopular decision of raising taxes to the extent of putting the government finances back in the black.

He says an expected budget deficit of around $10 billion will not be a problem in itself, but what will be an issue is a rising budget deficit with the government locked into further increases in expenditure in the future.

Gelber expects a combination of continued budget deficits, expenditure cuts and tax increases over the next election cycle.

In particular he expects significant cuts to infrastructure spending over the next few years as well as significant cuts to public service employment.

He also warns of the risk of a more significant fall in mining investment further down the track, but says Australia is safe “for another two to three years with projects already committed”.

“The question is about the next round of projects and work done in the second half of this decade,” he says.