Abbott ready to tighten screws

Prime Minister John Key and a bevy of ministers and business leaders will take their first real measure of Australia's new Coalition Government at a series of meetings in Sydney today as tough economic choices loom across the Tasman.

It will be an important litmus test for a time of change in Australia. The Australian Government is led by a conservative Prime Minister, Tony Abbott, and managed by a very dry Treasurer, Joe Hockey, who are both intent on reshaping the economy to a new Liberal image.

There will be goodwill. Abbott has been an admirer of Key's economic management, holding him as an example well before the election when Key shared the podium with former Liberal Prime Minister John Howard at a party function in Sydney.

New Zealand's recent economic performance has also been gaining unusually favourable attention and transtasman comparisons, underling the structural and cultural changes Abbott wants to stamp upon his country's economy.

But Australia's immediate future will not be easy to read. Abbott's agenda faces significant political challenges, especially where it requires the co-operation of a Senate controlled until July by Labor and the Greens, both of which oppose key measures.

The economy is sluggish and marked by conflicting data and trends that have yet to point to a clear direction for the coming year or so. And in May the political and economic imperatives will be shaped into what Hockey has been signalling will be a tough Budget with rigorous constraints on public spending.

There will be little for business in a climate that will have clear implications for New Zealand. Regardless of any goodwill, the Australian Government will be tightly focused on its own affairs, and extremely reluctant to agree to any transtasman proposals that could impose any costs or absorb significant time or resources.

Abbott is determined to break sharply away from Labor's economic policies to clearly define a new incarnation of traditional Liberalism: lean, efficient government with as little intrusion into the economy as possible; a high degree of corporate and personal responsibility; minimal union influence and power; and containment of welfare spending.

There will be few rescue packages and little federal largesse. Abbott and Hockey have continued their pre-election warnings of impending doom unless there is sweeping change and have said that taxpayers' money must not be regarded as a lifeline.

Individuals have been told to better manage their own financial affairs. So have companies, in the clearest possible terms. Abbott has rejected further subsidies to the car industry, allowing Holden to quit production and risking the departure of Toyota, the sole remaining car-maker.

The struggling national flag carrier Qantas is almost certain to be similarly refused federal aid to survive. Last week Abbott rejected a A$25 million ($27 million) rescue package for fruit canner SPC Ardmore. All are politically sensitive.

Although at this stage skirting a head-on war with the unions, the Government intervened on Toyota's behalf in its Fair Work Commission battle with unions over pay and conditions. This week it urged the commission to consider the broader economy in determining employers' challenges to penalty rates and other award conditions, and even to consider dumping the present award system.

"I say to you emphatically, everyone in Australia must do the heavy lifting," Hockey told the ABC. "The age of entitlement is over. The age of personal responsibility has begun."

Further structural change will be influenced by a series of reviews: the national commission of audit, due to report next month on economy-wide efficiency and productivity gains; an inquiry into financial services; and another into national competition policy.

Overlaying this is an economy with troubles of its own. Apart from global and domestic pressures, Australia is facing a difficult period of transition as the flush of the mining investment and construction boom slows, undermining the prop that largely kept the nation afloat through the global financial crisis and its aftermath.

"Not many in the business world have yet grasped the huge turnaround in major capital projects that is already under way," Deloitte Access Economics' latest quarterly business outlook said.

How severely this will affect Australia's immediate economic prospects remains unclear, although there is a wide expectation of slow growth and rising unemployment. On the other hand, the softening of the Aussie dollar and record low interest rates have improved prospects for ailing sectors such as housing, retail and tourism.

Opinions on the present climate vary. Holding the cash rate at 2.5 per cent for the sixth consecutive month, the Reserve Bank this week noted: "Uncertainties surrounding the domestic and foreign economies have not abated since December. Globally, while asset markets are performing well, GDP growth remains subdued, pointing to a disparity that must be resolved eventually."

Rates are likely to remain unchanged for months to come.

The National Australia Bank's December business survey was relatively buoyant, putting business conditions at a two-and-a-half-year high. Confidence was "surprisingly elevated", driven by global upturn and improving asset prices and a depreciating Aussie dollar at home. Last month's Australian Industry Group's performance of services index also showed signs of improvement in the sector after two years of contraction. But while finance, insurance and health and community services soared, the retail and wholesale industries were subdued, and hospitality, communications and transport and storage made few gains.

Overall, last month's rise was still only sufficient to push the index to a fraction below the 50-point level that separates expansion from contraction.

Housing and construction has gained ground, although the AIF-Housing Industry Association index for the sector showed moderating growth. But the outlook for manufacturing remains grim: the sector contracted in January for the third consecutive month. It has been shedding jobs for more than two years.

Wages growth across the economy has been slowing as job prospects decline. Unemployment of 5.8 per cent is expected to increase, underlined by a 16.7 per cent fall in job advertisements in the past year.

Australia is living, as the Chinese proverb says, in interesting times.