Strong dollar spells political trouble for Labor

WITH the Australian dollar nudging $US1.10, the big question on many peoples minds is: how high will it go? Some forecasts are extraordinary, predicting that it will hit $US1.30.

The economic impacts of such a rise are one thing, but what about the political impacts? The bottom line is that if the dollar keeps rising it will mean yet more trouble for the Labor government, as if they weren't already in enough strife.

The US continues to engage in quantitative easing (printing money) to help pull itself out of its debt trap. Because commodity prices are determined in US dollars, our export of commodities will yield a smaller return domestically if all else remains static. In other words, if the dollar keeps rising, even if commodity prices remain at record highs, the government won't be able to lean on the mining boom to fix the sharp divide between what it spends and what it earns in tax receipts.

Debt will be harder to get under control unless tough decisions to cut spending are made, and fast.

If Wayne Swan can't get the finances under control, that will be a huge blow to Labor come the next election. One of the few policy and management areas it continues to crow about is the way it managed the economy through the GFC, averting a meltdown.

But if the debt lag is such that voters feel Labor isn't managing the post-GFC economy well, there goes one of the last re-election mantras.

As concerned as Labor should be about the struggle to get debt under control with a high dollar, the more politically disastrous implications of it are directly associated with what a strong dollar does to domestic industries, and how those industries are culturally attached to the ALP.

In the simplest of terms, when the dollar goes up, imports get cheaper and exports suffer (why would the rest of the world buy Australian products at inflated prices?). That means some of us will benefit from cheaper goods bought from overseas, but the bulk of Australians working in industries reliant on exports will face employment threats and the industries themselves will fall on tough times.

There has been a lot of talk in recent years about a so-called two-speed economy -- the booming mining towns verses the lagging manufacturing states. But the real two-speed economy is more specific than that. For example, services such as tourism and education in parts of Queensland and Western Australia are suffering and face a dismal future unless the rise of the Australian dollar is arrested. Yet they are operating in supposed boom states.

Then there is the export-oriented manufacturing sector in this country. A long-term dog of an industry propped up by protectionism, they are Labor Party heartland. Blue-collar workers who have traditionally always voted Labor. And the powerful unions have a bulk of their members in these sectors.

The outspoken head of the Australian Workers Union, Paul Howes, wants to be re-elected to his current position by these workers before Julia Gillard goes to the polls. He will therefore be thinking of himself when measuring his rhetoric on the economy, the carbon tax or anything else that affects his members.

That's going to hurt a government already under pressure.

While imported goods become cheaper, it would be a mistake to conclude that as being a bonus for the retail sector. First there is domestically produced retail to consider, now under pressure from increasingly cheap overseas goods. But added to that is the growing propensity of Australians to buy their goods online, thereby finding cheaper prices from abroad and not having to pay GST. The retail sector is up in arms about this.

Given that spending is frugal in the post-GFC economy anyway, this becomes a double blow.

We will continue to see analysis of the economic implications of the rising dollar, but the political implications are just as significant. At a time when Labor is trying to sell a new tax with only a minority of seats in the House of Representatives, pressure on Labor's base and its powerbrokers is going to make it very hard for them to hold the team together for the rest of this year.