Australian conservatives readying for more cautious, do or die second budget

Reuters News
Posted: May 10, 2015 5:15 PM

SYDNEY (Reuters) - Australian Prime Minister Tony Abbott, facing growing pressure to call early elections, is expected to take a far more cautious tack in the conservative government's second budget on Tuesday after a politically disastrous plan last year.

Abbott and Treasurer Joe Hockey were savaged in 2014 for handing down a budget that aimed to slash spending on social welfare programs in order to reign in spiraling deficits.

Both have promised that Tuesday's budget will be "boring" in comparison, favoring tax breaks for small business owners and new family benefits over big-ticket structural items to address a collapse in revenue as a decade-long mining boom winds down.

Selling the plan will be vital for Abbott, who earlier this year narrowly survived a leadership challenge from within his Liberal Party, in resisting pressure to break the deadlock by calling a snap poll.

"People in their camps saw the first budget as a complete disaster," Peter Chen, a senior lecturer in politics at the University of Sydney, told Reuters.

"This is going to set the framework for the next six months, and Abbott has been put on notice that basically he's got until the end of this year to get it together."

Australia's finances have taken a beating as falling prices for iron ore, the country's single biggest export earner, have eaten into company profits and wages.

The Treasury estimates every $10 drop in iron ore prices cuts up to A$3 billion ($2.4 billion) off budget revenue. The steel-making mineral has fallen almost $90 since the start of 2014, implying a potential annual hit of A$27 billion.

Investment bank Goldman Sachs has warned Australia's coveted triple-A credit rating could come under threat soon because of a change to the way Standard & Poor's assesses sovereign risk, combined with the outlook for years of budget deficits.

But Hockey, in an interview with Reuters, slapped down speculation of a downgrade and said he was confident the economy would extend a run of annual growth that dates back to 1991.

Still, the painful revenue drain has intensified pressure to come up with savings or tax-raising budget measures, while also ensuring policies do no harm to the already sluggish economy.

Proposals in the first budget to slash government spending proved hugely unpopular with the electorate and were largely defeated in the raucous upper house Senate.

Instead of pursuing another suite of unpopular reforms, Abbott is aiming to emulate populist budgets from Prime Minister John Howard, said Goldman Sachs senior economist Ian Toohey.

But while small business tax cuts and increased family benefits may win Abbott a temporary reprieve with the electorate, Toohey said, they ignore the dire reality.

"No political party could be realistically expected to stem the hemorrhaging in tax revenue that occurs in a sharply falling terms of trade and the corresponding weak nominal growth environment," he wrote in a note.

"And even if a political party could design a suite of policies that might address the fiscal challenge, the strategy would be doomed to failure if it holds a minority position in the Senate and the other minority parties ... don’t share the economic urgency or the method of repair proposed."

Australia's net debt is forecast to rise to A$245 billion by the end of the fiscal year in June, but at 15 percent of gross domestic product is very low by international standards.

Still, the outlook is for debt to grow, with the budget deficit expected to be around A$40 billion in 2014/15, with further shortfalls seen over the following three years.

With Chinese demand for Australian commodities waning and long-term spending commitments locked in by legislation, budget repair cannot be put off indefinitely, said Deloitte Access Economics partner Chris Richardson.

"The budget boom is turning into a budget bust," he told Reuters.

Do not, however, expect Abbott to ignore political reality.

"The government's already taken an electoral beating for attempting budget repair and it's more or less said that it's not up for round two in this budget," he added.

(Editing by Kim Coghill)