Australia delays promised budget surplus as election looms

Reuters News
Posted: May 14, 2013 7:12 AM
Australia delays promised budget surplus as election looms

By James Grubel

CANBERRA (Reuters) - Australia's struggling Labor government on Tuesday used the last budget before national elections to delay a long-promised return to surplus, blaming a stubbornly high Australian dollar and lower commodity prices for a dramatic fall in revenues.

With polls pointing to a solid defeat for Prime Minister Julia Gillard at elections set for September 14, Treasurer Wayne Swan locked in 10 years of funding for landmark disability and school education policies aimed at reversing its downward trajectory, and committed more money to roads and suburban rail projects.

But the budget, with little room for traditional pre-election give-aways and with voters traditionally wary of government borrowing, was unlikely to do much to help revive support.

Instead, Swan has cut a range of benefits to middle-income families, putting off planned tax cuts, increasing a health levy on income, and scrapping a A$5,000 ($5,000) baby bonus popular with voters and which had helped address an aging population.

Swan defended the cuts as measured and balanced, and said the decision to abandon the surplus was right for the economic circumstances.

"To those who would take us down the European road of savage austerity, I say the social destruction that comes from cutting too much, too hard, too fast is not the Australian way," Swan said.

The Australian Greens, whose support is crucial for the government to pass its legislation, said they would not block the main budget measures, but could oppose specific cuts, including plans to cut funding to universities.

"In terms of blocking supply, no the Greens won't be blocking supply," Greens leader Christine Milne told reporters. "But we will certainly be looking at all the legislation that is coming through and we certainly won't be supporting university cuts."

Swan defended the tough measures by pointing to a A$17 billion drop in expected revenue since his previous budget, with a total write down of A$60 billion over the next four years, and said the measures were needed to support growth and jobs in the face of a flagging global economy.

Market reaction to the budget was muted, but the Australian dollar fell to an 11-month low to $0.9908, breaking below reported bids around $0.9920 to mark its lowest since mid-June 2012. So far this year, the Aussie has fallen 4.7 percent.

Australia, a major supplier of coal and iron ore, has enjoyed 21 years of uninterrupted economic growth, surviving the 2008 global financial crisis without dipping into recession, thanks to a mining boom fuelled by strong demand from resource hungry China, its biggest trade partner.

But the fall in global commodity prices, coupled with an Australian dollar which has traded above parity with the US dollar for most of the past two years, has hammered company profits and tax revenues.

The 2013/14 deficit was forecast at A$18 billion or 1.1 percent of GDP, down from a A$2.2 billion surplus forecast in October, but in line with economist expectations.

Swan outlined A$43 billion of savings over four years as part of a plan to return a balanced budget by the year to June 30, 2016.


Ratings agencies Standard & Poors and Moody's Investors Service said the budget had no impact on Australia's AAA credit ratings.

"The outlook on the Australian government's Aaa bond rating remains stable despite the move into a period of budget deficits beyond that originally forecasted," said Moody's senior vice president Steven Hess.

Swan said the Australian dollar had remained stubbornly high despite a steep fall in Australia's terms of trade over the past year.

At the same time, Swan dramatically downgraded the revenue from Australia's controversial 30 percent profits tax on coal and iron ore mines, which began on July 1, 2012.

The budget forecasts the tax, originally expected to raise A$13.4 billion over its first four years, will now raise only A$3.3 billion in that time.

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The government has also slashed expected revenue from its price on carbon after revising down the expected carbon price from June 2015, when Australia links its trading scheme to the European carbon scheme.

The government now predicts a carbon price of A$12.10 a metric ton from June 2015, compared to its previous forecast of A$29 a metric ton. The price of EU carbon permits hit a six-day low of around A$4.20 late on Monday.

To help make up for falling revenues, Swan said the government would use its leadership of the Group of 20 wealthy nations next year to drive a crackdown on tax loopholes and evasion by multinational companies, helping recoup as much as A$4.2 billion.

Facing a shaky world economy and sovereign debt woes ailing Europe, Australia's economic outlook remained positive, with growth forecast to slow to 2.75 percent in 2013-14 from 3.0 percent this year, before climbing back to 3.0 percent for the following three years.

That compares to forecast growth in 2013 of 1.25 percent in Japan, 2.0 percent in the United States and -0.5 percent in the euro area.

In a nation wary of government debt, Swan has long promised to deliver surplus budgets. But he has delivered six straight deficits, in part due to hefty stimulus spending in 2008 and 2009 to help buffer the country from the global slowdown.

He forecast a deficit of A$19.4 billion in 2012/13, or about 1.3 percent of GDP.

Net debt is expected to peak at A$191.6 billion, or 11.4 percent of GDP, in 2014-15 - still less than one eighth of the debt levels of major advanced economies.

(Editing by Eric Meijer)