May 5, 2011 / 7:53 AM / 6 years ago

Australia to deliver a "Made in China" budget

CANBERRA, May 5 (Reuters) - Australia’s minority government will hand down its first budget next Tuesday, with revenues hit by natural disasters and a high Australian dollar and little room to spend on populist policies to buy back falling support.

What revenues it does have to spend are heavily dependent on China’s insatiable demand for its natural resources.

With the Labor government trailing the opposition in opinion polls, the budget is the latest test for Prime Minister Julia Gillard, whose shaky grip on power relies on three independents and a Green lawmaker for her one-seat majority.

“It is a crucial budget,” said Monash University political analyst Nick Economou. “The polls are looking really bad, but the government can’t spend and splurge.”

“There’s been a big hit to tax revenue, and the government is still trying to convince voters they are good at managing the economy. So the government is caught. It won’t be the kind of budget they’d like to deliver.”

Though the economy is in its 20th year of expansion and with a booming resource sector and huge Chinese demand, Treasurer Wayne Swan has promised a tough budget, with a tight rein on spending to ease mounting inflationary pressures and achieve a promised 2012-13 surplus.

Australia’s deficit and debt is small by international comparisons, but its political parties are obsessed with achieving and maintaining a surplus, aware that voters see failure to do so as economic mismanagement.

GOVERNMENT SAFE, DESPITE TOUGH BUDGET

Australia was the only advanced nation to avoid recession during the global financial crisis, thanks in large part to exports of resources to China.

The government has committed to keep growth in spending to two percent or less above inflation until it delivers a surplus equal to one percent of gross domestic product.

Budget revenues this year have been hit by record summer floods and a massive cyclone, which disrupted coal exports and destroyed crucial infrastructure, and by a strong Australian dollar which has hit a record high of $1.10 in the past week, further eroding resource industry revenue and profits.

At the same time, Australia’s unemployment rate continues to fall towards full employment, with the government saying it needs around 1.3 million new workers by mid 2016.

Swan has said the natural disasters, followed by the tsunami in leading export destination Japan, would cut tax revenues by at least A$4.5 billion this year, fuel inflation, and temporarily cut economic growth by at least 0.5 percent.

But even if Swan delivers a very tough, and unpopular budget, the minority Labor government is unlikely to fall.

Under their agreements with the government, the independents and Greens have pledged not to block the budget, but that does not prevent them from trying to negotiate any unpopular changes.

“It is more likely than not that parliament will run its full (three-year) term, because the cross benchers have a vested interest in government stability,” said Economou.

BUDGET MADE IN CHINA

Economists expect the budget deficit to be around A$50 billion in the year to June 30 this year, compared to the previous forecast of A$41.5 billion, and A$18-22 billion for 2011-12, compared to the previous forecast of A$12.3 billion, before returning to a small surplus in 2012-13.

The deficit is expected to peak at less than 5 percent of GDP in the current budget year, under half the U.S. shortfall. Net government debt should peak at 14 or 15 percent, again a drop in the ocean compared to the United States, UK and Japan.

“The budget comes with a ‘made in China’ stamp these days,” said Deloitte Access economist Chris Richardson. “If China, and hence commodity prices, stumble, then the budget will take a battering.”

He estimated tax revenue will be down A$6.4 billion this year. The last official government forecast in November forecast tax revenue of A$292 billion.

The budget’s centrepiece will be a package to boost skills and encourage people off welfare and into jobs to meet worker shortages, particularly in the mining and aged care sectors.

But the two biggest challenges facing the government, a new carbon tax on big polluters and a 30 percent tax on coal and iron ore mines, will not be fully included in the budget package, although mining tax revenues should be forecast.

The government hopes to finalise details of its carbon tax by July and laws for the mining tax are likely to be finalised and introduced to parliament by late May or early June.

Editing by Michael Perry and Jonathan Thatcher

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