May 9, 2018 / 12:36 AM / 4 months ago

RPT-UPDATE 4-Australia budget sees early return to surplus, cuts personal taxes

(Repeats story first published late Tuesday; no change to text)

* Budget surplus seen for 2019/20, a ‘turning point’ for debt

* Govt announces some personal income tax cuts

* S&P retains its AAA rating and negative outlook

By Swati Pandey and Jane Wardell

CANBERRA, May 8 (Reuters) - Australia’s centre-right government said in its annual budget on Tuesday that it would return the country’s finances to a small surplus in 2019/20, a year earlier than planned and after almost a decade of deficits.

The improved budgetary position was welcomed by the two biggest ratings agencies - Standard & Poor’s Global and Moody’s Investors Service.

The improved budgetary position was welcomed by rating agencies Standard & Poor’s Global and Moody’s Investors Service.

The ruling Liberal-National coalition also unveiled some big spending measures, including a package of personal income tax cuts for low and middle-income earners, as a revenue windfall from company taxes enabled a shift away from its previous “debt and deficit disaster” rhetoric.

“We are no longer borrowing to pay for everyday expenses,” Treasurer Scott Morrison told reporters. “We have reached a turning point for debt.”

Morrison predicted a budget surplus of A$2.2 billion ($1.6 billion) in 2019/20, a remarkable turnaround on the A$2.6 billion deficit forecast in the government’s mid-year review in December. The projected surpluses increase to A$11 billion in 2020/21 and A$16.6 billion in 2021/22.

Net debt is seen peaking at 18.6 percent of Australia’s A$1.8 trillion ($1.4 trillion) gross domestic product (GDP) in the current 2017/18, also a year earlier than forecast, before falling to 3.8 percent by 2028/29.

In a statement after the budget release, S&P said strength in the Australian and global economies, and “fiscal prudence” by the government, had helped ease negative pressure on the country’s credit rating.

It said that global trade tensions may dampen economic growth among Australia’s key trading partners.

“The outlook on the long-term Australian sovereign ratings remains negative for now to reflect these uncertainties,” S&P said.

S&P put Australia on a “negative outlook” in mid-2016, citing deteriorating government finances.

Moody’s said Australia’s AAA rating continues to reflect its strong institutions and solid growth potential.

On Tuesday, the Australian dollar hit an 11-month low as a rally in its U.S. counterpart overshadowed the upbeat budget.

The marked improvement in Australia’s finances will likely be positive for Prime Minister Malcolm Turnbull after a series of political setbacks. The budget is widely viewed as the unofficial campaign kick-off for federal elections due in the first half of 2019.

Morrison maintained the government continued to “live within its means” despite the budget spending splash.

The government estimated total 2018/19 revenues would rise to A$486.1 billion, or 25.5 percent of GDP, largely from corporate taxes and as a crackdown on black economic activity and multinational tax avoidance bears fruit.

Despite the additional expenditure, spending levels were at just below the 30-year average of 24.8 percent.

SUSTAINED GROWTH

Australia’s economy, which has outperformed many rich world peers since the global financial crisis, has now entered a 27th straight year of growth, but the pace has slowed significantly as the country recalibrates following the end of a once-in-a-generation mining investment boom.

The government predicted domestic activity would accelerate at 3 percent annually through 2021/22, unchanged from December. Its outlook for unemployment and inflation were also unchanged.

The budget included a number of voter-friendly spending plans, as Turnbull seeks to improve his standing after a dual citizenship crisis and a sex scandal involving his deputy, that have seen his popularity plummet in polls from record highs of late 2015.

Revelations of serious misconduct in Australia’s powerful banking sector - during an ongoing inquiry the government initially resisted as unnecessary - have ramped up the pressure.

The budget did not address that crisis in detail, saying only the government would continue to roll out stronger penalties, powers and enforcement for the sector. It also steered clear of discussing a plan to lower taxes for big businesses, which did not have parliamentary support.

SWEETENERS FOR VOTERS

A A$13.4 billion four-year income tax package included immediate cuts for low- and mid-income households, and a proposal to flatten the overall tax structure by abolishing the highest income bracket, 37 percent, in 2024/25.

The extra money will be welcomed by Australia’s heavily indebted households. Monthly retail sales data released on Tuesday showed spending falling on everything from clothes to restaurants.

Paul Dales, Capital Economics’ chief economist for Australia, said the tax cuts probably wouldn’t prompt the central bank to hike interest rates before late 2019.

“Overall, the treasurer appears to be using a rosy outlook for the economy to justify income tax cuts and an earlier surplus,” Dales said.

“We believe that low wage growth and a weakening housing market will mean the economy doesn’t live up to those high hopes.”

The government will continue its A$75 billion 10-year infrastructure plan to build rail and road projects and a A$30 billion five-year investment plan for hospitals.

It will also spend A$2.5 billion in public technology infrastructure, A$1.6 billion in residential aged care and A$294 million to improve national security. ($1 = 1.3412 Australian dollars)

Reporting by Swati Pandey and Jane Wardell; Additional reporting by Jonathan Barrett in SYDNEY and Colin Packham in CANBERRA; Editing by Richard Borsuk & Shri Navaratnam

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