May 13 (Bloomberg) -- Australia is embarking on the biggest building program in its history, driving its budget deficits to records until 2016 to help counter a recession that may swell the jobless queue to 1 million within two years.

The budget deficit will be A$32.1 billion ($24.6 billion) in the year ending June 30, rising to A$57.6 billion in fiscal 2009-10 as a recession that will linger through next year drives up unemployment and erodes tax receipts, Treasurer Wayne Swan said in his annual budget released yesterday in Canberra.

The government, leading opinions polls, is seeking to prove it can manage the economy amid the global downturn before an election in the next 18 months. It is also trying to reward voters who ousted John Howard in 2007 by delivering policies including paid parental leave, clean energy and family payments.

“They are trying to set the groundwork for the next election,” said Rick Kuhn, a political analyst at Canberra- based Australian National University. “They would want nothing more than an early election, as they know things in the economy will get much worse.”

The government will spend A$8.5 billion on roads, railways and ports and A$3.5 billion to boost the use of energy from clean sources. It will also spend A$2.6 billion on universities, A$3.2 billion on hospitals, and an initial investment of A$4.7 billion on a national broadband network.

High-Income Earners

Swan will reduce tax breaks, welfare payments and raise medical insurance costs for high-income earners as well as sell a record A$60 billion of bonds next fiscal year to pay for the stimulus plan. He’ll raise the pension age to 67 years from 65 by 2023, the first increase since the introduction of government payments to retirees in 1909, to achieve long-term savings.

“The government has managed to successfully juggle the need to support economic growth at a time of global recession,” said Stephen Koukoulas, global strategist at TD Securities Ltd.

“To do less would have compelled the economy to an even weaker performance and even higher unemployment,” he said in London. “To do more would have threatened Australia’s AAA credit rating.”

Australia’s sovereign credit ratings won’t be affected by the budget, Standard & Poor’s, Moody’s Investors Service and Fitch Ratings said after the budget was released. The country has triple-A ratings from Moody’s and S&P, the highest possible. Fitch ranks the country’s debt at AA+, its second-highest grade.

Deficit Forecasts

The Australian currency rose to 76.72 U.S. cents as of 9:21 a.m. in Sydney from 76.17 cents.

The budget-deficit forecast for fiscal 2010 is equivalent to 4.9 percent of gross domestic product, Swan said. The shortfall will hold at A$57.1 billion in 2011 before dropping to $44.5 billion in 2012 and $28.2 billion in 2013, he said.

The economy will shrink 0.5 percent in the 12 months through June 2010 after stagnating in fiscal 2009, the government forecast yesterday.

“You really only get a return to surpluses once the economy grows above trend, and that will take a while given the global environment,” said Stephen Halmarick, an economist at Colonial First State in Sydney. “The recovery will be pretty slow and grinding.”

Australia’s net debt will peak at 13.8 percent of GDP in fiscal 2014, Swan said. By contrast, most advanced economies will have a debt-to-GDP ratio of 80 percent then, he said.

‘Brutal Force’

“The global recession has been unleashed on Australia with a brutal, uncompromising force,” Swan said. “Never before has a government had to frame a budget with a A$210 billion shortfall” in tax receipts.

In the U.S., President Barack Obama has proposed raising income-tax rates to help narrow a record budget shortfall and pay for a planned overhaul of health care. U.K. Chancellor of the Exchequer Alistair Darling this month raised taxes for top income earners to pay for government efforts to stimulate the economy.

Yesterday’s budget may be Swan’s penultimate before the next election. Rudd may call an early vote if the upper house Senate, which he doesn’t control, refuses to pass all of the budget measures.

Some voters “will be unhappy with the hard choices we’ve taken,” Swan said. “Especially those we have asked to contribute more, because they can afford to do so.”

Unemployment Climbs

The government says a drop in global demand for commodities from Australia, the world’s biggest shipper of iron ore and coal, will trigger a rise in unemployment as companies such as BHP Billiton Ltd. fire workers and shelve expansion plans.

The jobless rate will peak at 8.5 percent by June 2011, from 5.4 percent last month and a three-decade low of 3.9 percent in February 2008, according to the budget.

The government’s forecast implies that the number of unemployed people will rise to about 970,000 in two years from 615,000 last month, according to calculations based on Australian Bureau of Statistics figures.

“There will be one million unemployed by 2011, a record deficit and record net debt,” said Joe Hockey, opposition Liberal-National coalition treasury spokesman. “Having blown all the proceeds of the last mining boom, Labor is betting the house on another upswing that hasn’t even begun yet.”

Infrastructure Spending

Building projects include improving metropolitan rail networks in the nation’s state capitals, expanding the port of Darwin, and upgrading Network 1, Australia’s busiest road freight route that stretches along the eastern seaboard from Melbourne to Cairns. Money was also allocated to fund the building of a high-speed Internet network.

To save about A$5.5 billion over four years, the government will reduce a rebate on private health insurance for people earning over A$75,000, reduce tax breaks for workers who make additional contributions to their compulsory pension funds, and limit welfare payments to wealthy families.

The savings will “put us on the path to surplus by fiscal 2016,” Swan said.

Between 2017 and 2023, the government will also gradually increase the pension age from 65 to 67 to offset the cost of an ageing population that will cut the ratio of workers to pensioners from 5 to 2.5 by 2050. “We have to put in place an essential reform to face this demographic timebomb,” Swan said.

To contact the reporters for this story: Jacob Greber in Canberra at jgreber@bloomberg.net; Gemma Daley in Canberra at gdaley@bloomberg.net.

Last Updated: May 12, 2009 20:13 EDT