Australia Faces ‘Tough Budget’ After Flooding, Strong Currency, Wong Says

Australia will see a “tough budget” this year as recent natural disasters, slower consumer spending and a strong local dollar take their toll on the nation’s economy, Finance Minister Penny Wong said.

“We got some short term softness -- that’s as a result of a number of factors, the floods, the cyclone, but also a cautious consumer and a strong Aussie dollar,” Wong said today on the Australian Broadcasting Corp.’s “Insiders” program. “We also have to look to the long term, a very big wave of investment. We have to make space for that.”

Prime Minister Julia Gillard has pledged to return the budget to surplus by the fiscal year ending June 30, 2013, after recording a deficit of A$54.8 billion ($58 billion) last fiscal year that reflected spending to avoid a recession during the global financial crisis. The budget will be presented to Parliament on May 10.

Gillard announced a one-time tax to fund at least A$5.6 billion in federal government spending on flood reconstruction, saying it won’t jeopardize the budget goal. Two months of floods and a cyclone in the northeastern state of Queensland earlier this year will likely cost the economy about A$9 billion, Treasurer Wayne Swan said last week.

The Australian dollar has risen to a record versus its U.S. counterpart. Consumer spending has been subdued as the stronger currency lowers some costs and a mining boom raises others, Philip Lower, assistant governor of the Reserve Bank of Australia, said March 9.

Mining Investment

The government expects a A$3 billion decline in company tax revenue and a drop of A$1 billion in income tax intake, Wong said today.

In total, tax receipts have fallen by about A$4.5 billion over the first eight months of the financial year, Swan wrote in an e-mailed note today.

“Losing big slabs of revenue like this, of course, makes it even tougher to get back to surplus as planned, but we’re determined to make the difficult decisions to meet that commitment,” he said.

Mining investment this year will rise to A$55 billion from A$35 billion last year, and will hit A$75 billion next year, Wong said. “The private sector are going to employ more people, use more resources,” she said.

Jobless Rate

Australia’s jobless rate fell to 4.9 percent in March as employers extended 2010’s record hirings. Unemployment levels under 5 percent cause labor shortages that lead to inflation pressures, according to government officials.

While the 4.9 percent unemployment rate in March is a “terrific achievement,” the economy still has “soft patches,” and needs changes to boost competitiveness, Swan said.

Gillard’s Labor Party lost its majority at the August 2010 national election, the closest in 70 years, and relies on the support of four non-party lawmakers to pass legislation.

The government will continue to honor the commitments made to the independents to secure their support, Wong said.

“ We’ve made very public commitments to the independents, and some of them, we’ve already delivered,” she said. “And we’ll deliver further commitments to the independents in the budget.”

Tropical Cyclone Yasi in February tore through sugar- and banana-producing areas, following two months of flooding in Queensland that killed 36 people, shut mines and wiped out crops. The state produces 80 percent of the coking coal exports from Australia, the world’s biggest supplier, and grows more than 30 percent of the nation’s fruit and vegetables.

Coal Production

Lost coal production will account for a third of the estimated A$9 billion cost to the economy, Swan said April 3. Damage to crops would add A$2 billion and lost tourism A$400 million, he said.

Economists have estimated the damage from the floods may reach $20 billion, or about 1.5 percent of Australia’s $1.3 trillion economy, while the cost of rebuilding after Cyclone Yasi may be more than A$2 billion.

In addition, Japan’s strongest earthquake in history on March 11 is estimated to have dented demand for Australia’s bulk commodities by almost A$2 billion in this fiscal year, shaving less than one-fourth of a percentage point from GDP, according to the Treasury.

To contact the reporter on this story: Nichola Saminather in Sydney on nsaminather1@bloomberg.net

To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net

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