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Australia Ends 23 Years of Spending Growth to Slow Mining-Fueled Inflation

Australia’s government will end 23 years of spending growth to ease inflation from the biggest mining-investment boom in the nation’s history and plans measures to help companies hurt by a record-high currency.

The underlying cash deficit will narrow to A$22.6 billion ($24.4 billion) in the 12 months to June 30, 2012, less than half the A$49.4 billion gap this fiscal year, Treasurer Wayne Swan said in Canberra today. The government plans A$22.2 billion in savings over the next four years that it projects will help deliver a A$3.5 billion surplus in 2012-13.

“With the investment pipeline ramping up and unemployment falling, the boom will test our economy and our workforce, and price pressures will reemerge,” Swan told parliament. “The dollar is around post-float highs and this makes it difficult for some sectors, particularly those that compete in international markets.”

The currency soared 20 percent in the past year as surging iron ore and coal shipments to China and India spur investors to bet the Reserve Bank of Australia will raise interest rates to contain inflation. Unemployment has fallen to a two-year low and inflation accelerated last quarter to the fastest pace in five years as businesses including BHP Billiton Ltd. (BHP), the world’s No. 1 mining company, expand output.

Spending Falls

“In these conditions, it is important the government does not compound these pressures, which is why the government is rapidly returning the budget to surplus in 2012-13 as planned,” the budget said. Government spending adjusted for consumer-price inflation will shrink by 0.1 percent in 2012-13, the first fall since a 3.1 percent drop in 1988-89, it said.

The plans will see the fiscal stance supporting monetary policy as Prime Minister Julia Gillard’s government seeks to reduce the need for higher borrowing costs that would add to challenges for an administration with a 15-year low public approval rating.

“They’re making a big play to say that they’re taking a lot of pressure off the economy in this budget and they’ve taken some hard decisions on cutting, but they couldn’t help but spend a lot of money at the same time,” said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney who forecasts a rate increase next month.

The Australian dollar was little changed after the announcement, trading at $1.0788 at 9:00 p.m. in Sydney from $1.0796 just before the proposal was released.

Credit Ratings

Standard & Poor’s sovereign credit analyst Kyran Curry, in a phone interview from Melbourne, said the plan is consistent with Australia keeping its AAA rating. Art Woo, director of Asia sovereign ratings at Fitch Ratings in Hong Kong, said the budget has no impact on the country’s AA+ rating and means “no change to the outlook, which is also stable.” Steven Hess, a senior credit officer at Moody’s Investors Service, said Australia has “about the lowest debt of any Aaa government we rate.”

Consumer-price growth will be 3.25 percent in the year to June 30 before easing to 2.75 percent in the 12 months to June 30, 2012, projections in today’s budget papers showed.

The government forecast economic growth will accelerate to 4 percent in the year to June 30, 2012, from 2.25 percent in the prior 12 months.

Driving growth is the mining investment spree totaling A$76 billion next fiscal year, spurring companies to hire workers and the government to forecast the unemployment rate to fall to 4.5 percent by mid-2013.

Job Growth

Australia recorded its biggest annual job growth on record last year and employers added 37,800 workers in March, more than economists forecast, led by hiring in the mineral- and energy- rich states of Western Australia and Queensland.

BHP Billiton is expanding its iron ore operations in Western Australia’s Pilbara region.

Two coal-seam gas projects, expected to cost more than A$30 billion, are proceeding near the Queensland port of Gladstone. Santos Ltd. (STO), Australia’s third-largest oil producer, and BG Group Plc, the U.K.’s third-biggest gas producer, will start hiring the first of more than 10,000 construction workers needed for the two projects later this year.

The government’s plan today had measures to boost migration to remote areas such as Pilbara to ease the labor shortage. These include a program to encourage 16,000 migrants to settle in remote areas and “fast-tracking” permanent residency for visa holders who spend two years in such regions.

The Australian currency’s strength has hurt non-resource industries, with the nation’s manufacturing contracting in April for the seventh time in eight months and the tourism industry suffering.

Surf’s Down

Darren Handley, co-founder of Gold Coast-based BASE Pty Ltd., said the higher dollar cut his exports in half in the past two years to 30 percent of the A$10 million per year business. BASE, which makes 10,000 DHD surfboards, is moving its manufacturing from Australia to Los Angeles and South Africa to remain competitive, he said.

“The currency is killing the industry here in Australia,” Handley said today after he returned from a four-day visit inspecting sites in Los Angeles. “We have to move offshore because it’s too expensive to make boards here now.”

The government’s budget proposes A$34.4 million to assist manufacturers to build on skills to integrate into global supply chains and identify new opportunities to develop a competitive advantage.

Australian household spending is also subdued, with the central bank saying last week that personal savings have increased in recent years to the highest level since the 1980s.

Monetary Policy

Australia’s central bank said May 6 it will likely need to raise rates “at some point” as underlying inflation is expected to be in the top part of the target band over much of the next couple of years.

Swan’s budget outlined new spending totaling A$9.1 billion through fiscal 2014-15, less than half the savings over the same period. A temporary levy on personal income will total savings of A$1.7 billion, it showed.

Among the biggest spending initiatives in Swan’s proposal were A$1.25 billion in tax breaks for low-income families; A$969 million in health and hospital investment; and A$359.3 million for a national workforce development fund.

Savings such as spending cuts in the plan included A$3.2 billion in “tax reform and integrity” measures, A$2.5 billion in defense cuts and A$712.8 million in “reprioritized spending” on Medicare and mental-health benefits.

Two-Speed Economy

Such steps would add to the drag on consumer spending after households boosted savings rates in the aftermath of the global financial crisis. Retail sales fell 0.5 percent in March for the first time in five months, sending shares lower for Myer Holdings Ltd. (MYR), David Jones Ltd. (DJS) and Woolworths Ltd. (WOW)

In a statement today, the Australian National Retailers Association criticized the budget, saying “resting on the laurels” of the mining industry may hurt household finances and have a long-term impact on its members.

Flooding across Australia, Tropical Cyclone Yasi, bushfires, the gain in the local dollar against the U.S. currency and slower consumer spending have seen revenue fall, Swan said in the budget papers today.

To help pay for the natural disasters the government plans a flood levy, applying a range of increases in income taxes.

Prior to today’s budget, the International Monetary Fund estimated Australia’s deficit next year at 0.6 percent of gross domestic product, smaller than any member of the Group of Seven industrial nations.

RBA Tightening

The fiscal tightening would add to a monetary brake on the economy that has undergone a 1.75 percentage-point gain in the benchmark interest rate from October 2009 to November last year. The Reserve Bank has kept the cash rate target unchanged at 4.75 percent since then.

Interest rates have to go up, but that will have enormous damage on some sectors of the economy that aren’t doing so well,” said Gerry Harvey, executive chairman of No. 1 furniture and electrical retailer Harvey Norman Ltd.

Australia’s benchmark rate is the highest in the developed world and contrasts with near-zero in the U.S. and Japan, a differential that has driven the currency to the highest level since it was freely floated in 1983. The European Central Bank last month boosted borrowing costs to 1.25 percent, the first increase in almost three years.

To contact the reporter for this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang in Singapore at sphang@bloomberg.net

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