Gillard Says Budget Gives RBA Maximum Room on Rates

Australian Prime Minister Julia Gillard said returning the budget to a surplus gives the central bank “maximum room” to adjust interest rates and ease pressure on manufacturers that have been hobbled by currency gains.

“What we can do as a government is to get fiscal policy in the right shape to give the Reserve Bank the maximum room to move should they choose to do so,” Gillard said in an interview in Canberra today. “That’s been one of the drivers as to why we want to bring the budget back to surplus.”

The government yesterday forecast a A$1.54 billion ($1.55 billion) surplus for the year starting July 1, ending four years of deficits. Gillard dumped a corporate tax-cut plan, instead boosting aid for families as her Labor party tries to reverse near record-low poll ratings before an election due in 2013.

Australia’s dollar today slumped to its lowest level since December as Gillard’s fiscal restraint underscores projections for the central bank to add to last week’s cut in its benchmark rate, the highest among major developed economies. Yields on 10- year government bonds slid to a record low, auguring cheaper borrowing costs as unemployment is poised to rise.

“This budget will have the Reserve Bank leaning further toward cutting rates,” Michael McCarthy, chief market strategist at CMC Markets Asia Pacific Pty in Sydney, said in an interview with Bloomberg Television. “It’s quite clear that the direction for interest rates in Australia remains downward.”

Dollar, Yields

The local currency fell 0.4 percent to $1.0082 as of 4:12 p.m. in Sydney, after touching $1.0054. In July, it hit the highest level in three decades. Bonds rallied after the budget, with 10-year yields dropping as much as seven basis points to 3.35 percent.

Gillard, the nation’s first female prime minister, is under pressure to revive parts of the economy not benefiting from the biggest mining investment boom in more than a century. The government scrapped plans to reduce company taxes by 1 percentage point, citing a lack of support in parliament, and said the money would be spent instead on increasing family benefits and other support for businesses.

The budget handouts are a “sugar hit to try and save Julia Gillard’s leadership,” Joe Hockey, the opposition’s Treasury spokesman, said in an Australian Broadcasting Corp. interview today. “From our perspective and the Australian people, many will be bewildered what this budget is meant to deliver.”

The budget requires passage by parliament, where Labor lacks an outright majority.

Deficit Ratio

Treasurer Wayne Swan said yesterday the government will reduce spending for the first time in at least 42 years in the 12 months starting July 1. Expenditures are forecast to fall to A$364.2 billion next fiscal year, the first drop in figures dating back to 1971. The A$44.4 billion deficit this year is the third-largest on record and 3 percent of gross domestic product.

Signs of slowing growth have prompted the Reserve Bank of Australia to lower its benchmark three times since Nov. 1. RBA Governor Glenn Stevens last week enacted a half-percentage-point reduction, the biggest in three years, spurring banks to lower mortgage rates.

Gillard is faced with a two-speed economy -- a phrase the RBA uses to distinguish resource-rich regions in the north and west that are powering growth and hiring workers, from struggling tourism, manufacturing and retail industries across the south and east.

Unemployment to Rise

A government report tomorrow will show the unemployment rate rose in April to a seven-month high of 5.3 percent, according to a Bloomberg News survey of economists. The Treasury yesterday forecast the rate at 5.5 percent over the next two years. It projected economic growth at 3.25 percent in the 12 months beginning July 1, slowing to 3 percent the following year.

Traders are forecasting a 54 percent chance the RBA rate will drop to a record 2.75 percent by October, according to swaps data compiled by Bloomberg.

Gillard, whose minority government relies on independent lawmakers and the Greens party to legislate, said companies need agility and innovation to cope with the economy’s structural change and prosper in an era of an elevated exchange rate.

“We can be a country that has strong manufacturing,” Gillard, 50, said in the interview in parliament house. “It does mean we have to do things differently. We have to drive ourselves up the value chain. We’ve got to make sure the things we’re doing in manufacturing are so valuable in the eyes of the world that the strong dollar is not making that impossible for us. We will continue to be a country that makes cars.”

Double-Edged

While the currency’s strength helps contain inflation by making imports cheaper, it hurts exporters by making their products more expensive relative to overseas competitors.

“The Australian dollar is one of the most highly traded currencies around,” Finance Minister Penny Wong said in an interview in Canberra today. “The market is seeing the economy has been strong and also recognizing our proximity to Asia. Certainly the engine house of global growth will be in the Asian region and obviously we’re well positioned in that.”

BlueScope Steel Ltd. (BSL), the country’s largest steel producer, in August shuttered its export division. Toyota Motor Corp. (7203) and General Motors Co. have cut jobs in Australia this year.

Labor-market weakness is taking a political toll on Gillard, who withstood a leadership challenge from predecessor Kevin Rudd in February. Labor trails opposition leader Tony Abbott’s coalition by 18 percentage points, according to a Newspoll survey published in the Australian newspaper on May 1.

Top Ratings

“We’re located in the growth region of the world, people view our currency in part as a proxy for what’s happening in our region, so that puts upwards pressure on the value of the dollar,” Gillard said. “Our economic fundamentals are strong so people are saying we’re increasingly viewed as a safe-haven currency.”

Moody’s Investors Service Vice President Steven Hess said Australia’s Aaa rating with a stable outlook remains intact. Kyran Curry, an analyst at Standard & Poor’s, said that while there’s no immediate impact Australia’s AAA rating, the strategy relies on “an accommodative economic outlook that remains highly uncertain.”

The budget leaves “monetary policy to focus on near-term demand management of the economy,” Swan said in the treasurer’s traditional post-budget address to the Press Club in Canberra.

Projected surpluses through 2016 are driven by A$33.6 billion in savings, including A$5.4 billion from defense over four years and A$2.9 billion from the deferral of an increase in overseas aid by a year. The budget will also reduce tax breaks on pensions for higher income earners and tighten pharmaceutical benefits to lower costs.

Carbon Tax

A tax on profits from iron ore and coal, which won Senate approval in March and takes effect July 1, will reap about A$6.5 billion in revenue over two years from companies including BHP Billiton Ltd. (BHP) and Rio Tinto Group, government estimates show.

The government also expects to raise A$24.7 billion in four years from a levy on carbon emissions coming into effect July 1, as policy makers seek to reduce pollution and spur investment in cleaner energy.

The budget “is ambitious for Commonwealth finances but lacks vision for the broader economy,” Peter Anderson, chief executive officer of the Australian Chamber of Commerce and Industry, said in a statement. “The decision to abandon the company tax cut is dripping with politics and a low blow to the business sector given that the quid pro quo mining tax has already been legislated.”

As Europe faces years of fiscal austerity, Australia’s budget surplus would make it one of the first developed nations to emerge from an era of red ink caused by the worldwide financial crisis that started in 2008.

“We’ve all just lived through the biggest economic meltdown since the Great Depression,” Gillard said, when asked why her government has low poll ratings. “While Australia has largely dodged that bullet -- we didn’t have a recession, for example -- it has had an impact on people. We’re a government with a big reform agenda. I’m not surprised there’s some nervousness in the community.”

To contact the reporters on this story: Jason Scott in Canberra at jscott14@bloomberg.net; Shraysi Tandon in Sydney at standon14@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.