Australia Rejects ‘Savage’ Budget Cuts to Get Surplus, Swan Says

Australia’s government rejects “savage” cuts to public-service spending in order to fulfill its pledge to return the budget to surplus in this election year, Treasurer Wayne Swan said.

“One thing is certain -- savage cuts would be the wrong thing for our economy,” Swan told business leaders in New York on Jan. 18. “It would not be responsible for any government to make deep spending cuts to try and fill a hole in tax revenue when that would put growth and jobs at risk.”

Swan’s comments come a month after he said he’s unlikely to deliver a pledged budget surplus this fiscal year as weaker growth and a strong local currency curb tax receipts.

Prime Minister Julia Gillard, trailing in polls ahead of this year’s election, last May staked her economic credibility on achieving a A$46 billion ($48.3 billion) fiscal reversal, driven by the first overall cut to government spending in at least 42 years.

“Further turbulence in the global economy in the second half of last year has meant we’ve had to write down in just four months the revenue loss we expected over a full year,” Swan said. “We are still delivering one of the biggest fiscal consolidations in our nation’s history, and we’ll continue our fiscal discipline despite the big revenue write downs which have made a surplus unlikely this year.”

The government, in a midyear review released in October, forecast a budget surplus of A$1.08 billion in the 12 months ending June 30. It recorded a A$44 billion deficit last fiscal year.

Commodity Weakness

Weaker commodity prices and an elevated currency have prompted mining companies including BHP Billiton Ltd. (BHP) to put off projects and cut jobs, while a construction slump forced building-materials company Boral Ltd. (BLD) to reduce payrolls.

“We’re not immune from ongoing global uncertainty, which has weighed on consumer and business confidence and contributed to patchy conditions in some parts of our economy,” Swan said in his weekly e-mailed economic note yesterday.

In August, Resource Minister Martin Ferguson told reporters that “the resources boom is over,” while Reserve Bank of Australia Governor Glenn Stevens told lawmakers “the peak of the resource investment boom as a share of gross domestic product, the highest such peak in at least a century, will occur within the next year or two.”

Boom ‘Claptrap’

Swan told his audience in New York that such talk is “claptrap.”

“Let me also be very clear that you have been hearing claptrap getting around about it being over,” Swan said. “The mining boom is best described as having three overlapping phases -- a boom in prices, then investment, and then in production. We passed the peak in prices a bit over a year ago as we’d expected, but we also see our terms of trade remaining at historically high levels. And the second and third phases of the boom still have a way to run.”

While Australian employers unexpectedly cut payrolls in December and the unemployment rate rose, the economy expanded 3.1 percent from a year earlier in the third quarter, among the fastest in the developed world.

The Reserve Bank of Australia’s latest benchmark rate cut to 3 percent on Dec. 4 made it 1.75 percentage points in reductions in 14 months, which may aid Labor’s re-election chances as about 90 percent of the nation’s mortgages are at variable rates.

Poll Gain

Gillard’s Labor rose 3 percentage points to 49 percent on a two-party preferred basis, with Tony Abbott’s Liberal-National coalition falling 3 points to 51 percent, according to a Newspoll survey published in the Australian newspaper on Jan. 15. The measure is the best gauge of which major party will probably to win the seats required to form a government.

With an election to be held by Nov. 30, Swan said on Jan. 18 the government wouldn’t cut spending in its annual budget, to be delivered May 14, at the expense of its policy commitments to revamp funding for education and disability welfare.

Gillard is seeking to legislate in parliament this year to implement some of the changes in schooling urged in a report headed by Australian Future Fund Chairman David Gonski. The report found earlier this year that spending may need to rise by about A$5 billion a year to improve education at government- funded schools, particularly in disadvantaged and rural areas.

“Let me be crystal clear,” Swan said in New York. “The budget outcome for 2012-13 has no bearing at all on our determination to make room for our medium-term priorities like the Gonski education reforms and the National Disability Insurance Scheme.”

Productivity Priority

Swan also said a priority for the government was boosting labor productivity growth, “which has been in structural decline for the past decade or so.”

Looking overseas, Swan said China was managing its transition to more consumption-led growth “pretty well.” He called on Europe to balance fiscal restraint with the needs of stimulus and growth and said he was “deeply” concerned about the looming U.S. debt ceiling debate.

“It’s the responsibility of all leaders, governments and commentators around the world to ensure that sensible realism about these challenges doesn’t morph into undue pessimism, which itself hurts confidence,” Swan said in his note yesterday. “Endless pessimism is in itself a risk to the global recovery, just as it weighs on business and consumer sentiment in Australia’s economy.”

To contact the reporter on this story: Jason Scott in Canberra at jscott14@bloomberg.net

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

Press spacebar to pause and continue. Press esc to stop.

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.