Australia’s Budget Position Deteriorates Since September Poll

Australia’s Liberal-National government, which took power seven weeks ago, says the budget position has worsened since its election victory, with the $1.5 trillion economy struggling for momentum in non-mining sectors.

“The reality is that we are in challenging times,” , Finance Minister Mathias Cormann said in a Sky News interview yesterday. The new government has inherited “not just a bad position at the time of the election but a position that continues to deteriorate,” he said.

The coalition, which ousted Labor on Sept. 7, is pledging to cut red tape and lower taxes as a China-led mining investment boom crests. Prime Minister Tony Abbott’s government is grappling with rising unemployment and cooling growth as a strong currency hurts manufacturing and service industries.

Treasury said in its pre-election outlook released Aug. 13 that the federal deficit will widen to A$30.1 billion ($28.8 billion) for the fiscal year ending June 30, and the budget is no longer projected to return to balance in 2015-16. The coalition will release updated projections in a mid-year report before Christmas, Cormann said yesterday.

“We will put the budget back into surplus as soon as possible,” he said, without committing to a timetable. “What we are committed to is to get spending growth under control.”

The Reserve Bank of Australia has cut the benchmark rate by 2.25 percentage points to a record 2.5 percent to help revive non-resource industries, even as signs emerge that mining investment has crested. Philip Lowe, deputy governor of the central bank, said Oct. 24 that he wouldn’t be surprised if mining investment relative to gross domestic product fell by 3 percentage points or more in coming years.

Budget Surplus

The budget shortfall in the 12 months ended June 30 totaled A$18.8 billion, the government said Sept. 27 in announcing the final budget outcome for 2012-13. The previous Labor government in December abandoned a surplus pledge as revenue failed to meet projections.

Abbott’s government on Oct. 22 announced plans to raise the nation’s debt ceiling to A$500 billion from A$300 billion now, and ordered a Commission of Audit to identify potential spending cuts as government revenue slows.

The economy’s transition from growth led by mining development in the north and west to industries like residential construction in the south and east was aided by a 12 percent decline in the Australian dollar in the second quarter. The currency has since rebounded as the U.S. Federal Reserve unexpectedly delayed tapering bond purchases.

‘Take Action’

“There’s no doubt that investment in the mining industry is not at the same level that it has been in recent years,” Cormann said yesterday. “It is so important that we take action to reduce the cost of doing business in Australia, to make ourselves more competitive internationally, to improve productivity, so that the non-mining parts of the economy can start to grow and prosper again.”

Treasurer Joe Hockey also highlighted the budget challenges the new government faces in an interview on Channel Nine television yesterday.

“I’m inheriting rising unemployment, not falling unemployment,” he said. “I’m inheriting falling growth, not rising growth. Having said that, we will get the budget under control.”

Still, anecdotal signs show that confidence in the Australian economy is returning and retailers should have a “good Christmas,” Hockey said.

“You can see it in property transactions and property prices that there’s confidence coming back,” he said in the interview. “When people come up to me in the street and say ‘It’s turned,’ I’m encouraged.”

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

To contact the editor responsible for this story: Jim McDonald at jmcdonald8@bloomberg.net

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