Australia Pledges Spending Curb as Debt-Crisis Shield

Wayne Swan,  Australia's treasurer
Wayne Swan, Australia's treasurer, speaks during the annual budget at Parliament House in Canberra. Photographer: Luis Enrique Ascui/Bloomberg

Australia’s government aims to bring the budget into surplus three years ahead of forecast, seeking a “solid buffer” against a European debt crisis that threatens to undermine the global recovery.

Treasurer Wayne Swan, releasing the annual budget yesterday in Canberra, estimated a A$1 billion ($900 million) surplus in 2012-13, from a A$40.8 billion deficit in the year to June 30, 2011. He said he’ll keep a 2 percent cap on spending growth until the surplus reaches 1 percent of gross domestic product.

The pledge reflects concern that investors will punish countries that fail to rein in deficits, which swelled during the world recession. Australia, whose public debt is projected to peak at 6.1 percent of GDP, is reaping the rewards of Chinese demand for its resources, and the surplus forecast is aided by a proposed “super” tax on miners.

“Our big advantage is that we’ve got this big wave of mining investment coming down the pipe and prices” of commodities rising, said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney, who previously worked at the Treasury Department of the Western Australia state government. He recommended that investors buy Australian dollars and prefer Australian bonds when purchasing government debt.

Concern that a European Union-organized package of almost $1 trillion won’t halt the region’s fiscal crisis sent the Australian dollar tumbling yesterday. The currency fell to 89.48 U.S. cents as of 9:16 a.m. in Sydney from 89.52 in New York yesterday, while remaining 18 percent higher than a year ago.

60-Year High

The Treasury predicts that Australia’s terms of trade, a gauge of income from exports, will rise to a 60-year high in the fiscal year that begins July 1, boosted by price gains for iron ore and coal exports. The measure will retreat in 2011-12 as commodity prices “moderate somewhat” with rising production, the budget said.

“We see Australia as being relatively a safe haven,” Kyran Curry, a credit analyst at Standard & Poor’s in Melbourne, said in an interview. “There’s a key risk that Europe is very weak and a lot of our growth is dependent on our key development partner, China. If the external environment weakens then Australia will be on a weaker recovery path.”

Even with economic growth projected to double in the next two years, Swan said the risks illustrated by Greece’s fiscal crisis mean spending must be constrained. With Prime Minister Kevin Rudd facing an election within a year, Swan said the restraint showed his isn’t a “political” budget.

Greek Message

“What Greece has demonstrated to the world is that countries don’t have the luxury of ignoring some of these fundamental issues,” Swan said in a press briefing in Canberra. The budget “forms a solid buffer against the troubles of Europe,” the Treasurer said in a speech to parliament.

The ceiling on spending growth, plus higher taxes from mining profits and tobacco sales, will help Australia’s debt peak at less than one tenth of the average level of advanced economies including the U.S., Europe and Japan, according to the budget, which must be approved by parliament.

“The budget’s return to surplus relies upon a great big new tax on Australia’s resources sector, not tough decisions,” Joe Hockey, the Treasury spokesman for the opposition, said in a statement.

The government expects to sell A$56 billion of Treasury bonds in the year to June 30, 2011. That compares with estimated issuance of A$50 billion to A$54 billion in the fiscal year through June 2010, according to the Australian Office of Financial Management.

Avoiding Recession

Australia’s was one of few economies, along with China and India, to skirt last year’s global recession after Swan embarked on the biggest building program in the nation’s history and the central bank cut the benchmark interest rate to a half-century low.

Since then, faster-than-forecast economic growth has kept the unemployment rate at almost half the level of the U.S. and Europe, driven a 20 percent jump in property prices, and stoked optimism in surveys of consumers and businesses.

The Australian dollar’s climb in the past year has reflected the economy’s outperformance. It was also propelled by the Reserve Bank of Australia’s six rate increases in the past seven months as Governor Glenn Stevens withdrew monetary stimulus.

The central bank will “most certainly welcome” the government’s plan to bring the budget back into surplus, Swan told Nine Network television today. Improving infrastructure and the productive capacity of the economy will “put downward pressure on inflation and interest rates,” he said.

Growth Forecasts

GDP will grow 3.25 percent in the year through June 2011, after expanding 2 percent this year, and 4 percent the following year, according to the budget proposal. The rollback of fiscal stimulus will subtract 1 percentage point from GDP in the 2010 calendar year and 0.75 point in calendar 2011, the budget said.

Unemployment will fall to 4.75 percent in 2011-12 from 5.25 percent this year, after peaking during last year’s global recession at 5.8 percent.

World stocks, the euro and bond prices tumbled last week as investors sought safer assets amid concern Greece’s debt turmoil would spread to other European countries and hamper their economic recoveries. The declines were pared after European policy makers this week unveiled an unprecedented loan package worth almost $1 trillion to shore up confidence in the euro.

Mining Tax

Australia’s projection of a net-debt ratio of 6.1 percent of GDP in 2011-12 is half the level expected a year ago. By comparison, Japan’s net debt is forecast by the International Monetary Fund to exceed 100 percent of GDP.

The government expects to raise A$12 billion in the first two years of a new 40 percent tax on resource companies, a move that has been criticized by miners such as BHP Billiton Ltd. and Rio Tinto Group.

To offset higher spending on health care, railways and border protection, Swan will also boost taxes on tobacco, boosting revenue by almost A$5 billion by 2013-14.

“Overall it reaffirms the commitment that this government has in terms of its fiscal prudence and conservatism,” said Ngiam Ai Ling, a director of sovereign ratings at Fitch Ratings in Singapore, referring to Swan’s budget.

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