Australian Treasurer Wayne Swan will eschew European-style austerity as a stronger currency slows growth, wagering the government can win a Sept. 14 election fought on jobs and absorb the pain of a broken surplus promise.
The underlying cash deficit will be A$18 billion ($17.8 billion) in the 12 months to June 30, 2014, Swan said in Canberra yesterday as he released the federal budget. The A$19.4 billion shortfall this fiscal year is 1.3 percent of gross domestic product, compared with a projected A$1.1 billion surplus released in the government’s mid-year review seven months ago. The Australian dollar dropped to an 11-month low after the release.
“To those who would take us down the European road of savage austerity I say the social destruction that comes from cutting too much, too hard, too fast is not the Australian way,” Swan told parliament. “The alternative, cutting to the bone, puts Australian jobs and our economy at risk.”
Swan outlined a longer path back to the black that funds pledged spending on infrastructure, education and disability care, while saying restraint gives the Reserve Bank of Australia scope to cut record-low interest rates even further. Prime Minister Julia Gillard’s Labor government trails Tony Abbott’s opposition by double digits and has seen its economic credibility weakened as a stronger currency dents tax revenue and weighs on exporters and manufacturers.
“The revenue forecasts have been pared back, they’re a bit more realistic, but I think they’re probably still a little optimistic,” said Su-Lin Ong, Sydney-based head of Australian economic and fixed-income strategy at Royal Bank of Canada. “It’s a modest fiscal tightening back to surplus. It sits with the idea of lower for longer in terms of the RBA. That’s consistent with their easing bias.”
After the fiscal plans were released, Moody’s Investors Service Vice President Steven Hess said Australia’s Aaa rating with a stable outlook remains intact. Standard & Poor’s echoed that view, saying the government continues to demonstrate a commitment to prudent fiscal policy. Fitch Ratings said its AAA rating with a stable outlook remains and the budget is consistent with Australia’s commitment to fiscal consolidation.
The Australian dollar traded at 99.15 U.S. cents at 10:29 a.m. in Sydney today compared with 99.76 cents before the budget was released. Traders are pricing in a 69 percent chance RBA Governor Glenn Stevens will lower the overnight cash-rate target by a quarter percentage point to a new record 2.5 percent by September, on the eve of the election, swaps data compiled by Bloomberg show.
“The market’s mood towards the Australian dollar has turned remarkably bearish in a very short period of time, and Treasurer Swan gave it no reason to change its mind,” said Sean Keane, an analyst in Auckland at financial advisory group Triple T Consulting.
Treasury projects Australia’s unemployment rate will rise to 5.75 percent by June 2014, from 5.5 percent last month, as the economy undergoes a “substantial transition” from resource investment to growth led by industries like housing construction.
“Challenging global conditions and the high Australian dollar have put huge pressure on the budget and led to a significant reduction in expected tax receipts,” Swan said, announcing a revenue shortfall of A$16.6 billion in fiscal 2014. “This government is providing a buffer to continued global uncertainty and giving the Reserve Bank of Australia more scope to cut interest rates should it want.”
Gillard and Swan, also her deputy, have struggled to protect the ruling Labor party’s electorate from the two-speed economy -- a phrase officials use to distinguish resource-rich regions in the north and west that powered growth and hired workers during the mining investment bonanza, from struggling tourism, manufacturing and retailers of the south and east.
To help woo voters in the outer suburbs ahead of the election, the government plans to spend A$24 billion on roads and railways in Sydney, Melbourne, Brisbane and Adelaide.
“Traffic congestion costs commuters time with their families and is estimated to cost our economy up to A$20 billion a year by 2020 if not addressed,” Swan told parliament.
The government projects the budget will return to balance in the 12 months through June 2016 and record a surplus of A$6.6 billion in 2016-17, the budget papers show.
Funding a return to surplus and savings to offset pre-election announcements of a disability care program, overhaul of education and the upgrade of transport infrastructure, are measures including tightening company tax breaks for a saving of A$4.2 billion through June 2017. It will also scrap a cash payment to parents of newborns and cap family payments for a saving of A$2.4 billion.
“This year we face the second largest revenue writedown since the Great Depression,” Swan said in the speech. “This budget sets a sensible pathway to surplus, while making room for the big investments in our nation’s future.”
The government won’t proceed with a proposed family tax benefit that would’ve cost A$2.5 billion, and will link cigarette-price increases to faster-rising wages instead of inflation. It didn’t disclose how much extra cash will be raised from the measure.
Treasury forecasts the economy will expand 2.75 percent in the 12 months beginning July 1 and accelerate to 3 percent the following year. Consumer-price growth will slow to 2.25 percent in the 12 months to June 30, 2014, from 2.5 percent this fiscal year, the budget papers show.
“The growth projections are downbeat,” said Hideo Shimomura, who helps oversee the equivalent of $59 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s largest publicly-traded bank. “They will struggle to get out of the deficit. It could lead to further easing” from the Reserve Bank, he said.
Treasury predicts resource investment will reach a record of more than 8 percent of GDP in 2013-14 and said projects worth A$260 billion are currently committed or under construction. It said the central bank’s 2 percentage points of rate reductions over the past 19 months are having an impact, with dwelling investment “already showing signs of a recovery.”
Governor Stevens last week cut the overnight cash-rate target by a quarter percentage point to a record-low 2.75 percent. Australia still has one of the highest benchmark rates among major developed nations. Central banks from Europe to New Zealand to Canada have policy rates ranging from 0.5 percent to 2.5 percent. Rates in Japan and the U.S. are near zero.
The Australian dollar has soared 65 percent from its 2008 crisis low on Oct. 27 as quantitative easing in the U.S. and Japan to stimulate their economies unleashes cash seeking yield.
Manufacturers are beginning to buckle under the sustained strength of the local dollar, with General Motors Co.’s Australian Holden unit announcing the loss of about 500 jobs last month. The impact on the ruling Labor party’s blue-collar supporters has taken a political toll on Gillard. Labor trails Abbott’s Liberal-National coalition by 12 percentage points, according to a Newspoll published on May 7.
The currency, which averaged about $1.03 since Gillard’s government’s 2010 swearing in, last week ended its longest stretch above parity since the 1983 float. The Aussie’s resilience, even as commodity prices ease, is among reasons the government revised down company taxes by about A$5.2 billion in 2012-13 and A$7.2 billion in 2013-14 from October forecasts. Mining and petroleum taxes were downgraded A$3.6 billion and A$3.2 billion respectively over the periods, budget papers show.
Treasury projects the economies of China and Japan, two of Australia’s key export destinations, will ease next year.
Elsewhere, Singapore retail sales probably declined in March for a sixth straight month, economists predicted before data due today, while the Malaysian economy probably grew 5.5 percent in the first quarter, another survey showed. Gross domestic product data are due for Germany, France and Italy.
In the U.S., industrial production probably declined 0.2 percent in April, a survey showed before the release of data.
Australia’s 2013-14 deficit will amount to 1.1 percent of GDP, the budget showed. That compares with a U.S. deficit equivalent to 5.4 percent of the economy, Japan’s shortfall of 7 percent and the euro area’s gap of 2.6 percent of GDP in the period, according to the International Monetary Fund’s fiscal monitor.
“While large deficits are politically damaging to admit during a feisty election campaign, compared with global debt and deficit metrics there is still not much to be concerned about,” said Alvin Pontoh, a Singapore-based Asia-Pacific strategist at TD Securities Inc. Labor has chosen a “social policy legacy over austerity,” he said.