Good Budget News Leaves The Markets Unmoved

Australia's 1995-96 budget contains something rare: a surplus. But financial markets are far more drawn to the record current-account deficit.

The new budget proposed by Prime Minister Paul J. Keating's government promises a small surplus of A$718 million (U.S.$524 million) for the fiscal year starting July 1. The plan depends on a hike in corporate income-tax rates, to 36% from 33%, and asset sales. Rising taxes dimmed consumer confidence, as the Westpac index fell 5.8% in May.

The budget also expects real gross domestic product to grow 3.75% in fiscal 1995-96, but economists already say that forecast may be too optimistic given tighter fiscal and monetary policies.

Members of the ruling Labor Party argue that fiscal restraint will take the pressure off the Reserve Bank of Australia, which has lifted interest rates three times since August. But with the economy still strong, the RBA may have to hike rates again. Employment surged 90,400 in April, more than 10 times the consensus forecast. April's jobless rate fell from 8.7% to a 41/2 year low of 8.3%.

What stole attention from the surplus news was the government's forecast of the current-account deficit, which has been worsening since last year (chart). Because of higher interest payments to foreigners, the 1995-96 deficit is likely to remain at this year's record A$27 billion, or 5.5% of GDP. Australia's domestic savings must rise to curtail the need for foreign funds. And to that end, the government proposed a compulsory superannuation, or pension, plan. But it won't kick in until 1997.

By then, Australia's trade position will be hurt by other factors. The 1994 drought means fewer agricultural exports, and Aussie auto-parts makers could be a casualty in the Japanese-U.S. trade dispute. The current labor strife doesn't help, either. And unluckily for Labor, which must call elections by next March, the financial markets may punish Australia for its bigger trade deficit while ignoring the government surplus.

Before it's here, it's on the Bloomberg Terminal.