Australia Sees Wider Deficit as High Currency Hits Revenue

Australia has lost A$7.5 billion ($7.7 billion) in revenue since the October mid-year budget review due to its strong currency and lower terms of trade, worsening its budget position, Treasurer Wayne Swan said.

“We’ve been hit in Australia with a high dollar, lower terms of trade, which has had a dramatic impact upon the profitability of companies and prices more generally in the economy,” Swan said in an interview on the Australian Broadcasting Corp.’s ‘Insiders’ program yesterday. That’s caused “a sledgehammer to revenues in the budget since the mid-year update of something like A$7.5 billion.”

Prime Minister Julia Gillard, whose ruling Labor party is trailing the Liberal-National coalition in opinion polls ahead of Sept. 14 national elections, has pledged to restrain spending before the May 14 release of the annual budget. Australia faces years of deficits due to tax shortfalls and declining prices for resources, an independent think tank said today.

“Turning these problems around is an alarming task but not impossible,” Grattan Institute Chief Executive John Daley said in the report. “It will require tougher choices than those governments have made over the last decade. Even in good times it is hard for governments to run a surplus.”

Australia’s state and federal governments may post combined deficits in the next decade of about 4 percent of gross domestic product, or about A$60 billion a year, the report said. Extra spending on health is the biggest cost, it said.

Three Speeds

Mining regions in Australia’s north and west are thriving on Chinese demand while manufacturers and retailers in the south and east struggle under the strength of the local currency. Australia’s economy is now moving at three different speeds, a separate report released today said.

“Increasingly Australia’s state and territories appear to be breaking into three distinct groups,” Commonwealth Bank of Australia said in its “State of the States” report today authored by economists including Craig James. “The key mining economies of Western Australia and the Northern Territory are performing strongly and are firmly fixed at the top of the economic leader-board.”

The Australian Capital Territory, New South Wales, Victoria and Queensland are in the mid-tier, with each having “particular strengths but also areas where it could be performing better.”

“For the bottom grouping of states -- Tasmania and South Australia -- joint action by the federal government and the individual state governments will probably be necessary to lift economic momentum and overall performance,” the report said.

Difficult Choices

A “dramatic” writedown in state revenue means the government will have to make “some very difficult choices,” Swan said yesterday in his weekly economic note, without being specific.

The budget deficit was A$23.6 billion for the first eight months of the financial year, already A$5.7 billion wider than earlier projected, primarily due to reduced tax revenue and higher personal benefit payments, according to Treasury figures released on April 12.

In its October mid-year review, the government 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. It had forecast a deficit of A$17.9 billion for the fiscal year’s first eight months.

Strong Currency

A strong currency has hurt earnings for industries such as manufacturing, while an easing of commodity prices lowered the gains from exports and the nation’s terms of trade. The so-called Aussie dollar, the world’s fifth most-traded currency, has appreciated more than 70 percent against its U.S. counterpart since late October 2008.

“Of course the impact won’t just be in this financial year, it will also be across the forward estimates,” Swan said in the ABC interview. “This is one of the reasons why I made the point at the end of last year that we were unlikely to return to surplus in 2012-13 because of this hit.”

Gillard this month unveiled a plan to boost education spending by A$14.5 billion over six years in what she called the biggest overhaul of school funding in 40 years. Earlier in April, Swan announced plans to curb tax concessions for wealthy Australians saving for retirement, seeking spending cuts of about A$900 million over four years.

Gillard’s minority Labor government narrowed the gap against the Liberal-National coalition, led by opposition leader Tony Abbott, in an opinion poll released April 9. Labor rose 3 percentage points to 45 percent on a two-party preferred basis, while the opposition fell 3 points to 55 percent, according to a Newspoll published in the Australian newspaper April 9.

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