Budget Blows Out as Australia’s Rudd Prepares for Vote: Economy

Australia’s budget deficit will blow out to A$30.1 billion ($26.8 billion) this fiscal year, limiting the scope for Prime Minister Kevin Rudd and opposition leader Tony Abbott to embark on a spending spree in an election campaign that may be announced this weekend.

Treasurer Chris Bowen today projected a revenue shortfall of A$33.3 billion over the next four years from forecasts 2 1/2 months ago. The government cut its growth estimate this fiscal year to 2.5 percent from 2.75 percent seen May 14 and said unemployment will rise to a more than decade-high 6.25 percent.

“Faster than expected falls in commodity prices have resulted in a weaker outlook for company tax,” Bowen said in a statement. “The government has made the clear decision to allow the tax write-downs to flow through to the budget balance.”

Rudd’s Labor party is framing the looming election as a battle between David Cameron-style austerity from the opposition and its own program that allows the deficit to widen as it prioritizes jobs and economic growth. Labor has closed the gap in opinion polls since Rudd regained the leadership five weeks ago and may call an election for as early as Sept. 7.

“Rudd is really trying to ensure that there are no harsh cuts in the economy, and that is perfectly within the Labor tradition,” said Zareh Ghazarian, a political analyst and lecturer in politics at Melbourne’s Monash University. “Labor is trying to discredit the coalition over austerity measures, which are never popular. It’s a useful weapon against them.”

Smaller Deficit

Australia’s 2013-14 deficit will amount to 1.9 percent of GDP, the statement showed. That compares with a U.S. deficit equivalent to 5.4 percent of the economy in 2014, 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 in April.

“Announcing the revenue shortfall now gets that out of the way and the government will hope it doesn’t become an election issue by announcing it this early ahead of the formal election campaign,” said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore. “Growth this far below trend -- even if trend is now 3 percent -- certainly does mean the labor market is likely to be weaker for longer and the Reserve Bank has some further heavy lifting to do.”

Investors are pricing in a 93 percent chance the Reserve Bank of Australia will cut the benchmark interest rate by a quarter percentage point to a fresh record 2.5 percent at its Aug. 6 meeting, according to swaps data compiled by Bloomberg. The Australian dollar traded at 89.09 U.S. cents at 3:15 p.m. in Sydney, from 88.92 cents before Sky News announced the revenue shortfall an hour before Treasury’s release.

‘Conservative Approach’

Standard & Poor’s said today’s statement is consistent with its view that the government “will continue to take a conservative approach” to public finances in the medium term.

“With the government taking further action to improve the budget position over the forecast period, we expect government debt to remain low,” said Craig Michaels, a Melbourne-based sovereign analyst at S&P. “In our view, the government has the flexibility and willingness to address further revenue pressures that arise going forward.”

A 2016-17 surplus projection was cut to A$4 billion from the A$6.6 billion seen in May, the documents show. The 2014-15 deficit is now expected to be A$24 billion and the 2015-16 shortfall is now seen at A$4.7 billion, from a balance forecast in the May 14 budget handed down by Bowen’s predecessor Wayne Swan.

Tobacco Tax

To raise receipts, the government will increase tobacco taxes by A$5.3 billion; save A$1.8 billion by tightening tax breaks for business car use; target A$827 million of unpaid tax and pension savings; and charge banks a fee for deposit insurance. The government’s decision to scrap the fixed carbon price and bring forward the start date of emissions to July 1, 2014, will cost the budget approximately A$3.8 billion over the forward estimates, while offshore asylum seeker management costs will be A$1.3 billion higher than seen in May.

Rudd is selling himself as the best leader to steer Australia through a downturn as he flags the end of a China-led mining boom, ditching the optimism of predecessor Julia Gillard. As employers including Ford Motor Co. cut jobs, and the central bank says growth is likely to remain below trend in the near term, Rudd’s language has put him more in tune with voters.

Treasury is predicting an unemployment rate of 6.25 percent at June 30, 2014, versus 5.75 percent seen in May. A jobless figure of that level would be the highest in more than 10 years.

Abbott Attacks

With signs of a slowdown in the world’s 12th-largest economy, including a waning mining boom, Abbott’s conservative coalition has attacked Labor’s economic management as it seeks to win office for the first time since 2007.

“Australia is undergoing an economic transition,” Bowen told reporters in Canberra after the release of the statement. “This transition is brought about by the Chinese mining investment boom coming to an end.”

Elsewhere in Asia, Indonesia’s economy expanded less than economists estimated in the second quarter.

The U.S. probably added 185,000 jobs in July, and the jobless rate may have fallen to 7.5 percent from 7.6 percent the previous month, economists surveyed by Bloomberg News predicted.

Euro-area producer prices probably rose in June from a year earlier, according to a Bloomberg survey, while U.K. house prices may have climbed in July, a separate survey showed ahead of a report by Nationwide Building Society.

Rudd Return

Labor has made up ground since Rudd’s return, after trailing the coalition by 14 percentage points in a poll conducted before be defeated Gillard on June 26 in a leadership ballot. The coalition took a 52 percent to 48 percent lead on a two-party preferred basis in a Newspoll published in The Australian on July 23.

Newspoll surveyed 1,141 people and the poll had a margin of error of plus or minus 3 percentage points. The two-party preferred measure is designed to gauge which party is most likely to form government under the country’s preferential voting system.

Rudd, 55, is burnishing his record as leader through the 2007-2009 financial crisis, when Australia sustained growth as much of the developed world slid into recession. An election must be held by Nov. 30, and could come as early as Sept. 7 if Rudd calls the ballot this weekend.

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