Australia Sees Wider Budget Deficit as RBA Keeps Cut Option
Australia’s budget deficit will balloon to A$47 billion ($42 billion) this fiscal year as Treasurer Joe Hockey pledged spending cuts in an economy weighed by an elevated currency and slowing mining investment.
The underlying cash deficit compared with an August projection of a A$30.1 billion shortfall, according to the government’s mid-year economic forecast released in Canberra today. Separately, the central bank maintained the option of loosening monetary policy further, saying the Aussie remained “uncomfortably high.”
“The structural deterioration of the budgetary position goes on,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “There are clearly hard yards to be done to fix these problems.”
The Liberal-National coalition government renewed a pledge to return the budget to surplus within a decade, even as it scraps taxes on carbon emissions and mining profits. Plans to tighten government spending come as the central bank tries to guide the economy through the end of a mining investment boom with interest rates at a record-low 2.5 percent.
The Australian dollar bought 89.47 U.S. cents at 5:07 p.m. in Sydney, little changed from before the budget update.
“The budget position has deteriorated significantly,” Hockey said in a statement. “This is an unsustainable fiscal position and the government is committed to taking the hard decisions to live within its means.”
Growth is expected to be 2.5 percent this fiscal year, unchanged from the Treasury’s forecast ahead of the Sept. 7 election. Real gross domestic product growth in 2014-15 is seen at 2.5 percent, compared with 3 percent seen four months ago.
Australia’s dollar has dropped 12 percent this year, the steepest decline after the yen among 10 developed nation currencies tracked by Bloomberg Correlation Weighted Indexes.
A lower level of the currency “would likely be needed to achieve balanced growth,” the Reserve Bank of Australia said in minutes released today of its Dec. 3 meeting.
“Given the substantial degree of policy stimulus that had been imparted, it was prudent to hold the cash rate steady,” the minutes showed. It said the board didn’t want to “close off the possibility of reducing it further should that be appropriate to support sustainable growth in economic activity.”
Markets and economists predict the central bank will leave rates unchanged in the near term to avoid a growth gap emerging as mining companies plan fewer projects. Low borrowing costs are driving up home prices, suggesting the RBA may be reluctant to add to its 2.25 percentage points of rate cuts since late 2011.
Hockey said in the budget papers that without policy changes or “remedial action” the budget would be in deficit every year to 2023-24.
The 2014-15 deficit is projected at A$33.9 billion, compared with an August forecast of a A$24 billion shortfall. The 2015-16 shortfall is now seen at A$24.1 billion versus a A$4.7 billion deficit seen in August, the Treasury documents show. The earlier projection of a A$4.2 billion surplus for 2016-17 has been replaced by an A$17.7 billion deficit.
Unemployment (AULFUNEM) is expected to be 6 percent by July 1, down from the 6.25 percent estimate in August.
The coalition has pledged to revoke a Labor-implemented carbon-price mechanism and tax on iron-ore and coal profits, along with cutting red tape as signs emerge of a slowdown in the nation’s $1.5 trillion economy. From July 1, when a new Senate convenes, it will have to negotiate with a bloc of minor parties holding the balance of power in the Senate to pass laws.
“If we want a dynamic, modern economy that delivers ongoing rises in living standards, the heavy lifting of deficit reduction will have to come from spending restraint rather than from a raft of new taxes,” Hockey said in a speech in Canberra.
The deficit blowout comes as the coalition trails in polls after a spying scandal led Indonesia to suspend efforts to co-operate with Abbott, 56, in his bid to halt a surge of asylum seekers arriving by boat from the Asian nation. Last month, he back-flipped on a pre-election promise to match Labor’s pledge to increase education funding.
After announcing in his Sept. 7 election speech that Australia was again “open for business,” his government received criticism from the business community for blocking a $2 billion takeover of grain handler GrainCorp Ltd. (GNC) by Archer-Daniels-Midland Co. on national-interest grounds. His challenge in keeping the nation’s manufacturing industry afloat was underscored last week when General Motors Co. said it planned to cease producing cars in Australia by 2017.
Since winning office, Hockey has pledged to inject A$8.8 billion into the central bank’s depleted reserve fund, scrapped plans to tighten loopholes on company cars and reversed other revenue raising measures.
Australia’s currency climbed almost 50 percent in the four years ended Dec. 31 as the nation escaped the 2009 global recession and the China-led commodities-investment boom spurred growth. That squeezed manufacturers and tourism operators in Australia’s southeast, spurring job losses.
“Whilst investment in the non-resources sector is declining this year, the recent fall in the Australian dollar and generational low interest rates should ease some of the pressures being faced by firms outside of the resources sector,” Hockey said in the speech.
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