Australia to Make ‘Substantial’ Budget Cuts, Swan Says
May 08, 2011, 8:41 PM EDTBy Gemma Daley
(Updates with Swan comment from ninth paragraph.)
May 9 (Bloomberg) -- Australia will make "substantial" spending cuts in the budget after a rising currency, the nation’s costliest natural disasters and Japan’s earthquake crimped revenue, Treasurer Wayne Swan said.
Swan, who delivers the budget to Parliament tomorrow, said yesterday the deficit in the government’s finances will widen in the fiscal year ending June 30 before increased mining revenue and an improving economy help bring about a surplus in 2012-13.
Prime Minister Julia Gillard’s administration has said the budget will reduce welfare payments to get people back into the workforce and cut 1,000 jobs in the civilian defense industry in the next three years. The government also aims to stop high- income earners receiving a subsidy for having private health insurance.
"This budget is tough and it will keep spending tight, give incentives to companies to create more jobs," Craig James, senior economist at Commonwealth Bank of Australia in Sydney, said in a phone interview yesterday. "There won’t be much in it for people, although treasurers have a habit of pulling rabbits out of hats."
The government, which steered Australia through the global financial crisis, is trying to emphasize its economic management skills as its popularity declines over plans to impose a tax on mining companies’ profits and charge polluters in order to reduce greenhouse-gas emissions.
Restrain Spending
“We need to restrain spending and return to surplus in 2012-13 so we’re not adding to the pressures that come from the mining boom,” Swan said yesterday in his weekly economic note. “Our fundamentals are strong, with low unemployment, record terms of trade and a huge pipeline of investment in the resources industry.”
Flooding, a tropical cyclone, bush fires, the Australian dollar’s rise against the U.S. currency and slower consumer spending have caused revenue to fall by A$6.5 billion ($7 billion) since a November budget forecast. Japan’s March 11 earthquake will cut commodity exports by A$2 billion, Swan has said.
The Australian currency’s 18 percent gain in the past year has also hurt export revenue, Swan said yesterday. The dollar touched $1.1012 on May 3, the highest level since it began trading freely in 1983.
Skilled Migration
Swan, who has promised to create 500,000 jobs in the next three years, which would lower the unemployment rate to 4.5 percent from its current 4.9 percent, said the government may also seek to increase skilled migration to help fill positions.
“The most important thing to note is that net overseas migration in this country has come down dramatically,” Swan, 56, told reporters in Canberra today. “We will put forward in the budget, our estimates for the future.”
Credit-rating companies, a Reserve Bank of Australia board member, economists and analysts have said the government could delay the surplus without harming the economy.
Australia, the world’s biggest coal and iron ore exporter, is entering its 20th year of economic growth as companies including BHP Billiton Ltd. and Rio Tinto Group expand to meet surging Asian demand. The central bank increased its benchmark lending rate by 175 basis points from October 2009 to November last year.
‘Short-Term Softness’
“There is short-term softness in the economy caused by natural disasters and international uncertainty but there’s medium-term strength,” Swan said in his note. “What we must do in the years ahead is not compound any of the inflationary and capacity pressures.”
The budget will include assistance for low-income earners faced with higher living costs, cut taxes and give vehicle incentives to small businesses, Swan said. The reduction, which will begin in July, would cut taxes by an amount equal to A$300 annually for those earning A$30,000 per year and benefit 6.5 million workers, he said.
Australia will also provide A$308.8 million to help pensioners, regional and low-income households switch to digital television as analog transmission is turned off.
Interest Rates
The central bank on May 6 said it will likely need to raise interest rates “at some point” as inflation accelerates. It increased its forecast for consumer-price growth for 2011 to 3.25 percent from a previous estimate of 3 percent. The bank has an annual inflation target of between 2 percent and 3 percent.
Swan in November forecast a A$41.5 billion deficit for this fiscal year, followed by a A$12.3 billion shortfall next year and a A$3.1 billion surplus in 2012-13.
The budget implications from the emissions-trading system won’t be known until the project, which is scheduled to begin in July 2012, is completed, Swan said. The plan also needs to be approved by Parliament.
“Labor will never to deliver a surplus,” opposition Liberal-National treasury spokesman Joe Hockey told Australian Broadcasting Corp. television yesterday. “On budget night, when they claim to deliver a surplus in 2013, there will be a gaping hole and that hole will be the carbon tax.”
--With assistance from Rob Fenner in Melbourne. Editors: Patrick Harrington, John Brinsley
To contact the reporter on this story: Gemma Daley in Canberra at gdaley@bloomberg.net
To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net
