Bloomberg News

Australia Keeps 2013 Budget Surplus Pledge Amid EU Debt Crisis

December 06, 2011

Nov. 29 (Bloomberg) -- Australia’s government will cut A$6.8 billion ($6.7 billion) in spending to meet Prime Minister Julia Gillard’s pledge to deliver a budget surplus as Europe’s debt crisis reduces revenue by slowing global growth.

The underlying cash deficit in the fiscal year ending June 30 will be A$37.1 billion, compared with a May budget estimate of A$22.6 billion, the Treasury said in a midyear review released in Canberra today. The budget is forecast to record a A$1.5 billion surplus the following year, compared with the previous projection of a A$3.5 billion excess.

“The recent instability in the global economy has had obvious consequences for revenue,” Treasurer Wayne Swan said today. Lower tax receipts and higher payments, including outlays to Queensland residents after natural disasters, contributed to a wider forecast deficit this year, he said.

Gillard, 50, is trying to balance the books in a nation forecast to have the fastest-growing economy in the Organization for Economic Cooperation and Development next year. The task is made tougher as Europe’s sovereign-debt crisis intensifies, increasing the threat to growth in Asian countries that buy Australia’s iron ore, coal and energy.

The heightened global risk is reflected in a decline in commodity prices this quarter and a 6.3 percent drop in the Australian dollar this month. The so-called Aussie, the world’s fifth-most traded currency, fell to as low as 98.63 U.S. cents after the review was released, from 99.05 cents yesterday in New York.

Global Risks

“Global economic and financial conditions have deteriorated markedly in recent months, and the risks to global stability from the European sovereign debt crisis have intensified,” Swan said in a statement. “Global growth prospects have been downgraded markedly in 2012, with the euro area expected to return to recession.”

The Reserve Bank of Australia on Nov. 1 lowered its benchmark interest rate by a quarter percentage point to 4.5 percent from a developed-world high to help boost domestic demand, its first reduction in 31 months. Swaps traders wager policy makers will need to cut again next month on the way to reducing borrowing costs by at least 1.5 percentage points over the next year, a Credit Suisse Group AG Index shows.

Political ‘Fetish’

To fend off criticism from an opposition coalition about her fiscal management, Gillard is sticking with a commitment to return to surplus by fiscal 2012-13 even after floods and cyclones in the nation’s northeast earlier this year slowed the domestic economy. Former RBA board member Warwick McKibbin earlier this year called that pledge a political “fetish” for avoiding deficits.

“It’s quite miraculous that they’ve retained the forecast surplus for 2012-13 given how bad 2011-12 looks,” said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. “The fact the forecast surplus remains razor thin suggests a downside risk.”

The Labor government’s stimulus measures to support household spending and increase construction, combined with the central bank slashing rates to a 50-year low, helped Australia avoid a recession as the world economy slumped in 2009.

The urbanization of hundreds of millions of people in China and India has also intensified demand for Australia’s mineral wealth, produced by companies including BHP Billiton Ltd. and Rio Tinto Group.

The surge in commodity extraction has also spurred hiring and Australia’s jobless rate, at 5.2 percent in October, was almost half the euro zone’s 10.2 percent in September. The government forecast Australian unemployment will increase to 5.5 percent in June 2012, today’s report showed.

Growth Stalling

The OECD said this week mounting concern about the survival of Europe’s monetary union has caused global growth to stall and represents the main risk to the world economy.

The 34 OECD economies will expand 1.9 percent this year and 1.6 percent next, down from 2.3 percent and 2.8 percent predicted in May, the Paris-based organization said in its twice-annual global outlook released late yesterday.

Australia’s gross domestic product will increase 4 percent next year, tied with Chile as the best-projected performer among OECD members.

Earlier today, Fitch Ratings upgraded Australia’s long-term foreign-currency issuer default grade to AAA from AA+.

Fitch said one of Australia’s strengths is its debt-to-GDP ratio of 26.3 percent, compared with its peer group median of 55.7 percent. “This provides Australia with the fiscal space to weather adverse shocks,” the ratings company said.

--With assistance from Jacob Greber in Sydney. Editors: Brendan Murray, Garfield Reynolds

To contact the reporter on this story: Michael Heath in Sydney at

To contact the editor responsible for this story: Stephanie Phang at

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