Australia will need to find “substantial savings” in its budget due May 8 thanks to a cumulative A$150 billion ($156 billion) writedown in expected tax revenue over the past four years, Treasurer Wayne Swan said.
Returning the budget to surplus in the year through June 2013 will be “that much harder” for Canberra as a result of cuts in the tax revenue, which will take A$5 billion from the budget that year and again in the year through June 2014, he said in a weekly economic note yesterday.
Announcing a surplus will give “flexibility” to the Reserve Bank of Australia to cut interest rates “if the independent board thinks that’s required,” Swan said.
“Our savings will be targeted and responsible, charting a middle course between those who say take a chainsaw to government spending and those who say we shouldn’t cut at all,” he said in an e-mailed statement.
The Reserve Bank is expected to make the first cut to official borrowing costs in five months at its meeting May 1, with 16 of 28 analysts surveyed by Bloomberg forecasting Australia’s interest rates will drop 0.5 percentage point to 3.75 percent in the next two months.
Swaps indicate the bank will trim the overnight cash-rate target by more than a percentage point within a year.
Cuts of as much as 0.5 percentage point would help a retail industry struggling with declining consumer confidence, Wesfarmers Ltd. (WES) Managing Director Richard Goyder told Australian Broadcasting Corp. television yesterday.
Lack of Confidence
“There’s a distinct lack of confidence here,” Goyder said. “A rate cut would be good in terms of getting positive consumer sentiment.” While a cut of 0.5 percentage point would have more impact, Goyder said he “wouldn’t bet my house” on it happening.
Australia’s mining and energy boom made it the only major developed country to avoid a recession in the wake of the 2008 financial crisis. The country accounts for about 40 percent of worldwide iron ore exports and 30 percent of coal exports. There are A$231.8 billion in major mining and energy projects currently at an advanced stage of development, according to the government.
Still, a 72 percent increase in the value of the Australian dollar against the greenback since the start of 2009 has hit other trade-exposed areas of the economy, and the country’s A$240 billion retail industry is suffering from consumer confidence that has fallen for seven out of the past nine months.
Rates on Hold
The RBA has kept rates on hold since two successive cuts in November and December brought key borrowing costs to 4.25 percent, still the highest among developed economies.
Wesfarmers on April 24 reported sales from its Target department store chain fell 4.4 percent from a year earlier in the March quarter, while those from its budget department store Kmart rose just 1.2 percent.
Swan said that a return to budget surplus was a necessary step to maintain the confidence of sovereign debt investors despite the “huge battering” delivered to government revenue since the 2008 financial crisis.
“Market confidence rests heavily on demonstrated fiscal discipline and a loss of credibility can severely impact the price at which capital markets are willing to finance a budget deficit,” he said.
Taxes will amount to 22.8 percent of gross domestic product over the two years starting July 2013, compared with 24.2 percent during the first stage of the country’s mining boom in the middle of the last decade, Swan said. In all, the writedown to expected tax revenues since the May 2008 budget amounted to A$150 billion over a five year period, he said.
Australia ran 11 consecutive years of budget surpluses until the 2008 calendar year. It hasn’t matched revenue with expenditure since, and prices of key exports such as coal have fallen in recent months amid signs of slowing economic activity in China, the country’s largest export market.
“All four of our previous big mining booms ended poorly -- some in recession, others with little lasting benefit to show. This time it must and will be different,” Prime Minister Julia Gillard said in an April 19 speech in which she said there was “plenty of room” for the RBA to cut rates.
Investors and strategists including Jim Chanos, founder of New York-based hedge fund Kynikos Associates LP, have argued that Australia will be vulnerable in the event of a hard landing in China’s economy.
“What do you call a credit bubble built on a commodity bull market built on a much bigger Chinese credit bubble?” asks Societe Generale strategist Dylan Grice in a note to clients April 24: “Australia.”
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