Bloomberg News

Gillard Touts Surplus in Bid to Revive Leadership

May 06, 2012

Australian Prime Minister Julia Gillard, beset by political scandals and near-record low polls, will seek to win back disgruntled voters by delivering a federal budget tomorrow that ends four years of deficits.

Gillard, whose Labor party trails the opposition by 18 points in the latest opinion survey, says a return to budget surpluses gives the central bank the flexibility to lower borrowing costs. The potential political payoff: voter discontent diminishes as household finances improve in a nation where almost 90 percent of mortgages are at variable rates.

Australia’s first female prime minister is touting her government’s handling of the economy as she plans what may be the biggest cut in spending as a proportion of gross domestic product in six decades. The budget may be the last opportunity for Gillard, who faced a party leadership challenge this year, to reverse her poll slump, said political analyst John Warhurst.

“It almost seems too late for Gillard to get her message out to voters but the budget is perhaps her only opportunity to break the cycle of bad news that’s enveloped her government,” said Warhurst, a professor at the Australian National University in Canberra. “One of the few things Gillard has got going for her is the relatively healthy state of the economy, so this is a chance for her to publicize that.”

Fighters Postponed

To reach its target, the government may have to cut spending by the equivalent of about 2.5 percent of GDP as it battles lower-than-expected tax revenue, according to Treasury data. In a sign of how it plans to do that, Defense Minister Stephen Smith announced May 3 the government will save A$1.6 billion ($1.6 billion) by delaying the purchase of 12 Lockheed Martin Corp. (LMT:US) F-35 Joint Strike Fighter jets by two years.

Gillard, 50, is banking on two pieces of signature legislation she passed adding billions to state coffers. A mining tax, which won Senate approval in March, will reap about $11 billion in taxes within three years from companies including BHP Billiton Ltd. (BHP) and Rio Tinto Group, government estimates show.

Gillard is hoping she’ll be able to soften public disapproval of a separate carbon-emissions tax that passed in November by redistributing some of the revenue from the measure. Both pieces of legislation take effect on July 1.

“The scheme has been designed with assistance to families as part of it, and people will see that assistance flow as soon as in the next few weeks,” Gillard told reporters May 3 in Canberra. “Supporting working people every step of the way is already in the scheme, already designed, and people will see the cold hard cash very, very soon.”

Rate Cut

Gillard received a fillip on May 1, when the central bank lowered its benchmark rate, the highest among major economies, by half a percentage point, to 3.75 percent. She said last month that a rate cut “could deliver widespread benefits for households and business.”

The budget will include a payment to families of up to A$820 for each child in high school, Treasurer Wayne Swan said in an interview with Nine Network yesterday. More than 110,000 businesses will also be eligible for a tax refund that allows companies to claim current losses against tax paid in previous years, Swan said.

Politically Gillard, a former labor lawyer whose party lacks a majority in parliament, is fighting to overcome setbacks that have weakened her control of the 150-seat lower house.

Tony Crook

Tony Crook, a National party member of parliament for Western Australia who voted as an independent, announced yesterday he will join the opposition coalition when parliament reconvenes tomorrow.

Gillard on April 29 asked Labor lawmaker Craig Thomson to quit the party in the wake of allegations he used a union credit card to pay for prostitutes while working for the Health Services Union before becoming a lawmaker in 2007. Thomson, who has denied the claims, said he will continue to vote with the government.

Peter Slipper, the parliamentary speaker on whom Gillard had relied to solidify her control of the house, last month stepped aside to deal with fraud and sexual harassment claims that he denies.

Gillard’s minority government has needed the support of independent lawmakers and the Green party to pass legislation following the closest election in seven decades in 2010. She has battled charges by the opposition that she’s beholden to the Greens and broke a campaign pledge to oppose a carbon levy. In February, she saw off a challenge by Kevin Rudd, whom she ousted as Labor leader and prime minister two years ago.

Wheels ‘Spinning’

“Labor is like a car bogged in the mud,” said Zareh Ghazarian, a political analyst at Monash University in Melbourne. “The engine is running, but the wheels are spinning instead of going forward, and it just can’t get any traction.”

The slope of the mountain Gillard needs to climb highlights the challenge. The opposition Liberal-National coalition increased its lead over Labor in a April 27-29 Newspoll survey to 18 points, on a two-party preferred basis that takes into account the country’s preferential voting system. The survey of 1,148 people had a margin of error of plus or minus 3 percentage points.

Election Disaster

If the Newspoll result were replicated at the election that’s due by November 2013, Labor would lose more than half of the 72 seats it won last time, according to Malcolm Mackerras, a political analyst at the Australian Catholic University in Canberra.

“It doesn’t really matter what Labor does in the budget -- the voters have stopped listening to Gillard and are just waiting for a chance to get rid of her,” Mackerras said. “Economic conditions in Australia are pretty good but people want to punish the government anyway.”

Gillard’s administration has pointed to the decision in November by Fitch Ratings to upgrade Australia to a AAA credit rating as evidence of its sound stewardship of the economy. Standard & Poor’s and Moody’s Investors Service also give the sovereign borrower their top grades.

Australia’s government bonds handed investors a 2.2 percent return in April, the most among 18 nations holding a AAA credit score, according to Bank of America Merrill Lynch index data. U.S. Treasuries were the second-best performers, having gained 1.5 percent.

“The impact of Australia’s return to surplus is already clear to those in financial markets,” Commonwealth Bank of Australia economists led by James McIntyre wrote in a May 4 budget preview. “A surplus is of some benefit to perceptions of Australian borrowers trying to access currently fickle global markets.”

To contact the reporter on this story: Jason Scott in Canberra at jscott14@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

Australian Prime Minister Julia Gillard. Photographer: Mark Graham/Bloomberg

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