Bloomberg News

Australia to Tighten Spending to Meet Budget Surplus Pledge

October 21, 2012

Australia’s government will tighten health-care spending and scale back family support payments to help deliver an election-year budget surplus, giving the central bank scope to further reduce interest rates.

The underlying cash surplus will be A$1.08 billion ($1.11 billion) in the 12 months ending June 30, compared with a A$1.54 billion surplus seen in May, the government said in a midyear review released in Canberra today. Spending is forecast to be A$363.2 billion compared with a May projection of A$364.2 billion, while the revenue estimate was cut to A$367 billion from $A368.8 billion.

“While global headwinds, a high dollar and changing consumer behavior are weighing on some sectors, the Australian economy is expected to outperform every major advanced economy this year and next, with growth underpinned by strong investment, strong growth in export volumes and solid growth in consumption,” Treasurer Wayne Swan said in a statement in Canberra today.

Prime Minister Julia Gillard is bidding to end four years of deficits heading into an election year with polls showing she will lose to the opposition Liberal-National coalition. As the government reins in spending, she’s putting the onus on the central bank to further reduce the highest benchmark rate among major developed nations to bolster a slowing economy.

Rate Outlook

For the Reserve Bank of Australia’s Nov. 6 policy meeting, investors are pricing in a 99 percent chance of a 0.25-point reduction to 3 percent, up from 96 percent before the release, swaps data compiled by Bloomberg showed.

“The historically large turnaround in the budgetary position hints at considerable fiscal drag which is already starting to emerge,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney. “This will keep pressure on the RBA to cut further.”

The Australian dollar fell for a third day, buying $1.0313 at 1:19 p.m. in Sydney.

The government will save A$700 million over four years by changing the private health-insurance rebate, and it will also curtail the so-called baby bonus starting July 1. It will alter the way companies pay their taxes, moving from quarterly to monthly installments starting in January 2015, according to the budget papers released today.

The economy is predicted to grow about 3 percent in 2012-13, he said, or 0.25 percentage point slower than predicted in the May budget.

Economic Beacon

During a press conference in the nation’s capital, Swan said that while the global economic slowdown makes delivering the surplus harder to achieve, Australia remains a “beacon of strength,” with trend growth and low unemployment.

The global slump is reflected in Australia’s terms of trade, or export prices relative to import prices, which will decline 8 percent this financial year compared with the 5.75 percent forecast at budget time, the papers showed.

Even so, the nation’s unemployment rate is predicted at 5.5 percent this fiscal year and next, Swan said, compared with the 5.4 percent recorded in September.

Australia’s budget surplus would make it one of the first developed nations to end an era of red ink caused by the worldwide financial crisis that started in 2008.

Resource rent taxes have been revised down by A$1.8 billion in 2012-13 and 2013-14, mostly from minerals resource rent tax. The changes reflect lower global commodity prices, particularly iron ore prices, according to today’s budget papers.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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