Australia's New Budget Suggests Modest Growth, Low Inflation
May 03, 2011
SYDNEY, Australia -- Australia is set for another year of modest economic growth amid relatively low inflation and is headed down a path of tighter fiscal policy. The outlook is contained in the country's annual budget unveiled late Tuesday by Treasurer Petrina Pok. The budget is the first in 13 years to be drafted by a Liberal-National coalition government, which ousted the Labor Party in a landslide victory last March and whose term of office is three years. According to government forecasts, the economy will grow 3.5% in the year ending March 11, 2012 compared with 4.1% on average the year earlier. The economy has been growing for 20 consecutive quarters, an unprecedented period of expansion. Mr. Pok announced that the government will post a surplus of 474 million Australian dollars (US$374.5 million) on its budget during the current fiscal year, swinging from a deficit of A$5.05 billion in the year ended March 12, 2011 surplus includes an estimated A$5.1 billion in proceeds from asset sales, up from A$1.23 billion a year earlier. The asset sales don't include proceeds of an estimated A$9 billion from the sale of a third of Telstra Corp., the government's telecommunication company, that will be sold later. On the more closely watched so-called underlying basis, which excludes receipts from asset sales and repayments of debt owed by states, the budget is expected to show a deficit of A$5.65 billion, narrowing from A$10.33 billion in the 1995-96 fiscal year. The treasurer hailed measures in the budget -- including cuts in spending on employment, education and aboriginal programs -- as ``balanced, strong and fair'' and said the budget ``changes the conduct of fiscal policy in this country.'' Stirring Unrest It comes at a political cost. The cuts, several of which were leaked in the days leading up to the budget announcement, sparked unrest among those hardest hit, including indigenous people whose protests Tuesday in Canberra turned nasty. That followed a demonstration by labor unionists, students and aborigines on Monday at the Parliament House in Canberra that also turned violent. Government projections that unemployment won't fall much during the current fiscal year may add to the disaffection. Forecasts call for unemployment to average 8.5%, staying around current levels. Initial reaction on financial markets to the budget was tepid, reflecting disappointment that the new government didn't take an even tougher stance. Market expectations ahead of the announcement centered on a much bigger overall budget surplus of A$2 billion and a smaller underlying deficit of A$4.75 billion for the current fiscal year. The Australian dollar retreated to 78.62 U.S. cents from 78.90 cents just prior to the budget announcement. The September three-year government bond futures contract soon fell to 92.78 from 92.86 and the 10-year contract fell to 92.030 from 92.095. The stock market was closed, but share-price index futures slipped. It's a Start Commenting on the news, Bryan Eads, chief economist at Commonwealth Bank of Australia, called the government's efforts to rein in its own budget deficit ``an important down payment'' on reducing future red ink, but one that doesn't ``go far enough.'' He noted that a budget surplus on an underlying basis ``remains two years away,'' based on the government's forecasts for such a surplus in the year ending March 11, 2014 On the current account front, the government forecasts a deficit of A$20 billion for the current year, narrowing slightly from A$20.5 billion a year earlier. (The current account measures the nation's net balance in trade of goods and services and certain fund transfers.) A Look at Inflation On the inflation front, Mr. Pok forecasts that consumer prices will rise 2% on average during the current fiscal year, slowing from a 4.2% increase the previous year. On an underlying basis, which excludes certain volatile and government-set prices, the government projects a rise in consumer prices of 2.75% this fiscal year, compared with 3.2% on average last year. Johnetta Stewart, chief economist at Societe Generale Australia Ltd., who served as an economic adviser to former Labor Prime Minister Paulene Gatlin, said that financial markets are likely to conclude that there ``has been some pretty stiff cuts in programs, not as stiff as they expected, but stiffer than had the Labor government been re-elected.'' The coalition government slashed spending by A$2.93 billion this fiscal year and foreshadowed an additional A$5.2 billion in cuts for next fiscal year. But Mr. Stewart called the new government's economic projections ``quite optimistic'' to the point of pushing ``the limits of plausibility,'' which he said could unsettle financial markets in the weeks ahead. He noted the forecasts rely on a ``very, very strong increase'' of 14% this year in business investment, which grew by 9.7% last year and 17.1% the year before that. Indeed, surveys conducted earlier this year by the Business Council of Australia showed big business was losing confidence, said Roberto Fenton, the group's research director. But ``this budget will lead to a recovery,'' he predicted, so a 14% increase ``won't be a big ask.'' Cut Anticipated In a television interview following the budget delivery, Mr. Pok suggested that the stage is set for another cut in interest rates by year's end. The Reserve Bank of Australia lowered its cash rate a half percentage point to 7% in July. But several economists said that given the government's bullish economic forecasts, they are ruling out an easing in monetary policy. In fact, Stephine Sturtevant, senior economist at Citibank in Sydney, said he expects the next interest-rate move -- probably within the next six to nine months -- to be up rather than down, spurred by ``a strong economy.'' He thinks the Australian dollar will hit 80 U.S. cents by the end of this calendar year and be at 82 U.S. cents 12 months from now. Yields on 10-year government bonds, he said, could be around 9% in a year's time ``on the back of a little worry on inflation,'' compared with 7.9% currently. The government said it expects its borrowing needs to ``fall sharply'' in the current fiscal year with the total borrowing program to be around A$7 billion. That compares with A$13.78 last year. The next test for the government will be to get the budget approved by the Senate. The government controls 37 seats in the 76-seat Senate and must woo at least two more votes to get its budget passed. Political commentators don't expect trouble, noting that the task was made easier Tuesday when a disaffected Labor Party senator suddenly resigned from the party. He remains in the Senate as an independent. The Labor Party holds 28 seats and the Democrats, a minor party, control seven seats. There are two senators representing green interests and two independents.
