Posted by WARREN MOSLER on October 22nd, 2012
October 22 (Reuters) — Australia’s government announced A$16.4 billion ($17 billion) in new savings and tax measures over four years on Monday to protect a wafer-thin budget surplus for 2012/13, opening the way for the central bank to further cut interest rates as early as next month.
Releasing the government’s mid-year budget update, Treasurer Wayne Swan said GDP growth would be slower in the year to June 30, 2013, and come in at 3.0 percent compared to May’s budget forecast of 3.25 percent, as the country’s mining boom slowed.
Financial markets have priced in up to two more interest rate cuts over the coming months and economists said the extra fiscal tightening could now see the Reserve Bank of Australia ease policy at its policy meeting on November 6.
“The prospect of small budget surpluses means that fiscal policy settings have been tightened a notch. It also means that monetary policy can be further eased without a significant domestic inflation risk,” CBA Economics senior economist Michael Workman said.
A fall in tax revenue, slower economic growth and lower commodity prices led to the downward revision in this financial year’s expected surplus to A$1.1 billion, from May’s budget forecast for a surplus of A$1.5 billion.
Government revenues have also been hit by lower commodity prices, with the controversial mining tax on iron ore and coal mining profits to bring in A$1 billion less this year and A$1.1 billion less the following year compared to the May budget forecasts.
Iron ore prices have fallen around 15 percent, thermal coal 9 percent and coking coal 30 percent since the mining tax started in July, and the government now forecasts the minerals resources rent tax to raise A$9.1 billion over four years, compared to the May budget forecast of A$13.4 billion.
“Global growth has slowed in recent months, with the recession in the euro area and the subdued recovery in the United States weighing on growth in our region,” Swan said.
“The weaker global outlook and lower than expected commodity prices, along with the general easing of price pressures in the economy, are again slowing the recovery in tax revenue.”
Despite the slowdown, Australia remains one of the few developed nations to have forecast a budget surplus for the current year, with net debt peaking at 10 percent of GDP last financial year and well below the average net debt projected to peak at 95 percent of GDP in 2016 for major advanced economies.
The Reserve Bank of Australia has cut official interest rates by 100 basis points in 2012, with the latest 25-point cut in October. Markets are betting on a further rate cut by the end of the year.
The biggest saving in the budget update includes A$8 billion over four years by introducing monthly pay-as-you-go company tax payments for large companies.
It will also raise A$445 million over four years by removing some in-house fringe benefits tax arrangements on salary sacrificing, and raise A$520 million over four years from higher charges for visas to visit and work in Australia.
Australia’s peak business group the Australian Chamber of Commerce and Industry condemned the budget changes and said most of the imposts would be borne by companies.
“Business is again in the firing line when it comes to helping out the budget bottom line,” chamber chief executive Peter Anderson told reporters.
“There is no doubt that many of the decisions in today’s statement will be negative for both households and business, it will be negative for confidence, negative for the economic outlook and negative for economic certainty.”
Swan has delivered consecutive deficit budgets since his first budget in 2008, due to stimulus spending to help Australia avoid recession after the 2008 global financial crisis.
The Labor government, struggling in the polls, is due to face elections in the second half of 2013 and is determined to restore the budget to surplus before it faces the voters, to head off opposition attacks on its economic credentials.