Australia's promised budget surplus blows out to $19.4 billion deficit as economy slows

CANBERRA, Australia – The Australian government’s promise to deliver a budget surplus in the current fiscal year has blown out to a 19.4 billion Australian dollar ($19.4 billion) deficit as a fading mining boom coupled with a buoyant Aussie dollar slows the economy.

The projected deficit for the 12 months ending June 30 is included in the government’s economic blueprint for the coming year released on Tuesday, which includes spending increases in defence, foreign aid, care for the disabled and education.

It is Treasurer Wayne Swan’s sixth annual budget and is likely to be the last for his centre-left Labor Party government, widely expected to be defeated at elections on Sept. 14.

The budget forecast a smaller AU$18 billion deficit in the fiscal year ending June 2014 with net debt peaking at AU$191.6 billion — 11.4 per cent of gross domestic product — in 2014-15. The books would finally be balanced in 2015-16 with an AU$800 million surplus. The surplus would widen to $6.6 billion surplus the following year.

A year ago, Swan declared an end to budget deficits in the aftermath of the global financial crisis and predicted an AU$1.5 billion surplus in the current fiscal year.

Swan on Tuesday defended his government’s decision not to make deeper spending cuts to balance the government’s books sooner.

“Cutting to the bone puts Australian jobs and our economy at risk, something this Labor government will never accept,” Swan told Parliament.

“To those who would take us down the European road of savage austerity, I say the social destruction that comes with cutting too much, too hard, too fast is not the Australian way,” he said.

The budget will have to be endorsed by Parliament over the next two months if it is to be implemented.

Business groups have largely reacted negatively to the budget and questioned whether its assumptions about Australia’s economic growth prospects were too optimistic.

“It is a missed opportunity because it keeps the nation shackled to more years of deficits and a high cost structure that erodes business competitiveness and innovation,” Australian Chamber of Commerce and Industry chief executive Peter Anderson said in a statement.

Government revenue has been increasing every year since 2009-10. Tax receipts are forecast to rise 7.4 per cent in the next fiscal year to AU$376 billion. But the government has struggled to rein in expenditure ever since its initial splurge of stimulus spending at the peak of the global financial crisis kept the economy out of recession.

Economic growth is forecast to slow from 3 per cent in 2012-13 to 2.75 per cent next year before gathering pace again.

Most economists were surprised when Australia’s jobless rate fell from 5.6 per cent in March to 5.5 per cent in April. The budget expects unemployment will rise to 5.75 per cent for the next two years before falling back to 5 per cent in 2015-16.

Defence spending is set to increase despite Australian troops withdrawing from Afghanistan, East Timor and the Solomon Islands this calendar year.

The defence allocation has swollen from AU$103 billion spread over four years in last year’s budget to AU$113 billion over four years in the latest budget.

The latest budget includes AU$3 billion over nine years to buy 12 new Boeing EA-18G Growler electronic warfare fighter jets to cover deliver delays in the Lockheed-Martin F-35 Joint Strike Fighter.

The cost of a new funding model for schools would increase from AU$17.7 million in the current fiscal year to AU$532 million next year.

The government plans to introduce a new levy from July 2014 that would raise AU$11.6 billion over three years to improve care for Australians with severe disabilities.

The budget confirmed Foreign Minister Bob Carr’s announcement on Monday that foreign aid would increase by 9.6 per cent on the current year to AU$5.7 billion next year.

Chinese demand for raw materials such as iron ore and coal helped keep Australia out of recession during the global economic crisis. But the mining boom is expected to peak this calendar year and businesses outside the resource sector are not growing fast enough to make up for the miners’ expected retreat.

The government introduced a 30 per cent tax on iron ore and coal miners’ profits above a set threshold in the current fiscal year which was supposed to raise AU$3 billion in its first year.

The latest estimate is that that tax will raise only AU$200 million in the current fiscal year due to a sharp fall in commodity prices and AU$700 million next year.

The government also introduced in the current fiscal year a carbon tax of AU$23 for every metric ton of carbon gases emitted by Australia’s worst industrial polluters. Most households were compensated for the higher living costs as a result of the tax with tax breaks and increased welfare.

The latest budget scraps plans for more tax breaks promised in 2015-16 when the carbon tax is scheduled to be replaced by a carbon permit trading scheme.

The Australian scheme will be linked to the European emissions trading scheme which has experienced declining carbon prices due to the depressed economy.

While last year the carbon price was expected to be AU$29 a metric ton in 2015-16, the latest budget predicts AU$12 a metric ton which won’t add to living costs.

Australia’s central bank last week cut its key interest rate by a quarter percentage point to a record low 2.75 per cent in an effort to boost economic growth and to drive down the currency that has failed to track lower with commodity prices. International investor interest in Australian bonds as a safe haven in global market turmoil has helped keep the currency buoyant.

Australian remains one of only eight countries with a stable AAA credit rating from all three major global rating agencies.