Christmas has arrived early in the Asia-Pacific region, with governments playing Santa Claus in a bid to revive economic growth prospects.
On Thursday, Australian Federal Treasurer Wayne Swan finally admitted the nation’s worst-kept secret: his cherished budget surplus would not be delivered in 2013 as previously promised.
Blaming a “sledgehammer hit” to revenues, Swan said the revenue shortfall in the first four months of the year was AUD$3.9 billion, making a promised AUD$1.1 billion budget surplus for fiscal 2013 difficult despite achieving an extra AUD$1.3 billion in spending cuts.
As The Diplomat previously reported, the prospects of the government’s “surplus fantasy” had already been written off by most economists due to a slump in commodity prices, the strong exchange rate and resulting lower economic growth.
While Opposition Leader Tony Abbott slammed another “broken promise,” the Australian dollar and bonds were virtually unchanged after the announcement, with business groups, economists and others generally welcoming the decision.
AMP Capital’s Shane Oliver said, “The government has done the right thing to drop surplus commitment…undertaking more fiscal austerity just to get a surplus would have been a disaster for the economy.”
He noted that even if Australia’s budget deficit blew out to AUD$10 billion for the fiscal year ending June 30, it would still be less than 1 percent of gross domestic product (GDP) and “way lower than most OECD economies.”
Standard & Poor’s Financial Services said its credit rating on Australian government debt was unaffected by the budget decision.
“We continue to view the government’s fiscal strength as one of the factors that offset the Australian economy’s weak external position, even if there were to be a budget deficit in fiscal 2013.”
Yet the political cost in abandoning the surplus commitment first made in 2010 may be high for the Gillard government, which trails the opposition Liberal/National Party coalition in the polls and faces reelection in 2013.
Japan stimulus boost
Meanwhile in Japan, newly elected Shinzo Abe of the Liberal Democratic Party (LDP) has wasted little time in putting his fiscal stimulus plans into action to pull the economy out of recession.
The LDP and its ally New Komeito are drawing up a supplementary budget of around 10 trillion yen (around U.S. $118 billion) for the fiscal year through March 31 to finance public works projects.
However, tax revenues are expected to drop for the first time in three years, potentially making it necessary for the new government to break the previous government’s annual 44 trillion yen cap on new bond issuance, as well as the 71 trillion yen spending limit.
Junko Nishioka, Chief Economist Japan, RBS told The Diplomat that the increased debt would “bring about market fears on fiscal risks,” although public works spending was more effective than tax cuts in spurring growth.
She said the planned increase in the consumption tax in 2014 to help repair government finances could still go ahead.
“As long as the [Japanese] economy recovers in the second half next year, I think Abe will press forward with the tax hike, based on official agreement among top three parties [LDP, New Komeito and the now opposition Democratic Party of Japan],” Nishioka said.
South Korea, China spending
Following Japan’s poll, the election of Park Geun-hye as South Korea’s new president has prompted speculation of increased welfare spending to prevent a widening income gap and boost a faltering economy.
According to The Washington Post, South Korea spends the second least on welfare as a proportion of GDP among industrialized nations. During the election campaign, Park promised to cut education costs, expand childcare and boost medical treatment, at an estimated cost of U.S. $125 billion.
U.S. investment bank Goldman Sachs has also urged the government to boost social spending, given the risk to the economy posed by U.S. $873 billion in household debt, according to Korean daily Chosun Ilbo.
In Asia’s biggest economy, China’s new leadership team has pledged a “proactive fiscal policy” and “prudent monetary policy” to boost an economy which posted a three-and-a-half year low of 7.4 percent growth in the 3rd quarter ending in September.
So it’s heigh-ho, off to treasury we go this year-end, with the fiscal expansionists in the ascendancy across the region and bond markets awash with debt.