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Australia’s Busted Budget

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Pacific Money

Australia’s Busted Budget

Australian governments at the federal and state levels could be facing a “decade of deficit.”

Australia’s Federal Treasurer Wayne Swan will hand down what is likely to be his final budget on May 14, having failed to achieve his elusive goal of a surplus. With estimates of the fiscal black hole growing bigger by the day, the former holder of the “world’s best finance minister” award is fast running out of time to confound critics.

As reported previously by The Diplomat, weaker growth in nominal gross domestic product caused Swan to ditch his previous pledge of returning the budget to the black in 2013. This year’s sixth consecutive budget deficit will almost certainly be Swan’s last ahead of September’s election, with the latest Nielsen opinion poll showing just 29 percent of voters support the ruling center-left Labor Party, compared to 49 percent for the opposition Coalition.

Compounding the challenge, Prime Minister Julia Gillard announced Wednesday plans for a levy on all taxpayers to fund a national disability insurance scheme (NDIS), making her the first prime minister to seek re-election promoting a tax hike since John Howard’s consumption tax in 1998.

The A$8 billion a year NDIS adds to the A$14.5 billion “Gonski” education reforms, giving Swan and his advisers extra spending to fund despite a predicted deficit of more than A$10 billion for fiscal year 2013. The headline deficit compares with the A$1.1 billion budget surplus forecast just last October.

On Monday, Gillard admitted that tax revenue had slumped A$12 billion below forecast, warning of cuts that included “options previously taken off the table”.

The Labor leader maintained her pledge of delivering budget surpluses on average over the medium-term economic cycle, although few expect the prime minister to be held to her promise.

‘Decade of deficits’

Gillard’s admission came after warnings from analysts that Australian governments at the federal and state levels faced a “decade of deficits.” The Grattan Institute said an annual deficit of around 4 percent of GDP a year was likely by 2023 due largely to the impact of higher health spending along with lower company tax revenues, requiring savings and tax hikes of A$60 billion a year.

The think tank’s report said health care spending had risen by A$40 billion over the past decade. Politicians on both sides had raised expectations of additional spending on NDIS, schools, parental leave and infrastructure, while company tax revenues were likely to weaken with the end of the mining boom.

Earlier, consultancy Macroeconomics warned of a structural deficit of around A$40 billion, calling on spending cuts of up to A$15 billion to close the gap.

The report it prepared for the Minerals Council of Australia called for cuts to corporate benefits along with “middle class welfare,” warning of the potential for decades of red ink.

Macroeconomics director Stephen Anthony told ABC radio that both sides of the political aisle were to blame, with the structural deficits having started during the Howard era from fiscal year 2007 despite headline budget surpluses.

“In its last five budgets [the Howard government] both handed back tax cuts and engaged in discretionary spending to such a degree that the previously strong record of fiscal rectitude was undermined,” he said.

“We entered into a period of structural budget deficits and then that situation wasn't addressed by the Rudd government and hasn't been significantly improved on by the Gillard government either.”

Nevertheless, Australia’s net government debt remains low by international standards at around 10 percent of GDP, with the International Monetary Fund putting the average for advanced economies at near 80 percent.

“While Australia is far from the basket case that is Europe, it is worth remembering that a rapid build up in debt was what hurt most European economies. Spain, Ireland and Iceland were thought to be in sound fiscal and debt positions before they blew up,” the Australian Financial Review’s John Kehoe warned.

Standard & Poor’s has stated that the nation’s AAA credit rating could be at risk without a road map toward a surplus within the next five years.

Swan has pointed out that Australia is one of only eight countries with the coveted triple-A rating from all three major credit rating agencies, saying that “Australia's public finances are among the very strongest in the world.”

The Grattan Institute said in its report that only “courageous leaders” capable of making tough choices could balance the nation’s books. As Yes Minister’s Sir Humphrey said, "A controversial decision will merely lose you votes; a courageous decision will lose you the election”.

Will Swan save the budget or simply attempt to save his job?