Budget blues have returned with a vengeance for Australia’s ruling Labor party, with Treasurer Chris Bowen forecasting Friday higher deficits and the worst jobless rate since the global financial crisis. For second-time Prime Minister Kevin Rudd, the economic downturn has come at exactly the wrong time as he prepares for the fight of his political life at this year’s poll.
Releasing an economic statement seen clearing the way for an election, Bowen announced a A$33 billion write-down in forecast government revenue, blamed on a weaker global economy, falling commodity prices and lower than expected nominal growth. Despite A$17 billion worth of new taxes and savings measures, the budget deficit is now set to widen from the A$18 billion forecast in May’s budget to A$30 billion.
Labor will enter the election campaign having failed to deliver its promised budget surplus, which has now been pushed back to fiscal 2017. Economic growth is expected to slow to 2.5 percent this fiscal year, down from the budget’s 2.75 percent forecast, before recovering to 3 percent the following fiscal year.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
“The outlook for world growth in 2013 has weakened since [the budget], with a larger economic contraction and slower recovery now likely in the euro area and more moderate growth expected in emerging Asia, most notably in China and India,” the statement said.
More damaging for Labor’s re-election bid though is a forecast that unemployment will reach 6.25 percent by the June quarter of 2014 – higher than the 5.9 percent rate reached during the GFC and the worst result since 2002.
Crisis, what crisis?
However, Bowen played down talk of a fiscal crisis as he maintained the line that the economy was undergoing a transition from the mining investment boom.
“As the prime minister and I have said, Australia is undergoing an economic transition, not a crisis, but a transition which needs careful economic management,” Bowen told reporters.
He pointed to a dip in nominal GDP growth from the budget forecast of 5 percent to 3.75 percent, well below its 20-year average of 6.5 percent, made worse by a 5.75 percent decline in the nation’s terms of trade (ratio of export to import prices).
The budget blowout will see net government debt jump to 13 percent of GDP in fiscal 2015, although that is still low by international standards, with Standard & Poor’s reaffirming its triple-A rating.
Defending his plan not to cut welfare spending or hike taxes significantly, Bowen said, “The economy and the budget need sensible, well thought-out measures which support jobs and growth now, but return the budget to surplus in the medium term.”
Nevertheless, the honeymoon has rapidly faded for Rudd’s government. Irate interest groups have slammed revenue measures including a A$1.8 billion impost on employer-funded cars and a A$730 million bank deposit insurance levy, while smokers face a A$5.3 billion hike in the tobacco tax.
Shadow Treasurer Joe Hockey condemned the statement, saying the government had lost control of the budget and the economy.
“It is the same old Labor and the same old Kevin Rudd,” he said. “The budget is in free fall.”
Business leaders expressed criticism also, with the Business Council of Australia’s chief executive Jennifer Westacott saying the statement would do little to boost growth.
“The economic statement has seen a continuation of the muddle-through approach characterised by ad hoc and rushed proposals that simply hasn’t worked in the past. The measures announced will do little to rebuild confidence,” she said.
While pointing out that the government’s fiscal problems were “overwhelmingly self-inflicted,” the Australian Financial Review’s economics editor Alan Mitchell said it had failed to address the underlying structural deficit.
“The election campaign has barely begun and both sides already have promised away billions of dollars in sweeteners. The coming months will see more expensive promises, with nothing but vague promises about finding offsetting spending cuts to fund them. This is a recipe for chronic fiscal vulnerability,” Mitchell warned.
In a report on Australia’s mining boom, the Grattan Institute said governments on both sides of politics had spent more than 90 percent of the A$200 billion revenue windfall over the past decade. As a result, “Underlying budget deficits must now be repaired in more difficult times,” it said.
With speculation growing that the election will be called for September 7, Rudd faces an uphill battle in convincing a skeptical electorate that his party can turn government finances around. In the famous words of the Bill Clinton campaign, “The economy, stupid.”