Australia is facing years of deficit with a A$17 billion (US$15.2 billion) blowout since September’s elections as the economy struggles to deal with an unwinding mining investment boom, the treasurer said yesterday.
Australian Treasurer Joe Hockey said the conservative government had inherited a “simply unsustainable” budget from center-left Labor and warned that without urgent action Australia would be in the red for a decade, with a deficit of A$47 billion this financial year.
“More than half the deterioration in the budget position is due to the softer economy,” he said in releasing the new government’s first budget update.
“This reflects a sharper-than-forecast fall in resources investment and a slower recovery in the non-resources sectors,” Hockey said.
Australia is undergoing a bumpy transition from an Asia-led decade of booming mining investment toward other drivers of growth, with key partner China slowing and easing demand, driving commodity prices down.
The update said the transition was “unlikely to be seamless” over the next four years with “the fall in resources investment expected to be sharper than previously forecast [and] the recovery in the non-resources sector expected to be more gradual.”
“Activity in the non-resources sectors has been subdued, with positive signs in those sectors thus far limited largely to the established housing market, above-average measures of consumer sentiment and improving business sentiment,” the update said.
“From 2014 to 2015, resources investment is expected to start sharply detracting from growth,” it added.
The opposition Labor and Greens parties accused Hockey of setting the stage for major spending cuts, with Hockey warning Australians would have to “adjust their expectations of what government can sustainably provide.”
“He’s preparing the ground for deep and brutal cuts come budget time, cuts to come which will affect every Australian,” Labor Party spokesman Chris Bowen said.
The conservatives had vowed during the election campaign to bring the budget back into the black at least as fast as Labor — a deadline of 2016-2017 — but this will not happen with deficits totaling A$123 billion forecast over the next four years.
The update committed the government to “returning the budget to sustainable surpluses that build to at least 1 percent of GDP by 2023 to 2024.”
“We want to get back to surplus as soon as we can,” Hockey told reporters. “It will require a sustained and fundamental structural overhaul of expenditure. All options are on the table.”
Detailed cuts are expected in the May budget.
Hockey said GDP forecasts for this year were unchanged at 2.5 percent for the current financial year to June 30 next year, but growth had been downgraded the following year from 3 percent to 2.5 percent.
Unemployment was revised down from a peak 6.25 percent to 6 percent this financial year, but the forecasts were more pessimistic in the medium term, seen at 6.25 percent in each of the next three years as the workforce aged and younger workers delayed entry.
Ratings firm Moody’s said the “somewhat worse projections” on growth and deficit were “clearly credit negative,” but did not pose a risk to the government’s “Aaa” credit rating.
“The rise in the debt ratios that would result from these deficits, while clearly a negative trend, still leaves Australia in a relatively favorable position compared to almost all other ‘Aaa’-rated sovereigns,” Moody’s said.