Tue, Dec 16, 2014 - Page 15 News List

Australian treasurer forecasts widening budget gap

MID-YEAR REVIEW:The treasurer said Australia’s drop in the terms of trade was the worst since 1959. However, Canberra kept its growth forecast of 2.5 percent

Bloomberg

The Australian government forecast a wider budget gap this year as plunging iron ore prices erode tax revenue and spending cuts are blocked by opposition lawmakers.

The underlying cash deficit would deteriorate to A$40.4 billion (US$33.3 billion) in the fiscal year ending June 30 next year from a May estimate of A$29.8 billion, Australian Treasurer Joe Hockey said in Australia’s mid-year economic and fiscal outlook yesterday. The government forecast unemployment would climb to 6.5 percent by the middle of next year, higher than its May projection of 6.25 percent.

“We are now witnessing the largest fall in the terms of trade since records began in 1959,” Hockey told reporters in Canberra, referring to export prices relative to import prices. “This has been faster and deeper than anyone expected.”

Australian Prime Minister Tony Abbott’s Liberal-National Party coalition, which was elected 15 months ago promising to end the “debt and deficit disaster” of the former government, has faced Australian Senate opposition to savings measures while falling prices of key exports have cut tax revenue.

The fall in iron ore prices is forecast to reduce company tax payments by A$2.3 billion from this year to next year and A$14.4 billion over the forward estimates, yesterday’s documents showed.

“The government’s in a very difficult position — the current situation is unsustainable and spending has to come down,” JPMorgan Chase & Co Sydney-based economist Tom Kennedy said. “Fiscal policy is going to be pretty restrictive over the next four or five years as the government looks to balance the books, so monetary policy is going to have to do most of the work, which means rates will remain at very low levels or potentially the RBA [Reserve Bank of Australia] could cut.”

The Australian dollar fell and was trading at US$0.8223 at 2:46pm in Sydney from US$0.8229 before the revised forecasts were issued. Traders are pricing in at least one rate reduction by the central bank in the next 12 months, according to a Credit Suisse Group AG index based on swaps.

The government kept its forecast for economic growth of 2.5 percent in the fiscal year ending next year after third-quarter data showed GDP grew just 0.3 percent from the previous three months, the slowest pace in 18 months.

The economy is struggling to transition to non-mining drivers of growth as a resources investment boom wanes even as the Reserve Bank of Australia has held its benchmark cash rate at a record low 2.5 percent for 16 months.

The revised deficit estimate for the current year is larger than a median estimate of A$37 billion from a survey of 13 economists by Bloomberg News. The papers project a return to budget surplus in 2019-2020.

The mid-year forecast sees a next year to 2016 deficit of A$31.2 billion compared with a May estimate of A$17.1 billion; a 2016-2017 shortfall of A$20.8 billion compared with a previous A$10.6 billion. For 2017-2018, the government sees a gap of A$11.5 billion compared with a May estimate of A$2.8 billion.

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