Australia is prioritizing growth over deficit reduction in its economic program, Australian Prime Minister Malcolm Turnbull said, signaling he expects to close the gap through rising tax receipts from faster expansion.
Turnbull, a month out from the budget’s release, signaled no plans to try to accelerate a return to the black — despite eight years of deficits and a projected four years to come.
His comments also imply a rejection of a panel of senior economists and former high-ranking officials who, on Tuesday last week, put forward a strategy to return to surplus in three years.
Turnbull’s assessment is grounded in economic and political calculations. He is betting the economy, already adjusting to weaker commodity prices and an unwinding of mining investment, would be put at risk by a further hit to demand from deep cuts in government spending.
He is also struggling with an electorate unwilling to accept tax increases or a reduction in services — an impasse that has bedeviled his predecessors since the global financial crisis in 2008.
Australia in December last year forecast an underlying cash deficit of A$37.4 billion (US$28.5 billion) in the fiscal year through June and a A$26.1 billion larger than previously anticipated shortfall in the four years through June 2019.
The overall deficit is forecast to be 1.8 percent of GDP this year, one of the lowest in advanced economies, according to IMF data.
That is also well below an average of 2.9 percent for developed economies that are part of the G20.
ECONOMY BOLSTERED
Meanwhile, recent data showed the economy was bolstered in the final three months of last year, chalking up a record jobs gain and expanding at a solid 3 percent for the year.
“The bigger picture is, if you can grow your economy at a faster rate than your spending then over time your tax receipts from a bigger economy will make up the work,” Turnbull said, citing New Zealand Prime Minister John Key as having successfully implemented a similar strategy. “There is no question, we have no hope of getting back into balance unless we can maintain strong economic growth. That’s the fundamental premise.”
The Australian Committee for Economic Development on Tuesday last week released a report compiled by a panel of experts that included Australian Reserve Bank board member John Edwards, Standard & Poor’s Australian chief and three former secretaries of the Australian Department of the Prime Minister and Cabinet.
It suggested measures such as halving the capital-gains tax discount, scrapping tax concessions on private pensions and increasing levies on alcohol, tobacco and luxury cars to plug the deficit.
“Australia’s deficit problem is particularly alarming because despite a quarter century of sustained economic expansion, we have had eight years of deficit, with four more to go,” the Committee for the Economic Development of Australia national chairman Paul McClintock said.
The report set out A$15 billion in revenue measures and A$2 billion in spending reductions to bring the budget back to surplus.
FINANCIAL CRISIS
Successive Australian governments have struggled with deficits since the global financial crisis: first as the currency soared to a post-float record of A$1.10, driving some exporters out of business; and then as commodity prices tumbled and wage growth slowed to recession-era levels, national income was cut and fewer people moved into higher tax brackets.
Yet critics point out that in three months’ time Australia would have avoided recession for 25 years and the government should be in a better budgetary position to respond to an inevitable downturn.
The economy has also been stimulated by record-low interest rates at 2 percent and a weaker currency.
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