Australia cuts spending to preserve surplus as mining boom slows

October 22 (Reuters) — Australia’s government announced A$16.4 billion ($17 billion) in new savings and tax measures over four years on Monday to protect a wafer-thin budget surplus for 2012/13, opening the way for the central bank to further cut interest rates as early as next month.

Releasing the government’s mid-year budget update, Treasurer Wayne Swan said GDP growth would be slower in the year to June 30, 2013, and come in at 3.0 percent compared to May’s budget forecast of 3.25 percent, as the country’s mining boom slowed.

Financial markets have priced in up to two more interest rate cuts over the coming months and economists said the extra fiscal tightening could now see the Reserve Bank of Australia ease policy at its policy meeting on November 6.

“The prospect of small budget surpluses means that fiscal policy settings have been tightened a notch. It also means that monetary policy can be further eased without a significant domestic inflation risk,” CBA Economics senior economist Michael Workman said.

A fall in tax revenue, slower economic growth and lower commodity prices led to the downward revision in this financial year’s expected surplus to A$1.1 billion, from May’s budget forecast for a surplus of A$1.5 billion.

Government revenues have also been hit by lower commodity prices, with the controversial mining tax on iron ore and coal mining profits to bring in A$1 billion less this year and A$1.1 billion less the following year compared to the May budget forecasts.

Iron ore prices have fallen around 15 percent, thermal coal 9 percent and coking coal 30 percent since the mining tax started in July, and the government now forecasts the minerals resources rent tax to raise A$9.1 billion over four years, compared to the May budget forecast of A$13.4 billion.

“Global growth has slowed in recent months, with the recession in the euro area and the subdued recovery in the United States weighing on growth in our region,” Swan said.

“The weaker global outlook and lower than expected commodity prices, along with the general easing of price pressures in the economy, are again slowing the recovery in tax revenue.”

Despite the slowdown, Australia remains one of the few developed nations to have forecast a budget surplus for the current year, with net debt peaking at 10 percent of GDP last financial year and well below the average net debt projected to peak at 95 percent of GDP in 2016 for major advanced economies.

The Reserve Bank of Australia has cut official interest rates by 100 basis points in 2012, with the latest 25-point cut in October. Markets are betting on a further rate cut by the end of the year.

The biggest saving in the budget update includes A$8 billion over four years by introducing monthly pay-as-you-go company tax payments for large companies.

It will also raise A$445 million over four years by removing some in-house fringe benefits tax arrangements on salary sacrificing, and raise A$520 million over four years from higher charges for visas to visit and work in Australia.

Australia’s peak business group the Australian Chamber of Commerce and Industry condemned the budget changes and said most of the imposts would be borne by companies.

“Business is again in the firing line when it comes to helping out the budget bottom line,” chamber chief executive Peter Anderson told reporters.

“There is no doubt that many of the decisions in today’s statement will be negative for both households and business, it will be negative for confidence, negative for the economic outlook and negative for economic certainty.”

Swan has delivered consecutive deficit budgets since his first budget in 2008, due to stimulus spending to help Australia avoid recession after the 2008 global financial crisis.

The Labor government, struggling in the polls, is due to face elections in the second half of 2013 and is determined to restore the budget to surplus before it faces the voters, to head off opposition attacks on its economic credentials.

26 Responses

  1. When they speak of an Australian govt surplus, is it in AUD meaning the Australian domestic private sector is in deficit, or is it in a foreign currency due to mining exports?

  2. meanwhile, some at the IMF appear to be endorsing a debt jubilee, while attempting to remove the power of creation of endogenous money from private banks. sounds like stumbing toward the right idea with the wrong fundamental understanding. i’ve not heard of Benes and Kumhof before.

    1. @gaius marius,

      What worries me about that is the actual driving force behind it – which I suspect is more about forcing the real world to fit their mental models than any real desire to put in place the best system.

      It all feels a bit Procrustean to me.

  3. Warren, a question for you or the commenters if you get a minute:

    Would it be fair to say that the primary cause for the recession/depression here in the US as well as across the Euro area is due to mismanagement of fiscal policy, going back to Clinton surpluses in the case of US? That if we had simply cut taxes or ramped up spending enough we wouldn’t be facing this situation? (assuming the Euro’s still had their own currencies)

    Stephanie makes the point that running surpluses has always led to recessions, do you agree that it is that simple of an explanation? Clinton running the surplus led to massive borrowing and unsustainable private debt, so (along with deregulation of derivatives and government incentivizing of borrowing) we ended up with the housing bubble? Could we conceivably avoid any kind of recession by managing it correctly from this perspective?

    1. @jerry, I think the simplest answer is you don’t get a debt bubble if people aren’t hungry for debt. So it’s critical to get fiscal policy correct to keep demand for debt at a sustainable level, but you’ve also got to keep a lid on banks’ tendency to engage in speculation/Ponzi finance so thy don’t get into trouble and damage the real economy.

      The best path toward those goals is, I think, some combination of Warren’s work on fiscal issues with Steve Keen’s Minskyan model of debt boom/bust cycles.

      1. @ Ben J.

        Right. But how can “we” keep a lid on bank’s propensity for speculation when GDP growth is tied to the financialization (even if it is unsustainable and pyramid-based) of the economy? Curtailing speculative investment and the implicit frauds associated with our current iteration of fractional reserve banking means contraction. We are as addicted to speculation and loose monetary policies as we are to private consumption and investment.

      2. @Dan W, I believe the most effective method of curtailing abuse of our banking system is hard laws limiting both leverage and eligibility for loans. A national law in the U.S. requiring 20% down to obtain a mortgage would have prevented the growth in liar loans which created the housing bubble. Both Minky and Keen argue that these sorts of financial crashes are inevitable as the laws protecting us are gradually rescinded (think the financial deregulation which began in the late 1970’s and continued until the GFC), so government’s primary responsibility is to delay the final (Ponzi) stage for as long as possible.

        Warren has shown us we can attenuate demand for debt with good fiscal policies, and that those policies are critical to preventing future financial crashes from bleeding into the the
        real economy.

      3. @Ben Johannson, Steve Keen correctly identified the rising prices of housing (or other assets) as the driving force behind the latest bubbles. This is also consistent with George Soros views on reflexivity. People buy existing assets and demand more of the same – paying with newly created money they borrow from the banking system. This stimulates construction activities. At some point housing becomes too expensive and the whole system crumbles – goes into reverse. This already happened in the US and the result is GFC and Great Recession. People try to net save (repay the private debt).

        Here in Australia we still have a bubble which hasn’t burst but started leaking. What Mr Swan is doing is a desperate attempt to stop that process by pushing RBA into lowering interest rates (the most of the mortgages are variable rate) or even restart the bubble. Instead of that he should have accommodated the deleveraging by running a higher deficit.

        A 3 bedroom house 40 km from the centre of Sydney still costs AUD300-400k. This is just a joke. I don’t believe the bubble will continue.

        The budget surplus of the Howard era was just a result of this bubble. The correct policy would have been stopping the bubble on its tracks – the policy implemented in China last year.

        Steve Keen may be vindicated soon.

      4. @Adam (ak), Warren, as someone who lives in Sydney, I can assure you the payment is not affordable. The $3-400k quoted price is actually the bottom end of the market, median price in Sydney is around $650k. Price/income relationship is at similar levels to American bubble states like Califonia at their peak.

        The other probelm is, every other major city in Australia is the same. Horridly expensive.

      5. @ Warren. Yes, I have read your banking proposals. But what Ben J. states is crucial to consider. In our evolving neo-pluotcracy, laws that limit the ranges of banking freedom (vis-a-vis government oversight and attendant regulatory regimes) are both counter-intuitive and contractionary. The people who make the laws also (consciously and unconsciously) seek to benefit from the laws. This is the nature of plutocracy; and this is why fiat currencies are so fragile. Fiat currency systems, if honestly regulated, are constructive systems. But within a socio-political paradigm in which wealth is transferred to the political ruling class via their inherent insider status, financialization (and the Ponzi nature of our current banking system) is legitimized and promoted because political leadership has no reason to limit or constrain banking. The wealthy make money when the market expands AND when it contracts. The insider gets wealthier regardless of the overall economic climate. I understand that Warren’s proposals are aimed at reforming this truism, but my feeling is that our global monetary system cannot be reformed because the would-be reformers benefit too much from the current iteration.

    2. @jerry, The rising inequality in the US should not be ignored. With no good investments and lots of money, elites turn to speculation. Wage-earners are not earning enough, so they get on board the bubble train as well … until it finally goes bust. We actually did all this in the 1920’s. We learned a few things, but forgot them.

  4. The problem in Australia (and probably other countries) is the Liberal party (Conservative, nominally centre-right) developed a reputation as more ‘responsible’ with finances. And rather than contest this be attacking the logic or assumptions of the Liberals the Labor party (less conservatice, nominally centre-left) decided to let the Liberals define what good economic management was and then try and beat them at their own game; or at least play ‘me too’.
    Of course this is because both parties are using Neo-Classical economics to pursue their ‘different’ political agendas. So both working with the same flawed assumptions.
    A real Labour party would have challenged the economic assumptions use by their opponents and supply alternatives.
    But Labor hasn’t represented workers in a long time and is internally split into Left and Right factions (guess which one dominates policy). And the Liberals haven’t been actually Liberal in any sense for a long time either.

  5. Hey Warren – do you think medium term to longer term this will pressure Aussie rates lower, if they force themselves to surplus? Their 10Yr is at about 3.2% – big standout in the global sovereigns..?

  6. For a while there I thought the [Australian] government might have known what they were doing and was aiming for a surplus to squash the housing bubble and didn’t mind the other effects. The end justifies the means theory.

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