Australian government delivers budget

20:53, May 08 2012

Australia's government delivered its promised surplus budget on Tuesday, scrapping planned tax breaks but offering more cash to its traditional supporters to deflect attention from scandals that threaten Prime Minister Julia Gillard's grip on power.

The government hopes the modest surplus, which some economists considered inappropriate while the central bank is cutting interest rates, will bolster its economic policy credentials and keep Australia's AAA credit rating safe.

Treasurer Wayne Swan said the budget would deliver a A$1.5 billion ($1.53 billion) surplus in the year to June 30, 2013, largely from cuts in spending on defence and foreign aid and abandoning planned tax cuts for companies and savers.

Small surpluses were also forecast for the following three years.

"The deficit years of the global recession are behind us. The surplus years are here," Swan said in a budget speech to parliament.

A voter backlash against austerity measures in Europe saw voters in Greece and France abandon ruling parties at the weekend, but Gillard's unpopular government sought to avoid anger among its Labor Party heartland by announcing a raft of new cash payments to low-income households and those on welfare.

Despite economists' doubts, Swan said the fiscal tightening would protect Australia against global turbulence and give the central bank room for further rate cuts.

"A surplus provides our best defence against dramatic changes in the global economy. A moderate recovery in the U.S. still has a long and difficult road ahead, and Europe continues to cast a shadow over the global outlook," Swan said.

Australia's economy has weathered the global downturn better than most other developed nations, as strong demand from China powered booming demand for iron ore, coal and other raw materials.

Australia's dollar and 10-year bond yield shrugged off the budget, with markets more concerned about developments in Europe's sovereign debt crisis.


"I don't think there is enough in here to be a market mover," said Annette Beacher, head of Asia-Pacific research at TD Securities.

"Having said that, it is still a shift to surplus and is ahead of every OECD nation.

"However most economists, including myself, questioned the rush to achieve it in one year. This could have been spread out in two."

Australia is one of only eight countries with a stable top-notch AAA rating from three major ratings agencies, and Moody's Investors Service said after the budget's release that it would have no impact on the rating.

Swan said business would invest a record A$120 billion in resource projects in 2012-13 and Australia's net debt would peak at 9.6 percent of gross domestic product this financial year, well below levels around 70 percent in the euro area and over 70 percent in the United States and Britain.

Much of the savings in the budget comes from business and defence, giving Swan room to divert spending to benefits for low-income families and into new cash payments for families with school children.

The government has scrapped a planned one-percentage point cut in the company tax rate, which was unlikely to pass through parliament, and delayed major defence procurements.

The government will also delay by one year a promised increase in its foreign aid budget to 0.5 percent of gross national income.

However, resource companies - facing new mining and carbon taxes from July this year - have been spared more tax pain.

The government decided to forgo cuts to diesel fuel tax rebates that the industry warned would cost miners an extra A$2 billion a year.

The forecast budget surplus will precede elections due in the second half of 2013, helping Gillard to bolster her image as a competent economic manager when opinion polls show government support near record lows around 27 percent.

Gillard holds a flimsy one-seat majority in parliament which relies upon a lawmaker who has been expelled from the party and who is under police investigation for suspected misuse of union funds to pay for prostitutes and lavish entertainment.

The member of parliament, Craig Thomson, has denied any wrongdoing, but the opposition is demanding Gillard no longer accept his vote in a move which could deprive government of its majority and force an early election.

The Australian Greens, whose votes are needed to pass the budget, said they would support budget supply measures to fund the government.

"But I have to say I am very seriously concerned about 3,000 public servants losing their jobs in this budget," Greens leader Christine Milne told reporters.

"In terms of other measures that will come through in legislation, the Greens will look at those and particularly look at whether the savings from stopping the big business tax cuts are being delivered in the fairest way."