Home MMBIZ News Australia Govt Staring At Debt ‘Mountain’ as Economy Slows

Australia Govt Staring At Debt ‘Mountain’ as Economy Slows

Just three months in power, Australia’s Liberal National government has abandoned all thought of returning to a budget surplus and predicted deficits for the next decade without spending cuts, heralding sober times ahead for the resource-rich country.

As subpar economic growth and a cooling mining boom carve a hole in government finances, Treasurer Joe Hockey warned that Australia had to climb a “challenging fiscal and economic mountain”.

“Returning the budget to sustainable surpluses will not be achieved by piecemeal savings here and there. It will require a sustained and fundamental structural overhaul of expenditure,” said Hockey as he announced the country’s third-largest deficit on record.

The Coalition government now expects a shortfall of A$47 billion ($42 billion) for the year through June 2014, up from a previous forecast of A$30.1 billion made only four months ago.

The gap would narrow only slowly to A33.89 billion in 2014/15, A$24 billion the year after and still be at A$17.7 billion in 2016/17.

“It highlights the scale of the funding challenge ahead,” said Su-Lin Ong, a senior economist at RBC Capital Markets.

“It’s not a debt path you would want to remain on, so there’s going to have to be a tough conversation on what amount of austerity lies ahead.”

The scope for drastic spending cuts or tax increases is limited by the sluggish economy, which grew 2.3 percent in the year to September.

Hockey forecast growth of 2.5 percent in both 2013/14 and 2014/15, short of the 3.25-3.5 percent pace considered “normal” in a country that has not suffered a recession for 22 years.

The Reserve Bank of Australia has done what it can to support growth by cutting interest rates to a historic low of 2.5 percent, but has appeared reluctant to ease any further for fear of stoking a speculative bubble in house prices.

Some of the deterioration in the budget bottom line is due to steps taken by the new government, in particular a plan to gift A$8.8 billion to the RBA to help rebuild its reserves.

It has also scrapped revenue-raising plans including fringe benefits on car leases and taxing high pension incomes.   

                                      Reuters

Just three months in power, Australia’s Liberal National government has abandoned all thought of returning to a budget surplus and predicted deficits for the next decade without spending cuts, heralding sober times ahead for the resource-rich country.

As subpar economic growth and a cooling mining boom carve a hole in government finances, Treasurer Joe Hockey warned that Australia had to climb a “challenging fiscal and economic mountain”.

“Returning the budget to sustainable surpluses will not be achieved by piecemeal savings here and there. It will require a sustained and fundamental structural overhaul of expenditure,” said Hockey as he announced the country’s third-largest deficit on record.

The Coalition government now expects a shortfall of A$47 billion ($42 billion) for the year through June 2014, up from a previous forecast of A$30.1 billion made only four months ago.

The gap would narrow only slowly to A33.89 billion in 2014/15, A$24 billion the year after and still be at A$17.7 billion in 2016/17.

“It highlights the scale of the funding challenge ahead,” said Su-Lin Ong, a senior economist at RBC Capital Markets.

“It’s not a debt path you would want to remain on, so there’s going to have to be a tough conversation on what amount of austerity lies ahead.”

The scope for drastic spending cuts or tax increases is limited by the sluggish economy, which grew 2.3 percent in the year to September.

Hockey forecast growth of 2.5 percent in both 2013/14 and 2014/15, short of the 3.25-3.5 percent pace considered “normal” in a country that has not suffered a recession for 22 years.

The Reserve Bank of Australia has done what it can to support growth by cutting interest rates to a historic low of 2.5 percent, but has appeared reluctant to ease any further for fear of stoking a speculative bubble in house prices.

Some of the deterioration in the budget bottom line is due to steps taken by the new government, in particular a plan to gift A$8.8 billion to the RBA to help rebuild its reserves.

It has also scrapped revenue-raising plans including fringe benefits on car leases and taxing high pension incomes.   

                                      Reuters

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