/ 6 May 2009

Australia’s Labour prepares voters for record deficit

Australia’s Labour government has begun softening voters for a painful budget with the biggest fiscal deficit on record, reviving memories of huge deficits that saw the party booted from power more than a decade previously.

Treasurer Wayne Swan would not confirm on Wednesday media reports that the country’s forecast ”temporary” deficit to be outlined in the May 12 budget would in fact last until 2015, but he said government revenue would fall by A$200-billion ($148-billion) over the four years to 2011/12.

”I’m not going to speculate about those sorts of forecasts, but what I can put down here very firmly is the government’s absolute determination to return to surplus,” Swan told state radio.

In a country where voters typically punish governments who rack up large deficits, Swan and Prime Minister Kevin Rudd have been preparing voters for bad news given the global economic tumult and the country’s first recession since 1991.

”Kevin Rudd will never deliver a surplus budget,” said conservative opposition treasury spokesperson Joe Hockey, outlining a likely battleground for elections expected late next year.

A Labour government was swept from power in 1996 leaving A$90-billion in government debt for the winning conservatives, who ruled for the next 12 years and used constant reminders of the debt as a stick with which to beat the opposition.

The previous record high government deficit was A$18,1-billion in 1992/93, equivalent to 4,1% of GDP, delivered by a former Labour administration.

Still, Finance Minister Lindsay Tanner told reporters in Sydney the coming budget would project a return to surplus.

”The first installment of the tough decisions that are necessary to get the budget back to surplus as quickly as possible will be seen in the budget next week,” Tanner said.

Rudd’s government has previously said there would be a budget deficit of A$22,5-billion, or 1,9% of GDP, in the fiscal year that runs to the end of June (2008/09).

It has said the deficit would rise to A$35-billion, or 2,9% of GDP, in 2009/10.

But a Reuters poll suggests those figures underestimate the fiscal position.

The median forecast of 13 economists suggests the deficit for 2008/09 will be around A$31,5-billion before expanding to A$54,8-billion in 2009/10. Some forecasts for the coming year run as high as A$80-billion.

Australia has announced stimulus spending of A$78-billion since September 2008 in an effort to support the export-driven A$1-trillion economy, and will continue with promised tax cuts in the budget.

Australian sovereign credit default swap spreads have narrowed in the past week amid expectations that the worst in the global economic downturn might have passed.

To counter rising debt jitters among voters, Rudd has pointed to global financial crisis and even bigger deficits in other major economies in Europe, Japan and the United States.

”Australia’s net debt will be the lowest of any major advanced economy in the world for the next decade. It is responsible for us to have embraced such a [deficit] strategy,” he said on Wednesday.

A poll this week showed Australia’s worsening economy and soaring state borrowings had begun to hurt the popularity of Rudd’s government. — Reuters