Australian budget almost in surplus as Chalmers joins price war

(Bloomberg) – Australia could post its first budget surplus in 15 years, boosting the centre-left government’s economic credibility as Treasurer Jim Chalmers scrambles to step up the central bank’s efforts to curb inflation.

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Economists expect Tuesday’s draft budget to post a deficit of A$5.35 billion ($3.6 billion) or 0.25% of GDP for the 12 months ended June 30. Local media reports that the government will run a small surplus amid unexpected earnings from high export prices and more income tax revenues from low unemployment.

The Treasurer has declined to comment on whether the books are back in the black, saying all will be revealed at 7.30pm Sydney time on Tuesday.

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Typically, a budget surplus in Australia is a political victory for the government as it indicates strong economic oversight – even when driven by external forces. But now, with inflation at 7% and interest rates rising at their fastest pace in 30 years, aligning fiscal policy with monetary conditions is crucial to cool prices and ease the pressure on a struggling electorate.

“It will be important for the government to run fiscal policy in line with monetary policy as the current elevated levels of inflation should be addressed through a coordinated policy approach,” said Yaying Dong, macro strategist at Credit Suisse Group AG. “This will suggest that spending measures should be more targeted, not broad-based.”

The Reserve Bank of Australia has raised interest rates 11 times since last May to 3.85% – a level not seen since April 2012 – and has signaled its willingness to tighten further to ensure inflation stays within its limits Aim of 2-3% returns.

Dong, who forecasts a modest budget surplus this year, is among a number of economists who expect the Treasurer to keep spending under control.

If Chalmers successfully charts a course back into the black, it will be a swift reversal from the peak of the pandemic, when Australia ran a budget deficit of A$134.2 billion, or 6.5% of gross domestic product. The interest costs for the enormous debt have also skyrocketed as a result of the interest rate hikes.

Any surplus in the current fiscal year is likely to be non-recurring as commodity prices fall back amid a slowing global economy and higher interest rates are expected to push up local unemployment. In addition, an aging population and increasing demand for services such as healthcare will drive up costs.

A Bloomberg poll of 17 economists found the median estimate for the 12 months to June 2024 is a budget deficit of A$22.25 billion, or 0.8% of GDP, growing to A$35 billion, or 1.5%, in the following year. of GDP increases.

Chalmers acknowledged in an interview with Bloomberg News on Sunday that the fiscal picture will become more difficult in the coming years.

“After that, the structural pressure on the budget will increase rather than ease,” said the Treasurer. “That is also a focus of the budget. We have a structural challenge.”

Still, a surplus this fiscal year is a boon for Australia, one of the few with a coveted AAA credit rating from all three major agencies.

The US budget deficit currently stands at 6.9% of GDP, while fiscally cautious Germany is at 2.6%, according to data from Bloomberg. In contrast, the Irish government predicted that rising corporate tax revenues will help widen its budget surplus to 10 billion euros ($11 billion) this year.

Many economists and former senior officials have urged the government to tackle Australia’s outdated tax system. But the policy of tax reform is dangerous.

Among the revenue measures detailed in the budget is an overhaul of Australia’s oil resource rental tax, which is expected to raise A$2.4 billion in the coming years by capping generous deductions for the gas industry. The cap goes into effect on July 1.

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“The election cycle leaves a very tight window to make some hard, principled decisions and reforms,” ​​said Stephen Anthony, managing director at Macroeconomics Advisory, who previously worked at the Treasury Department. “Now is the time for budget reform.”

What Chalmers had been vocal about was helping Australians, who were struggling to make ends meet amid elevated inflation and high borrowing costs. He has also pointed to possible higher unemployment benefits for people over 55, an increase in single-parent benefits, energy cost relief and more support for childcare benefits.

At the heart of the 2023-24 budget will be a package of measures worth A$14.6 billion over four years to help households facing rising living costs due to increased inflation. This includes spending to reduce energy bills for millions of homes and small businesses.

“Fiscal years over the past few years still look like large deficits,” said Diana Mousina, deputy chief economist at AMP Capital Markets in Sydney.

–Assisted by Cynthia Li and Ben Westcott.

(Updated Treasurer Interview, Household Cost Relief.)

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