Australia's budget windfall allows election sweeteners with a topping of fiscal repair

Australia's budget windfall allows election sweeteners with a topping of fiscal repair

(Reuters) - Australia's center-right government is set to unpack a budget larded with cash giveaways, petrol tax cuts, and infrastructure spending as it seeks to claw back votes for what is expected to be a tough election in May.


Tuesday's budget is still likely to see a reduction in the deficit, as sky-high prices for Australia's commodity exports have showered the taxman in cash, while a surprisingly strong labor market reduced expenses.

Having spent decades bemoaning deficits, the ruling Liberal-National coalition has now decided that protecting economic growth is more important than slashing debt.

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"There will be no policy pivot to austerity," said Gareth Aird, chief economist at CBA. "The government will target a budget position that stabilizes and then reduces gross debt as a share of the economy."

That might be in part because Prime Minister Scott Morrison is trailing badly in opinion polls to the opposition Labour Party, which is currently favored to win May's election after a decade out of power.

Extra billions have been earmarked to airports, railways, roads, and hospitals, and more than A$5 billion ($3.76 billion) to build dams favored by farmers in Queensland.

Treasurer Josh Frydenberg has also flagged a cash handout to pensioners and a temporary cut in petrol taxes to help with soaring bills and higher food costs.

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Also, the voter-friendly menu is an extension of a popular grant to first-home buyers aimed at soothing concerns about affordability after a long boom in prices.

Fortunately for the government, the huge windfall from high resource prices and low unemployment means this added spending can be accommodated without extra borrowing.

Prices for iron ore and coal, in particular, are far above forecasts and are huge export earners for Australia.

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Analysts expect the deficit for the year to end-June 2022 to be projected at A$70-A$80 billion, down from A$99.2 billion as recently as December. The shortfall is expected to remain around there out to 2023/24, before falling much further.

The commodity boom has also fuelled a remarkable turnaround in Australia's current account position to surplus from the deficit, safeguarding the country's triple-A credit rating.

Budget forecasts for unemployment are set to be trimmed given the jobless rate has already fallen faster than anyone expected to hit a 14-year trough of 4.0%.

The speed of the decline has led the Reserve Bank of Australia (RBA) to flag a possible rise in interest rates from pandemic lows of 0.1% later in the year.

($1 = 1.3316 Australian dollars)