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Australia cuts forecasts for wages, growth and budget surplus

Sydney

AUSTRALIA'S mid-year budget update showed economic reality is starting to bear down on the government's finances.

Treasury lowered its forecast surplus for the 12 months through June 2020 to A$5 billion (S$4.66 billion) from April's budget estimate of A$7.1 billion as it scaled back estimated tax revenues, according to the mid-year economic and fiscal outlook (MYEFO) released in Canberra on Monday.

It also predicted narrower surpluses for the following three fiscal years.

Australia's Treasurer Josh Frydenberg also cut his forecasts for gross domestic product and wages growth this fiscal year, though he dismissed concerns about the slowing economy and resisted calls for additional spending to support growth.

"With the budget back under control, our fiscal strategy now focuses on paying down Labor's debt with sustainable surpluses over the cycle," he told reporters after the release, referring to the opposition Labor party that lost office in 2013.

If Mr Frydenberg does manage to return the books to the black, it would be the first time since before the 2008 global financial crisis.

By sticking to a traditional conservative government playbook of trying to pay down debt, he's flying in the face of a growing global chorus calling for looser fiscal policy, most recently with government stimulus programmes announced in New Zealand and Japan.

The Reserve Bank of Australia (RBA) in the meantime has cut interest rates three times since June as it tries to spur hiring and investment to revive a slowing economy.

"The MYEFO confirms that Australia's lopsided economic policy mix remains in place, and that the RBA continues to bear the burden of returning the economy to potential," said Bloomberg economist James McIntyre.

"While the economic outlook underpinning the budget has been downgraded closer toward realistic outcomes, the outlook for the unemployment rate and wages growth continues to confound, and stands in contrast to the sober low wage reality laid bare by the RBA."

The downgraded wage growth estimate of 2.5 per cent this fiscal year may still be overly optimistic. It's higher than any year-on-year result since the end of 2014 and above the central bank's 2.3 per cent forecast.

While GDP growth has failed to reach even 2 per cent this year, the budget has been bolstered by commodity prices that have stayed well above forecasts. Iron ore is assumed to decline towards US$55 per tonne by the end of June 2020, according to the release.

S&P Global Ratings, in a statement after the budget update, reiterated that it expects the government to maintain strong fiscal settings in order to retain the economy's AAA rating. BLOOMBERG