Australia plans earlier return to surplus by defying global forces

Sydney

AUSTRALIA'S government will balance its books earlier than expected thanks to a revenue windfall ahead of a looming general election.

In its annual budget released in Canberra on Tuesday, the government burnished its economic credentials by forecasting an A$2.2 billion (S$2.19 billion) surplus in fiscal 2020 - the first since the global financial crisis. The reward for voters: modest tax cuts for low- and middle-income earners and some financial perks for baby boomers heading for retirement."This budget is providing tax relief to encourage and reward hard-working Australians," Treasurer Scott Morrison said on Tuesday.

"Through disciplined fiscal management and improved receipts from stronger economic growth, the budget position is improving."

In its path to surplus, the government has positioned Australia's economy as something of an outlier among its developed-world peers.

The budget projects that wages growth will accelerate even while spare capacity remains in the jobs market.

But that contrasts with the recent US example of unemployment falling well below assumed full employment and pay packets still seeing slow gains.

Returning to the black a year earlier than expected is a political boon for Prime Minister Malcolm Turnbull, ahead of a ballot that has to be called within a year.

Australian voters generally judge a government's economic performance by whether it manages to deliver a budget surplus. Furthermore, net debt is forecast to peak in the current fiscal year, also earlier than expected.

The headline numbers don't show the full story. Mr Morrison, in his speech to Parliament, lauded the retention of the nation's AAA credit rating from the three main agencies.

But of the 10 holders of such a distinction, Australia is in the weakest fiscal position.

While the economy is entering its 27th year without a recession, that's also an indictment on governments from both sides for running a decade of deficits.

Australia's budget is currently benefiting from unexpected commodity price strength, due to synchronised global growth that's boosted corporate profits and tax receipts; and a hiring bonanza last year that lifted the personal tax haul and reduced welfare costs.

The budget sees economic growth accelerating to 3 per cent in the year through June 2019, fuelled in part by investment and consumption. That's despite households being saddled with record-high debts and stagnant wage growth.

Unemployment is predicted to fall to 5.25 per cent in the 12 months through June 2019, and hold there for the ensuing two years. The jobless rate has hovered around 5.5 per cent for the past year, with the participation rate near a seven-year high.

But on wages growth, the government remains particularly ambitious. It sees the pace climbing to 3.25 per cent in fiscal 2020 and 3.5 per cent the year after that, compared with the current sluggish 2.1 per cent.

The budget even spells out the contradiction. It notes that in major advanced economies, particularly Japan, Germany and the US "despite stronger labour markets and a pick-up in overall economic performance, wage growth and inflation have remained largely subdued".

Beyond the blueprint's initial tax relief of A$530 a year for people earning between A$48,000 and A$90,000, the government plans to lift tax brackets in the longer term and lift the threshold for the 45 percent top rate to A$200,000 in 2024.

Mr Turnbull's administration remains committed to corporate tax cuts that, except for small firms, have been stifled in the upper house of Parliament. It's trying to maintain Australia's competitiveness in the wake of the Trump administration's cuts to US corporate rates. "We live in a very competitive world," said Mr Morrison. "If we make the wrong calls, other countries will 'cut our lunch'." BLOOMBERG