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Australian government delivers sombre election budget for "extraordinary times"

Australia's conservative government unveiled an economic blueprint on Tuesday aimed at creating jobs and growth in "extraordinary times", just hours after the country's central bank slashed interest rates to an all-time low.

[CANBERRA] Australia's conservative government unveiled an economic blueprint on Tuesday aimed at creating jobs and growth in "extraordinary times", just hours after the country's central bank slashed interest rates to an all-time low.

Stealing the thunder from the annual budget, the Reserve Bank of Australia (RBA) cut the cash rate by a quarter per centage point to 1.75 per cent, citing surprisingly low inflation and uncertainty about the global outlook.

This year's spending plan effectively doubles as the launch of an unofficial election campaign after Prime Minister Malcolm Turnbull said he planned to use a political deadlock to dissolve parliament.

With the polls narrowing, the government is keen to persuade voters that it alone can be trusted to manage an economy hampered by a once-in-a-century mining downturn and balance public finances after years of deficits. "These are extraordinary times," Mr Morrison told parliament in his budget speech. "At such a sensitive time, none of us can become complacent or make decisions that could put our successful transition at risk. There is too much at stake."

As expected, the budget stuck by the government's pledge to live within its means, offering little in the way of vote-buying sweeteners despite the looming July 2 election. "This is not the time to be splashing money around or increasing the tax burden on our economy," the Treasurer added.

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Mr Morrison spoke just hours after the Reserve Bank of Australia cut borrowing costs, after being caught off guard by weaker-than-expected inflation data last week that sparked fears of deflation. "Inflation has been quite low for some time and recent data were unexpectedly low," RBA Governor Glenn Stevens said in a statement after the bank's policy meeting.

"These results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast."

Eight central banks globally have embarked on entirely new stimulus cycles so far this year while the Bank of Japan and European Central Bank have embraced sub-zero rates and expanded their asset-buying campaigns in a bid to jump-start their economies.

The government did promise to lower the corporate tax rate for small firms to 27.5 per cent from July and broaden the middle-income tax bracket so fewer people would be hit by the second top marginal tax rate of 37 per cent. "While these are modest changes to our personal income tax system... they are affordable. They are not funded by higher deficits or higher borrowing," Mr Morrison said.

On revenue boosting measures, the government said it is cracking down on tax avoidance by multinational companies, proposing a UK-style diverted profits tax (DPT). The Australian version is tougher, however, proposing a 40 per cent penalty rate - well above the 30 per cent company tax rate.

A widely flagged hike in the tobacco tax was also confirmed, with the government saying it would increase the excise by 12.5 per cent every year for the next four years starting September 2017.

Mr Morrison, however, said there was no plan to "remove or limit" a tax break overwhelmingly favoured by wealthy property investors known as 'negative gearing'.

The budget deficit is estimated at A$37.1 billion (S$37.6 billion), or 2.2 per cent of gross domestic product (GDP) in 2016/17, slightly worse than the last estimate of A$33.7 billion deficit.

The Treasurer pushed out a return to a budget surplus by one year. The red ink is projected to fade to $6.0 billion by 2019/20, with the aim of returning the books to balance by 2020/21.

A credible path to budget surpluses is important for the country to maintain its top notch triple-A credit rating. Rating agencies have warned the inability of the government to balance its finances will lead to higher debt issuance, which in turn will threaten its highly coveted rating.

Fitch analyst Mervyn Tang said Australia's public finances are still consistent with the triple-A rating, but he warned a slower pace of fiscal consolidation would affect Australia's capacity to absorb future economic shocks.

On economic growth, the government sees real GDP at 2.5 per cent in 2016/17, down from the previous estimate of 2.75 per cent, then strengthening to 3.0 per cent through to 2019/20.

Nominal GDP growth is forecast to speed up to 4.25 per cent in 2016/17, from 2.5 per cent for the current fiscal year, then climbing to 5.0 per cent through 2019/20.

"Overall, this is a very positive budget for Australian business and one that we welcome. It gets us back on a path to sustainability and businesses will continue to transition," said Innes Willox, chief executive of Australia Industry Group.


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