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Politics trumps economics as Abbott stakes future on dull budget

Prime Minister Tony Abbott's first budget aimed to tackle a "debt and deficit disaster." His economic blueprint to be released on Tuesday will be as much about political survival as repairing Australia's finances.

[CANBERRA] Prime Minister Tony Abbott's first budget aimed to tackle a "debt and deficit disaster." His economic blueprint to be released on Tuesday will be as much about political survival as repairing Australia's finances.

The government is promising a "dull" budget centred around helping families and small businesses, after a backlash against last year's spending cuts worsened a poll-ratings plunge that triggered a challenge to Abbott's leadership.

As the Liberal-National coalition seeks to shore up voter support, it's stepping back from budget repair even as slowing growth and plunging commodity prices push Australia's finances further into the red. The task is only getting harder as the population ages and revenue leaks from the country's outdated taxation system.

"He may be calling it dull, but this year's budget is all about Abbott trying to save his prime ministership," said Haydon Manning, a politics professor at Flinders University in Adelaide. "He's abandoning last year's talk of an emergency and kicking the long-term problems down the road." The deficit for the year ending June 30, 2016, will blow out to A$40 billion (S$42 billion) or 2.4 per cent of gross domestic product, according to the median estimate of 20 economists surveyed by Bloomberg. Treasurer Joe Hockey estimated in his mid-year update in December the shortfall would be A$31.2 billion.

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A record collapse in Australia's terms of trade is putting a brake on income growth and crimping tax receipts. The price of iron ore, the country's biggest export earner, is almost 70 per cent below its 2011 record high.

Meanwhile, the local dollar is hovering around 79 US cents, frustrating policy makers' attempts to kickstart the economy as a China-led mining investment boom ends. The central bank has cut interest rates by 50 basis points this year to a record low 2 per cent. On Friday, it shaved the same amount off its growth forecast for 2015-16, to a range of 2 per cent to 3 per cent.

The nation faces deficits "as far as the eye can see," Chris Richardson, an economist for Deloitte Access Economics, said in a May 4 report. The budget "repair task has grown, but the appetite to tackle it has faltered," he wrote.

Fresh from winning power in September 2013, Abbott's coalition set about tackling structural deficiencies in its first budget, saying a "bold, new government" would do "what has to be done to set the nation on a better course." He told coalition colleagues on May 13 last year the public would "respect us for this budget even if there's parts of it they don't like."

Abbott misjudged. Voters saw his plan to reduce spending on schools and hospitals by A$80 billion over the next decade as a broken election promise, while welfare cuts were perceived as unfairly targeting poorer Australians. Facing the worst opinion polls for a new government in at least 30 years, Abbott saw off a leadership challenge from his own lawmakers in February.

Amid political gridlock in the Senate, where the government doesn't have a majority, Abbott has been forced to abandon or scale back many of his savings measures. The coalition dropped a plan to charge A$7 for every doctor visit, has watered down proposed cuts to a higher education loan program, while last week scrapped plans to change the indexation of pension payments to retirees. About A$30 billion of savings have been dropped or are stranded in the upper house.

The government has backed away from talk of tackling a "debt and deficit disaster," with Hockey now saying he will chart a "credible path" back to surplus.

Budget measures already flagged include a A$3.5 billion childcare package, cutting the corporate tax rate for small businesses by 1.5 percentage points and tightening means testing for state pension payments. The government may also cut subsidies on some medicines and is set to tax Internet downloads of books, music and movies, according to the Australian Broadcasting Corp.

Structural change appears to be off the table. Reform of the taxation system, such as expanding a goods and services tax to fresh food and health services, or curbing concessions in the private retirement savings system, have been ruled out until after elections due in 2016. A Productivity Commission review of workplace laws won't report until November.

The government is taking a small-target strategy in the budget and the nation risks losing its AAA sovereign rating from Standard & Poor's, according to Tim Toohey, Goldman Sachs Group Inc's head of economics and strategy for Australia.

S&P said in February it could potentially change Australia's rating or outlook if net debt as a percentage of GDP approached 30 per cent. The government's mid-year economic update in December forecast it would reach 17 per cent in 2017-18.

"If they allow the budget to blow out, it's going to take a lot longer for the deficit to be addressed," Toohey said. "That will clearly be an issue for some of the ratings agencies."

For Abbott, a change in rhetoric on the budget has coincided with an improvement in his poll ratings. He drew level with opposition Labour Party leader Bill Shorten as preferred prime minister in the latest Newspoll published May 5. The coalition was four points behind Labour on a two-party preferred basis, from a 14 point gap in February.

That's giving Abbott some breathing room, according to Manning.

"It must be heartening for him that he's now in a position to give his government some sort of chance to be re-elected," said Manning. "The proviso is that even if this budget is well received, he's only another big gaffe away from it all falling apart."