By Madelene Pearson and Gemma Daley
Nov. 5 (Bloomberg) -- Australia's government slashed its forecast budget surplus by 75 percent, saying the slowest economic growth in eight years and fallout from the global financial crisis will erode tax revenue.
The cash surplus in the year to June 30, 2009, will be A$5.4 billion ($3.8 billion), compared with A$21.7 billion forecast in May, as revenue falls and the government gives cash handouts to families, pensioners and homebuyers, Treasurer Wayne Swan said in Canberra today. The economy will grow 2 percent compared with a May prediction of 2.75 percent.
The central bank has cut the benchmark interest rate by 2 percentage points since September, the most aggressive round of reductions since the economy was in recession in 1991. Recent reports show house prices fell by the most since 1978, building approvals had the biggest drop in two years, the services industry shrank for a seventh month and retail sales contracted as Australia's 17 years of economic growth comes to an end.
``The revisions are a little bit conservative given the magnitude of what we've seen happening in the markets,'' said David de Garis, senior markets economist at National Australia Bank Ltd. in Sydney. ``It looks to us that when it's all tallied, the government will be skating close to a deficit,'' its first since 2002.
Still, unlike in the U.S., Australia does not plan to borrow to finance a fiscal stimulus package it has introduced to protect the economy in the face of the global market turmoil. The U.S. had a record $455 billion budget deficit in the 12 months ended September.
Cash Handouts
Swan also been forced to slash his budget surplus after an Oct. 14 promise to give pensioners, home buyers and families A$10.4 billion in handouts to boost the economy. Bank deposits and ``wholesale term funding'' have also been guaranteed, with the government ready to do more should the need arise.
The cash handouts came on top of the biggest income-tax cuts in history, delivered in the May budget, which the government said will add A$5.1 billion to consumer spending in 2008-09. Household spending accounts for two-thirds of the A$1 trillion economy.
The global financial crisis is forecast to reduce revenue from taxes by around A$40 billion over the next four years, Swan said today.
Australia's benchmark S&P/ASX 200 Index of stocks has plunged 32 percent this year, and property prices fell in the third quarter by the most since 1978, reducing government revenue from capital gains tax.
Company Taxes
Falling company profits will also cut government tax receipts. Caltex Australia Ltd., the nation's biggest oil refiner, said this week foreign-currency losses arising from an ``unprecedented'' drop in the Australian dollar will reduce its 2008 profit by about A$200 million. The currency has tumbled 30 percent since hitting a 25-year-high 98.49 U.S. cents on July 16.
The unemployment rate, now at 4.3 percent, will rise to 5 percent by the June quarter of 2009 and 5.75 percent the following year, taking more out of government revenue, Swan said.
Companies such as Qantas Airways Ltd. and Ford Motor Co. are firing workers after economic growth slowed in the second quarter to 0.3 percent, its weakest pace in more than three years, as consumers cut spending and business confidence slumped.
``Global economic conditions have changed dramatically in recent months as the global financial crisis has entered a dangerous new phase,'' Swan, 54, told reporters.
China Demand
Demand has slowed for exports from the world's biggest shipper of coal and iron ore to China and Japan. Home-building approvals fell the most in two years in September, the Bureau of Statistics said in Sydney today.
The International Monetary Fund's World Economic Outlook in October forecast global economic growth will slow to 3 percent in 2009, a world recession under the fund's informal definition.
``While Australia is clearly not immune from the effects of the global financial crisis and the global downturn, we are better placed than most other countries to withstand the fallout,'' Swan said.
The Reserve Bank of Australia cut its benchmark interest rate by three quarters of a percentage point yesterday, following a 1 percentage point reduction in October and a quarter-point drop in September. The U.S., China, India, Japan and South Korea all lowered borrowing costs in the past week.
The government today forecast a A$3.6 billion surplus in 2009-2010, with economic growth of 2.25 percent and a A$2.6 billion surplus in 2010-2011.
Inflation will be 3.5 percent this fiscal year, above the central bank's annual target of between 2 percent and 3 percent. It will be 3 percent in 2009-2010, Swan said.
The consumer price index in the third quarter jumped 5 percent from a year earlier, the fastest pace since 2001.
Swan is due to release the national budget for 2009-10 and at 7.30 p.m. on May 12 in Canberra.
To contact the reporter on this story: Madelene Pearson in Canberra on mpearson1@bloomberg.net
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