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Australia the Next Euro Zone? Maybe

Australian Treasurer  Wayne Swan
Eric Taylor | Bloomberg | Getty Images
Australian Treasurer Wayne Swan

A higher than expected deficit figure revealed in Australia's budget on Tuesday has raised concerns that the country could follow the same path as the highly indebted euro zone, said one expert.

Australian Treasurer Wayne Swan reported a A$19.4 billion (US$19.18 billion) deficit for the current fiscal year ending on June 30 and A$18 billion for the following fiscal year, and said he would not be able to balance the budget for another two years. The figure was above expectations of around A$17 billion for this financial year, and $10 billion for the next fiscal year, according to a Reuters poll.

(Watch This: Surplus Would Have Hurt Growth: Australian Fin Min)

According to John Daley, CEO of the Australian think tank the Grattan Institute, Australia's economy is facing a "very real danger" of following down the same path as Europe and words like austerity have come into the vocabulary of economic commentators.

"Even some of the rhetoric that we've started to hear in Australia is around 'mindless austerity.' The biggest lesson that Australia can learn is the one thing we never want to be in is the position that Europe is now in and making the decisions that Europe is now making."

Euro zone economies have struggled with high levels of debt, severe austerity programs and negative growth in recent years. Earlier this year, the European Commission forecast that the euro zone economy would shrink 0.3 percent in 2013, following a contraction of 0.5 percent in 2012.

Australia's economy, in contrast, has enjoyed two decades of growth and has held up relatively well since the financial crisis of 2008-2009. However, its government has had difficulty balancing the books in recent times, and last year had to backtrack on its pledge to return the Australian economy to a surplus of A$1.1 billion by the end of June this year.

Headwinds including a strong Aussie dollar and lower commodity prices have meant the government has collected less tax revenue than hoped for, leaving a gaping hole in its budget.

(Read More: Reserve Bank of Australia Cuts Rates to Record Low )

In his budget speech Swan addressed the parallels drawn between Australia and Europe.

He said: "To those who would take us down the European road of savage austerity, I say the social destruction that comes from cutting too much, too hard, too fast is not the Australian way," Reuters reported.

Gillianne Tedder | Lonely Planet Images | Getty Images

Daley said the fact that the Australian economy was in deficit despite its healthy fundamentals, including positive gross domestic product (GDP) growth, under control unemployment and inflation, was a cause for concern.

"This is as good as the economy is going to get for a long time and yet we are not in surplus," he said. "What that illustrates is that Australia has a substantial underlying deficit problem that needs to be dealt with and it's very easy to say let's put it off until life is terrific," said Daley.

(Read More: The Aussie Dollar Is Only Taking a Breather: Chartist)

Penny Wong, minister for finance and deregulation, told CNBC, the government was prepared to accept criticism for failing to return to surplus, but said the decision taken was necessary to protect jobs and growth.

"With an unemployment rate of 5.5 percent and growth around trend, we're keen to protect those figures because of what they mean for our economy and for Australians. So we've made a decision to defer the return to surplus," she said.

In the budget the government forecast that the Australian economy would grow 2.75 percent in the 2013/2014 fiscal year after having grown 3 percent in the current fiscal.

In reaction to the budget, the Australian dollar fell to an 11-month low of $0.9908. On Wednesday morning in Asia the currency was trading at $0.9904. Ratings agencies Standard & Poor's and Moody's Investors Service said the budget would have no impact on Australia's AAA credit ratings.

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