World Economy

Australian conservatives deliver soft budget after last year's bruising

Australia's conservative government delivered budget proposals on Tuesday that were light on radical reform but heavy on pledges to return to surplus, playing it safe politically after the disastrous reaction to last year's budget.

Prime Minister Tony Abbott and Treasurer Joe Hockey were savaged in 2014 for handing down an unpopular budget that slashed spending on social welfare programs in order to rein in spiralling deficits.

Mark Graham | Bloomberg | Getty Images

Major changes to the education and healthcare systems in last year's budget were knocked back by an unruly upper house senate following a public outcry that saw the government's approval ratings dip to record lows.

This budget instead focused on popular items such as tax breaks for small businesses, increased childcare subsidies and legislation allowing for a crackdown on tax evasion by big multinational companies.

With parliament deadlocked, selling the plan will be vital for Abbott, who earlier this year narrowly survived a leadership challenge from within his Liberal Party, if he is to resist pressure to call a snap election.

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"Today we have taken steps to continue repairing the budget with sensible savings and a prudent approach to spending," Hockey said in an address to parliament.

"We are redirecting funding to areas, such as small business, child care and infrastructure, which will boost growth and create jobs."

What businesses are looking for in Australia's budget

Australia's finances have taken a beating as falling prices for iron ore, the country's single biggest export earner, have eaten into company profits and wages.

Some A$52 billion in tax receipts were lost over the four years to 2017/18 according to the budget, with A$20 billion of that coming from the plunge in iron ore prices.

Ged Kearney, President of the Australian Council of Trade Unions, blasted the budget for not offsetting fresh cuts with any significant new revenue streams.

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"Last year the government took a sledgehammer to the budget, this year it's a chisel that is cut, cut, cutting away," she told reporters.

Some analysts had questioned whether Australia's coveted triple-A credit rating from all three major agencies might come under pressure without a credible path back to surplus, speculation Hockey slapped down in an interview with Reuters earlier this month.

Ratings agencies Moody's and Standard and Poor's said that the budget was unlikely to affect Australia's credit rating.

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The government is hoping that new free trade agreements with China, Japan and South Korea, together with a weaker and improvement in the terms of trade as major gas projects come on stream, will help offset those losses.

Record low interest rates, together with falling prices for petrol and electricity, are helping drive an uptick in household spending and investment in the country's red hot property and construction markets, it said.

The government insisted in the budget that it would be able to ride out the bumpy transition from a resource dominated economy to a more diverse one focused on services without raising significant new revenues or slashing spending outlays.

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Having outperformed most of its developed nation peers since the global financial crisis, Australia is expected to grow a modest 2.5 percent this year and 2.75 percent next year, rising to 3.5 percent by 2017/18.

Australia's net debt is forecast to rise to 18 percent of gross domestic product (GDP) by 2016/17, already low by international standards, before falling to just 7.1 percent of GDP by 2025/26.

Where has the Abbott government failed

The deficit is set to narrow from 2.6 percent of GDP in 2014/15 down to 0.4 percent of GDP by 2018/19, placing it on track for a return to surplus before the end of the decade.

The budget assumed an iron ore price of $48 per tonne, though spot prices have bounced back to over $60 per tonne.

"At face value, these are a pretty good set of numbers. Declining budget deficits, surplus on the horizon, debt peaking quite soon and a reasonably rapid return to normal rates of growth," said Michael Blythe, Chief economist at Commonwealth Bank of Australia.

"The only disappointment I can see so far is that we haven't seen much in the way of new spending on infrastructure, and that's what we're looking to help drive those better growth outcomes and take some of the pressure off the RBA."