World Economy

Australia budget: It’s all about buying votes

Swan: Australia got an 'emergency election budget'

The threat of early elections has driven Australia's ruling conservative government to cater the budget to its core constituencies, small businesses and middle class families with children, at the expense of structural reforms, analysts said.

"It looks like an election budget – the government has substantially spent on this budget and pushed off returning to a surplus into the distance," University of Sydney's lecturer in politics & public policy, Peter Chen, told CNBC. "This is not an economists' budget but a political budget…and all the major provisions are aimed at the coalition's base."

For more than a decade, Australia's economy has been fuelled by a mining boom – but a collapse in commodity prices is slowing economic growth and reducing tax receipts.

However, after last year's disastrously tightfisted budget sent the conservative government's approval ratings sinking to record lows, the ruling party has chosen this year to play for votes. The highlight of this year's spending plans turned out to be spending for its two core constituencies, mainly tax breaks for small businesses and increased childcare subsidies.

"Fiscal policy is, in all honesty, aimed at the individual and the nuclear family, and clearly the government have delivered overnight. A cynical call would be to say, votes don't come cheap," said IG market strategist Evan Lucas in a Wednesday note.

No help for economy

The government is so haunted by last year's debacle that it neglected to come up with any measures to help Australia wean itself off its dependence on commodity exports, critics said.

"This transition from mining to non-mining investment in the economy has been complicated and frankly [last year's] impact on consumer and business confidence was simply diabolical", former Deputy Prime Minister Wayne Swan told CNBC.

Kevin Winter | Getty Images

While Prime Minister Tony Abbott has not completely given up on cutting spending, the government may have absconded on stimulating the economy.

Total government spending will in fact decline by 1.6 billion Australian dollars ($1.28 billion) because the new spending has been offset by abandoning others announced in last year's budget, according to a note published on Tuesday by Capital Economics' chief Australia and New Zealand economist Paul Dales.

"By leaving the Australian economy facing a substantial fiscal squeeze, Budget Treasurer Joe Hockey washed his hands off the economy's woes and essentially left the burden to support growth squarely on the shoulders of the Reserve Bank of Australia," he said.

Fiscal reform shelved

With collapsing iron ore prices wiping 20 billion Australian dollars ($15.96 billion) off tax receipts, the government is forecasting the deficit will grow to 35.1 billion Australian dollars in 2015/16, up from the previous forecast of 31.2 billion Australian dollars.

As a result, the budget surplus target has been pushed back to the end of decade. The government sees the deficit narrowing from 2.6 percent of gross domestic product (GDP) this year to 0.4 percent of GDP in 2018/19.

However, the government's outlook may be too optimistic, analysts warned.

One of the government's key assumptions is that iron ore prices will stay at around $48 a metric ton, but Goldman Sachs is forecasting prices will fall to $44 in 2016 and to $40 in 2017 and 2018, according to a note published on Tuesday. Iron ore futures were quoted at $59.68 mid-day Wednesday Asia time.

"Together with economic and commodity price assumptions …Australia's budget deficits are likely to be significantly higher than projected in [Tuesday's] budget," the bank said.

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