By Gemma Daley
May 12 (Bloomberg) -- Australian Treasurer Wayne Swan will tonight unveil a Robin Hood-style budget, slashing tax breaks and welfare-payments to high-income earners as he tries to contain a record deficit amid the global recession.
Swan will take away subsidies for the rich while protecting payments to lower-income earners, the aged and the unemployed in the budget, framed amid an economic slump that has cut tax revenue by more than A$200 billion ($153 billion), economists say. He releases the budget at 7:30 p.m. in Canberra.
The Labor government (The Socialists) of Prime Minister Kevin Rudd will unveil a A$34 billion deficit in the year ending June 30, the first shortfall in seven years, as tax revenue from a commodities export boom dries up, according to the median of 16 economists surveyed by Bloomberg. Swan warned today there “will be tough decisions,” as he tries to limit debt in a budget the treasury department says won’t return to surplus until 2015-16.
“Swan will rob rich Peter to pay poor Paul,” said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney. “The rivers of gold from the commodities boom flowing through the economy are well and truly over.”
The economists’ survey predicts Swan will also forecast budget deficits of A$58.5 billion in 2009-10 and A$60 billion in 2010-11. The economy will contract 0.3 percent in 2009-10, they forecast.
Treasury has said the government will have to borrow as much as A$200 billion through the bond market to fund deficits until 2015-16.
Tax Breaks
Swan has already signaled he will halve tax breaks for high-income earners contributing to pension funds and slash their government subsidy for private health insurance. At the same time, he’ll deliver extra help for families earning less than A$150,000 a year and increase payments to aged pensioners.
Still, income-tax cuts for people earning between A$80,000 and A$180,000 scheduled for the two years starting July 1 will go ahead. The cuts were part of A$23 billion in cuts announced in last year’s budget.
“Everybody in Australia has to do their bit and some people have the capacity to do a bit more,” Swan told reporters in Canberra today.
Swan’s imposts on high-income earners mirrors steps in the U.S. and the U.K.
Obama Budget
In the U.S., President Barack Obama has proposed raising income-tax rates to help narrow a record budget shortfall and pay for a planned overhaul of health care. Obama’s budget, which must be enacted by Congress before taking effect, would reinstate the top two Clinton-era tax rates of 36 percent and 39.6 percent, up from the 33 percent and 35 percent the richest Americans now pay.
That would affect about 2.6 million taxpayers, starting with singles with taxable income of $164,550 and married couples with taxable income of $200,300.
U.K. Chancellor of the Exchequer Alistair Darling this month raised taxes on the top income earners to help pay for the government efforts to stimulate the economy.
Australian is in its first recession since 1991 as the international slowdown crimps demand for exports from the world’s biggest shipper of coal and iron ore. Gross domestic product will shrink 1.25 percent in the year ending June 30 and unemployment will rise, the central bank said last week.
Cash Handouts
That means the government will receive lower tax payments from the labor market and from companies including miner BHP Billiton Ltd., which is firing 6,000 workers as the global recession curbs demand for minerals. The nation’s biggest airline, Qantas Airways Ltd., will also pay less tax as it forecasts a record loss in the six months ended June 30, which has prompted it to cut 5 percent of its staff.
Swan’s deficit woes have been compounded by government stimulus packages over the past eight months.
The government since September has pledged an extra A$130 billion on cash handouts to low and middle-income earners, infrastructure spending, funding for a national broadband network and bond-market assistance. In the same period, the Reserve Bank of Australia cut its benchmark interest rate to a 49-year low of 3 percent to revive growth.
“The fiscal boost to the economy from earlier policy announcements is already massive, yet the budget will deliver even more largesse,” Walters said. “The fiscal pulse is equivalent to around 7 percent of GDP.”
Pension Increase
Swan has said the budget may include a A$30 a week increase in the aged pension, which would cost A$5 billion a year.
He will introduce government-paid parental leave, costing A$260 million per year, for people earning below A$150,000. New mothers who leave the workforce would receive the average weekly wage of A$544 a week for 18 weeks, starting in January 2011.
The budget may also spend extra on ports, roads and rail, and increase benefits to the unemployed. Grants to first-home buyers, which were raised to as much as A$21,000 from A$7,000 in October, may be reduced.
With lower income and demand, the government has reined in public service spending to limit the deficit. It may also raise taxes on alcohol and tobacco.
Economists forecast the 2009-10 budget deficit will be 4.9 percent of GDP, the largest since 1970, when Treasury forecasts were first provided. The U.K budget deficit will be 12.4 percent of GDP this year and the U.S. deficit is forecast to be 12 percent, according to the Congressional Office’s analysis.
Election Looms
The Labor government, which won power in 2007, faces an election by the end of 2010. Prime Minister Rudd may call an early vote if the upper house Senate, which he doesn’t control, refuses to pass all the budget measures.
Any refusal by the upper house to pass budget measures would leave the case for an early election “wide open,” Australian National University analyst Lindy Edwards said yesterday. “There would be a strategic advantage to go early because the government has been frustrated by the Senate already.”
To contact the reporter on this story: Gemma Daley in Canberra at gdaley@bloomberg.net
Last Updated: May 11, 2009 19:38 EDT
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