Aust budget surprises with fall into red


Prime Minister Howard, left, is pointing to an expected surplus of $1.15 billion in the 2002-03 Budget handed down by Treausrer Peter Costello, center

By Geoff Hiscock
CNN Asia Business Editor

SYDNEY, Australia (CNN) -- Australia's budget will slip into deficit for the first time in four years this year because of extra defense costs and slightly weaker revenue, Prime Minister John Howard said Wednesday.

The $600 million (Aust. $1.2 billion) deficit now expected for the financial year ending next month is viewed as a surprise, given the $275 million (A$500 million) surplus predicted by the Treasury last October.

Economic and political commentators are taking Howard to task over the shortfall, because of his statement during last year's election campaign that it was not his policy to run a budget deficit.

But Howard has defended the result, pointing instead to a budgeted surplus of $1.15 billion (A$2.1 billion) in 2002-03 and the repayment of $33.5 billion (A$61 billion) in debt that he says the coalition government inherited from the previous Labor government.

"What really matters is that the public debt of this country is about the lowest in the developed world. It is 4.5 percent of our gross domestic product," he told Australian radio Wednesday morning.

The 2002-03 budget unveiled by Treasurer Peter Costello also points to a continuation of the strong economic run enjoyed by Australia over the past 12 months.

Conservative forecast

EXTRA INFORMATION

Australian Budget 2002-03

The government's forecast is for GDP to rise by a relatively conservative 3.75 percent over the next year, which is below the consensus forecast of about 4 percent. It also sees unemployment falling to 6 percent by June 2003.

The lowest interest rates in 30 years, a cheap currency and strong consumer demand has made Australia one of the best-performing economies in the industrialized world in 2001-02.

But this month has seen interest rates on the move and the Australian dollar is starting to strengthen against the U.S. dollar.

HSBC Australia chief economist John Edwards said in a budget commentary that there is a "widening gap" between the Australian treasury and the central bank in their view of the economy -- particularly the inflation outlook -- over the next year.

The Reserve Bank of Australia, which lifted interest rates by a quarter of a percentage point to 4.5 percent last week, sees inflation as falling for a few quarters this year before beginning to rise again next year.

Different views on inflation

Edwards noted that the treasury offered a "striking contrast", seeing inflation as falling from just under 3 percent in the year to March 2002 to 2.5 percent in the year to June 2003.

The National Australia Bank's chief economist Alan Oster called the 2002-03 budget "somewhat disappointing".

"While the policy-driven slip into deficit in 2001-02 was a surprise, the more disappointing feature is the further erosion in the medium-term fiscal position," he noted.

Oster said there was limited fiscal freedom to fight any unexpected economic downturn in the next few years.

Nomura Australia economists also said the budget deficit was a "disappointing outcome" given the economy's robust performance in 2001-02. They said the government's move to a contractionary fiscal policy was a move in the right direction, though it probably did not go far enough.

But the Housing Industry Association praised the budget, calling it responsible. The association's managing director, Dr Ron Silverberg, said it was now up to the Reserve Bank to let the economy absorb the latest interest rate rise before considering any further tightening of monetary policy.

In the wake of the budget, Australia's stock market is turning in its best performance of the year Wednesday. The benchmark S&P/ASX200 is up 51.4 points or 1.55 percent to 3365.7 in late afternoon trade.

The currency is steady at 54.74 U.S. cents.