Sunday May 10, 05:47 AM
Australia braces for unpopular budget
By Neil Sands
MELBOURNE (AFP) - Australia is gearing up for a tough budget on Tuesday, facing the prospect of the largest deficit in the country's history as the economy struggles with its first recession in almost two decades.
The end of the China-driven resource boom that spurred Australia to 14 years of virtually uninterrupted growth has created economic woes not experienced for a generation in the so-called "Lucky Country."
Treasurer Wayne Swan has warned that the current situation means the centre-left Labor government must make "tough decisions" on budget night that will not be popular with the electorate.
"There will be hard choices, unpopular decisions and no easy options," Swan said last week, blaming the situation on the worst global recession in 75 years.
Economists say the government's attempts to soften the impact of the downturn with more than 50 billion dollars (32 billion US) in stimulus spending have also weighed on the bottom line, creating a mountain of debt.
The end result, according to numerous media reports citing unnamed government sources, will be a budget deficit of around 70 billion dollars in 2009-10.
Those sources say the budget is likely to remain in deficit for five to six years as the government attempts to recover from a 200 billion dollar slump in revenues caused by the financial crisis.
The reports say the economy will contract by 0.5 percent in 2009-10 and unemployment, now 5.4 percent, will soar well above eight percent.
"What (the financial crisis) has done is put a wrecking ball through government revenues," Swan said.
"This country, a country that has been such a beneficiary of a mining boom, has basically seen its revenues from capital gains tax and company tax dramatically reduced by this sharp contraction in global growth."
The situation is a massive turnaround from 12 months ago, when Swan predicted a 21.7 billion dollar surplus for the current financial year, a figure now reportedly expected to be a 30 billion dollar-plus deficit.
Access Economics analyst Chris Richardson said the government had to walk a fine line between short-term stimulus spending and austerity measures to put the budget back into the black by about 2014-15.
"Longer term they need less spending to repair the budget. That combination is going to be a difficult one to explain and sell," he said.
Richardson said some of the cutbacks could damage the government's popularity among middle-class voters who dumped former prime minister John Howard's conservative administration at the last election in late 2007 and switched to Labor.
"Soaking the rich isn't enough," he said. "Australia's budget problems are sufficiently deep that middle Australia will have to feel pain before the budget is back in balance."
In addition to more than 50 billion dollars in new spending on schools, roads, and cash handouts in the past six months, the government has also committed to a 43 billion dollar national broadband network and large increases in the defence budget.
It has also reportedly earmarked a further 25 billion dollars in the budget for infrastructure projects such as rail, roads and ports.
The opposition has accused the government of embarking on a spending binge that will leave Australia in the red for more than a decade.
"Ultimately someone will have to pay for all this," opposition treasury spokesman Joe Hockey said.
"It has to be all Australians, they will end up paying higher taxes, higher interest rates, not just for one or two years, but perhaps a decade or more."
With the government reportedly preparing to claw back some of the revenue by cutting so-called "middle class welfare" such as rebates on private healthcare, Swan said the budget would chart a way for Australia to emerge from recession.
"What this budget is about is making sure that we do everything within our power to support jobs and Australian businesses in the face of a global recession and make sure that we put this country on the right course for the long term," he said.
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