By Stella Qiu
SYDNEY, May 12 (Reuters) – Australia is expected to deliver a narrower than forecast budget deficit on Tuesday as it banks commodity-driven revenue windfalls, while also unveiling the most significant property tax reforms the country has seen in decades.
Figures from Treasury showed budget deficits would be lower in each financial year, compared with the government’s last economic projections in December. The bottom line is forecast to be A$44.9 billion better than initially thought.
Details of the budget will be announced by Treasurer Jim Chalmers in parliament at 1930 local time (0930 GMT).
“There will be more than the usual amount of savings and more than the usual amount of reforms in the face of more than the usual amount of global economic uncertainty,” he told reporters in Canberra on Tuesday.
Chalmers added there will be five major packages in the budget, focusing on fuel security, cost of living and housing, productivity, tax reforms and savings.
The main focus for the centre-left Labor government, however, is expected to be property tax reforms that may include a crackdown on capital gains tax discounts and negative gearing, local media reports said.
“I think the housing market and the tax system is not working for a lot of Australians, and tonight, we seek to address that,” Chalmers said, addressing the reports.
“I don’t dismiss or deny the very real concerns that a lot of Australians have about their ability to get a toehold in the housing market, or to get a toehold in the economy. More broadly, this is really one of the main issues playing out in our society now,” he said, the Australian Financial Review reported.
INTERGENERATIONAL EQUITY
Australia’s low debt to GDP ratio and coveted AAA sovereign credit rating usually mean the federal budget holds few surprises for markets. However, this year’s budget will be closely watched for any changes to property and investment taxes, the very proposals that cost Labor a national election seven years ago.
While details are thin, local media reports the government may scrap the 50% capital gains tax discount on assets held for more than a year and return to the pre-1999 policy of taxing inflation-indexed gains. Negative gearing, which allows investment losses to be offset against taxable income, is likely to be limited.
Capital gains tax discounts and negative gearing have long been criticised for skewing housing ownership towards older wealthy investors while young people struggle to buy homes.
The budget will also set aside A$10 billion ($7.22 billion) to establish permanent government-owned fuel reserves to prevent the kinds of localised fuel shortages across the country seen recently due to the Iran war.
The government has also committed an extra A$53 billion in defence spending over the next decade, including a A$14 billion lift over the budget forecast period.
SPENDING RESTRAINT
The budget will feature a major overhaul of its disability welfare programme, whose ballooning costs have blown a hole in the budget bottom line. That is expected to deliver savings worth more than A$35 billion over the next four years.
Higher commodity prices from the Iran war and elevated inflation would also lift revenues, but the government is under pressure to rein in public spending to avoid fanning inflation, which was already running too hot before the Iran war broke out.
The Reserve Bank of Australia has lifted interest rates three times this year to 4.35% to head off the war-driven energy shock, warning growth will stay anemic and unemployment will rise further.
“Our concern with the budget is that there will be new spending initiatives delivered and these will be offset by planned, rather than already delivered, spending cuts elsewhere,” said Paul Bloxham, chief economist, Australia, NZ at HSBC.
“If fiscal policy does end up being expansionary, the risk is that the RBA has to hike further yet, increasing the risk that a recession will be delivered to get inflation back to target.”
(Reporting by Stella Qiu; Editing by Sam Holmes)
Comments