Econintersect: Australian Treasurer Wayne Swan has announced that GDP growth for the country is now projected to slow to 3% for the fiscal year ending 30 June 2013. The previous projection had been 3.25%. The slower growth is attributed to reduced exports of commodities as well as lower export prices. The follow-on effect is that tax revenues will also be reduced.
The government has announced new fiscal initiatives to (1) reduce spending and (2) increase taxes to preserve a narrow budget surplus for the country. The moves total about $16.4 billion (Australian) over the next four years ($17 billion U.S.).
To offset the slowdown the RBA, (Reserve Bank of Australia, the country’s central bank) is expected to continue its monetary accommodation with further rate cuts. The RBA has already reduced interest rates by 1% in 2012, the most recent being 25 basis point cut this month.
The Labor government had planned a budget surplus for the current year to bolster their position in the fall of 2013 national elections. The country had run deficits for the past four fiscal years to combat the impacts from The Great Recession.
The surplus for the 2012-13 fiscal year was initially estimated to be a slim $1.54 billion (Australian) but that has narrowed to $1.08 billion after only 3 1/2 months into the year. This is only 0.3% of the newly pared down $363.4 billion spending plan (was $364.2 billion).
The Australian dollar is trading against the U.S. dollar very nearly the same as at the start of 2012, but the AYD/USD pair has seen a swing of 11% from high (February-March around 1.08) to a low (June around 0.96).
Editor’s note: Australia seems to be following a strategy of trying to offset the effects of fiscal tightening with monetary easing. The ultimate end game for such a strategy carried to the limit would be to follow the U.S. and Japan to a ZIRP (zero onterest rate policy). The difference, if Australia were to go all the way there, would be a very much smaller national debt (currently about $164.7 billion) ratio to GDP (about $1.5 trillion). The ratio is now only about 11%, a small fraction of what the ratio is for many other countries.
Click on the following graphic to go to an interactive overview of world debt at The Economist.
- UPDATE 1 – Australia sees smaller surplus as mining boom slows (James Grubel, Reuters, 21 October 2012)
- Australia to Tighten Spending to Meet Budget Surplus Pledge (Michael Heath, Bloomberg, 21 October 2012)
- The debtors’ merry-go-round (The Economist, 19 September 2012)
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