POSITIVE BUDGET REVISION; RATES GO UP, AGAIN

UNCLAS CANBERRA 000982 SENSITIVE SIPDIS DEPARTMENT FOR EAP/ANP, EEB/TPP/BTA E.O. 12958: N/A TAGS: EFIN ECON ETRD AS SUBJECT: POSITIVE BUDGET REVISION; RATES GO UP, AGAIN ¶1. (U) SUMMARY: Treasury released on November 2 revised budget estimates showing the economy will undergo higher growth, lower unemployment, lower deficits, and lower debt than previously expected. Given the more positive outlook - and constant criticism by Opposition of overspending - the GOA announced initial cuts in its stimulus package. Treasurer Swan still warned that challenges remain in areas like business investment and terms of trade. Monetary policy responded quickly on November 3, when the Reserve Bank of Australia raised interest rates once again by 25 basis points to 3.5%. END SUMMARY. Positive budget outlook -------------- ¶2. (U) Australian Treasury released on November 2 the 2009-10 Mid-Year Economic and Fiscal Outlook (MYEFO),which forecasts lower unemployment, higher growth, lower deficits and lower debt than previously expected. Australia's unemployment rate is now expected to peak at 6.75%, instead of the 8.5% predicted in May, and which translates to nearly 250,000 fewer unemployed. Inflation is expected to be subdued at 2.25% in both 2009-10 and 2010-11. While Australia's trade partners in Asia are recovering faster than expected, the country's terms of trade are down 16.9% since September 2008. Deficits and debt revised down -------------- ¶3. (U) Forecasts for budget deficits and government debt are down sharply, with the federal budget deficit to fall from 4.7% of GDP in 2009-10 to 1.1% by 2012-13, with a surplus expected in 2015-16. Lower government deficits have improved GOA's debt position considerably. By mid-2013, net debt is expected to be A$135 billion (9.4% of GDP),down A$53 billion from the original budget estimate of A$188.2 billion (13.6% of GDP). First sign of scaling back fiscal stimulus -------------- ¶4. (U) The GOA is adjusting fiscal policy to the earlier-than-expected economic recovery. Responding to calls from the Opposition to reduce its fiscal stimulus, the GOA announced expenditure reductions amounting to A$1.8 billion by 2013: holding real growth in spending to 2% per year until the budget returns to surplus; real government spending will contract in 2010-11 (the first time in 20 years); the Environment Minister announced a cut of A$250 million to the GOA's Home Insulation Program; and the Housing Minister announced restrictions on first home grants. Interest rates rise and Aussie dollar to stay high -------------- -------------- ¶5. (U) The Reserve Bank of Australia on November 3 raised interest rates by 25 basis points to 3.5%. Commercial banks followed suit with a similar increase. This means Australians with a home loan will pay an extra A$46 per month. Most analysts believe the Australian dollar's yield differential will continue to widen against other major currencies, which should support it in the months ahead. Some dislocation is expected in export-oriented sectors of the economy affected by the high Australian dollar, such as manufacturing and agriculture. ¶6. (SBU) COMMENT: Economic recovery in Australia is proceeding faster than expected, reducing federal deficits and debt. Treasurer Swan's comments following the RBA rate increase suggest the likelihood of further increases in the future and warned that, despite the improved budget figures, the economy will operate "below Qdespite the improved budget figures, the economy will operate "below capacity for some time" and that challenges remain in areas like business investment and terms of trade. To add some perspective, even though tax receipts are forecast to increase by A$40 billion over the 5-year period to 2012-13, they are still down A$170 billion from the May 2008 forecast. CLUNE