Australia govt promises 'back in black' budget in election run-up

(Adds analyst quotes, rating agency comments)

* Govt announces A$158 bln in tax cuts over a decade

* Budget forecasts a lift in wage growth

* Analyst: Doubtful budget can stem decline in govt's support

* Economist warns there are risks to budget assumptions

* Aussie dollar unchanged after budget released

By Colin Packham and Swati Pandey

CANBERRA, April 2 (Reuters) - Australia's conservative government on Tuesday proposed tax cuts for low and middle-income earners and record spending on health and education while promising the first budget surplus in more than a decade, shaping its pitch for votes in an imminent election.

Treasurer Josh Frydenberg offered A$158 billion ($112 billion) in tax cuts over the next decade primarily aimed at middle-income earners, on top of tax cuts of A$144 billion last year, as the coalition government, which is trailing in opinion polls, tries to win over voters.

An election must be held by mid-May and could be called as soon as this week.

"The budget is back in the black, and Australia is back on track," Frydenberg told parliament in a budget speech on Tuesday evening.

"For the first time in 12 years, our nation is again paying its own way."

Analysts long expected a spending plan designed to attract votes.

"It is the pre-election budget to end all pre-election budgets - it is extraordinarily generous," said Paul Williams, professor of political science at Griffith University.

There was muted reaction by the Australian dollar after the budget release. Earlier on Tuesday, it slid after the country's central bank held interest rates steady but still managed to sound dovish to some.

Standard & Poor's and Moody's left their top AAA ratings for Australia unchanged.

S&P said the country would achieve stronger fiscal outcomes than anticipated in the near term because of robust commodity prices and terms of trade. Moody's said strong employment growth supported the economy.

Frydenberg predicted a budget surplus of A$7.1 billion in the fiscal year ending June 2020, up from a December forecast of a A$4.1 billion surplus, as higher export receipts and tax revenues boost government coffers.

If achieved, it would be the first surplus since 2007/08, before the global financial crisis hit.

TAX REBATES

The projected surpluses increase to A$11 billion in 2020/21 and A$17.8 billion in 2021/22 before easing to A$9.2 billion in 2022/23.

Offering potential swing voters an immediate dividend, the government said it will double the tax rebate for people earning between A$48,000-A$90,000 a year to A$1,080 in the current fiscal year.

Budget papers showed the cost of the tax cuts out to 2021/22 would be A$15 billion.

Polls show the conservative Scott Morrison-led government - consisting of the Liberal and rural-focused National party - is headed for a resounding defeat against centre left Labor unless it can alter the current trajectory.

Williams of Griffith University said the most the budget can do, is "stem the decline in support. The electorate has stopped listening."

On Tuesday, Frydenberg also proposed changes in future years that would see income bands widened and tax rates reduced to deliver personal tax cuts.

The government would accelerate tax cuts for small businesses, it said, with the tax rate for businesses with turnover of less than A$50 million cut to 25 percent in 2021/22.

The opposition Labor party said the budget would not address stagnant wage growth or tackle climate change.

Anaemic wages growth has been a hot political issue and is being used as an election platform for Labor and its supporters to campaign on.

The Australian Council of Trade Unions described wage growth forecasts in the budget, rising to 3.5 percent in 2021-22, as "fantasy".

Strong inflows into government coffers meant Frydenberg could increase spending on healthcare, a strength of the opposition Labor party, to a record A$89.5 billion in 2022/23. That is up nearly 10 percent on expected spending in 2019/20.

The government would spend A$100 billion on infrastructure over the next decade to reduce congestion and improve links between Australia's cities and regional towns, a lot of which has already been announced.

MORE RURAL ROADS

Spending on rural infrastructure was forecast to rise by nearly 30 percent, with A$4.5 billion to go for building roads in rural areas, the major support base of the ruling coalition's junior partner.

The government also included an immediate one-off rebate on energy costs to pensioners, another key voter demographic for the coalition, of A$75 for an individual or A$125 for couples.

And Frydenberg announced a A$3.5 billion package to reduce emissions to meet Australia's commitments under the Paris Accord. The government's environmental record is seen as one of its electoral weaknesses with urban voters.

Frydenberg maintained a relatively optimistic outlook for the economy, though he conceded there were risks including from falling house prices and global ones such as Brexit.

The government forecast full-year economic growth of 2.25 percent in 2018/19, which would need activity to pick up in the January-to-June period as the economy grew 0.3 percent in the September quarter and 0.2 percent in the December quarter.

Growth in the A$1.9 trillion economy is seen picking up to 2.75 percent in 2019/20 and 2020/21.

The tax cuts and increased spending, if enacted, could offer a boost to the economy, as consumer spending has been soft recently as falling home prices and high debt levels weigh on sentiment. Financial markets are fully pricing in a 25 basis points rate cut later this year.

AMP chief economist Shane Oliver said there was some "fragility" around the budget assumptions, including downside risks to wage growth and consumer spending forecasts.

"It has provided stimulus but from what I can see it is not overwhelming," Oliver said, adding it was probably not enough to prevent Australia's central bank from cutting interest rates around mid-2019. (Reporting by Colin Packham and Swati Pandey in CANBERRA; additional reporting by Tom Westbrook and Jonathan Barrett in SYDNEY; Editing by John Mair and Richard Borsuk)

First Published: 2019-04-02 00:19:02
Updated 2019-04-02 12:45:46


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