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UNCLAS SECTION 01 OF 03 CANBERRA 000446 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EEB AND EAP/ANP; STATE PLEASE PASS USTR 
 
TAGS: EFIN ECON MCAP PGOV AS
 
SUBJECT: AUSTRALIAN BUDGET PREVIEW: INTO DEFICIT 
 
REF: A) 08 Canberra 490; B) 08 Canberra 1036; C) 08 Canberra 1302 
 
¶1. (SBU) SUMMARY: The upcoming Federal budget (release date May 12) 
will see a deficit of around A$70 billion (US$53b), due to 
significantly decreased revenue because of the effects of the global 
financial crisis and economic downturn.   Indications are that the 
Rudd government's second budget will increase excise taxes, reduce 
tax concessions for superannuation and health insurance and cut 
middle class welfare programs to offset an increase to the aged 
pension and cuts in income tax; it will also impose some cuts on 
defense spending.  Government debt could rise to A$300 billion (25% 
of GDP) in four years. Although beyond the GOA's ability to avoid, 
deficits could prove politically unpopular after a long series of 
surplus budgets.  END SUMMARY. 
 
BUDGET SEASON 
 
¶2. (SBU) Budget season is upon Australia.  The release of the 
Federal budget in May is the top event on the Australian political 
calendar outside of elections, laying out budgetary and political 
priorities for the GOA during the upcoming Australian fiscal year 
(July 1-June 30).  The 2009-10 budget, to be delivered on May 12, 
will be the second for Treasurer Wayne Swan and Prime Minister Kevin 
Rudd Government.  Last May, the Rudd Government was criticized 
(reftel) for not cutting taxes enough.  Economic events, however, 
subsequently showed that the budget was not too cautious after all; 
indeed the GOA's cautious projections turned out to be wildly 
optimistic after the global financial crisis intensified in 
September. 
 
¶3. (SBU) Although the budget itself remains veiled in secrecy until 
formally delivered, there are the usual copious leaks and hints, 
although surprises on the actual day are not unusual.  Swan himself 
has said the budget will include a third round of stimulus measures 
to counter the recession, and reforms to address costs associated 
with Australia's ageing population.  Last year's budget was 
initially in surplus, but fell into deficit after the onset of the 
global financial crisis.  This year, Swan says there will be a 
"temporary" budget deficit of A$50-70 billion (US$38-53b), but he 
stresses the GOA will bring back the surplus in a responsible way. 
Swan said the first priority in the current economic climate is "to 
support the economy, to support jobs", and that (plus reduced 
government revenues) means a temporary deficit. 
 
¶4. (SBU) Even as the budget slides into deficit, the Rudd Government 
has insisted it will find savings where it can, to prevent the 
deficit from being larger and to ensure the deficit remains 
temporary.  For example, some tax increases and benefit payments are 
expected.  Middle class recipients of benefits such as the private 
health insurance rebate, Medicare safety net, superannuation tax 
breaks and the Family Tax Benefit B will be means tested; savings 
from these reduced payments will help pay for an increase in 
pensions for the elderly and income tax cuts that were promised last 
year. 
 
¶5. (SBU) Rudd has admitted some decisions in the 2009-10 budget will 
Q5. (SBU) Rudd has admitted some decisions in the 2009-10 budget will 
be highly unpopular.  Swan said the budget strategy for 2009-10 
involves hard choices between helping pensioners and making 
"nation-building investments to stimulate the economy and to invest 
in the future."  However, Opposition leader Malcolm Turnbull has 
demanded that Swan "come clean" and explain what six successive 
deficits would mean for debt. 
 
AUSTRALIA'S FISCAL POSITION 
 
¶6. (SBU) The reasons behind Australia's slide into deficit were 
factors generally beyond the GOA's control.  Due to a collapse in 
company tax and resource tax revenue, government receipts are 
forecast to be A$200 billion (US$150b) lower over the next four 
years than originally envisioned a year ago.  The two stimulus 
packages (refs B and C) which totaled about 5% of Australian GDP 
alone will cost A$3 billion (US$2.25b) a year in interest charges. 
Slowing economic growth will also reduce government income and 
increase fiscal obligations.  Australia's net debt could reach A$300 
billion (25% of GDP) over 5 years, from an estimated net surplus 
 
CANBERRA 00000446  002 OF 003 
 
 
position of A$16.2 billion (US$12b) in 2008-09.  In February, the 
GOA forecast a budget deficit of A$35.5 billion in 2009-10, but next 
week's budget is expected to show a deficit of A$70 billion with no 
prospect of a return to surplus until 2015-16.  Economic forecasts 
don't show much help coming.  The Australian Treasury has predicted 
GDP growth is expected to be only 0.1% for the 2008-09 FY and up 
perhaps 0.7% in 2009-10. The unemployment rate is likely to rise to 
7.75% by June 2010, from 5.4% in April.  However, the latest Reserve 
Bank report of May 8 forecasts GDP will contract 1.25% in 2009-10, 
while the IMF has predicted it will drop 1.4 per cent, before 
growing by a meager 0.6% in 2010. 
 
REPORTS: SOME TAXES AND PENSION RISE, INCOME TAXES FALL 
 
¶7. (SBU) Prime Minister Kevin Rudd has reaffirmed the budget will 
deliver income tax cuts promised during the 2007 election campaign. 
These will provide tax relief of almost A$60 a week (US$2300/year) 
for high-income earners over the next two years.  To help fund these 
tax cuts, there will be excise increases for alcohol and tobacco 
partly on preventive health grounds.  Excise could rise by A$2.50 
for a packet of cigarettes and A$.15 for a draft beer, bringing in 
an estimated A$1 billion (US$750m) in additional revenue a year. 
The first-home buyers' grant (which doubled late 2008 to A$14,000 
for first-time buyers of existing homes and tripled temporarily to 
A$21,000 for new homes) will expire on June 30.  However, the grant 
may be extended in some reduced form since it has helped the 
building industry.  A rise in the aged pension by around A$30 a week 
is to be funded by cutting tax concessions for wealthy Australians 
salary sacrificing into retirement savings funds.  Those in line for 
a pay rise include 2.1 million age pensioners (10% of Australia's 
population), 740,000 disability pensioners, 140,000 carers and 
300,000 veterans. 
 
SUPERANNUATION AND HEALTH POLICY ADJUSTMENTS 
 
¶8. (SBU) To encourage greater use of private health care insurance, 
the Howard government gave all insured taxpayers an annual rebate 
worth 30% of their premiums, with those aged 65 and older eligible 
for a refund of up to 40%.  Swan will modify the rebate, which will 
save A$1.9 billion (US$1.4b) a year, and will lift penalties for 
higher income taxpayers who do not buy private insurance by boosting 
their Medicare levy surcharges to 1.5% from 1%.  This is likely to 
affect single people earning more than A$74,000 (US$55,500) and 
couples on more than A$150,000 (US$113,000) a year.  Couples earning 
more than A$240,000 (US$180,000) will no longer receive these 
subsidies.  An initiative to save A$440 million (US$330m) over four 
years will cap payments made by Australia's national health system 
Medicare to specialists that have been identified as exploiting the 
system by charging excessive fees.  At the center of the crackdown 
will be specialists such as vascular surgeons, obstetricians, and 
providers of artificial reproductive technology such as IVF 
specialists.  Medicare access to IVF will also be cut back in the 
Qspecialists.  Medicare access to IVF will also be cut back in the 
budget, with new limits on safety net reimbursements for obstetric 
treatments, forcing pregnant women who see private obstetricians to 
pay much more in out-of-pocket costs.  In response to questions, 
Rudd has refused to guarantee non-means-tested rebates for childcare 
expenses; these too are likely to change. 
 
¶9. (SBU) Currently, 37% of superannuation (retirement account) tax 
concessions go to the top 5% of income earners.  Today, workers aged 
up to 50 can contribute up to A$50,000 (US$37,500) a year to their 
super fund at a 15% concessional tax rate instead of paying their 
individual marginal tax rate.  Over 50s can contribute up to 
A$100,000 (US$75,000) a year towards their superannuation at the 
lower tax rate.  It is anticipated the budget changes will lower the 
contribution caps from A$50,000 to A$25,000 a year for those under 
50, and from $100,000 to $50,000 for the over-50 population. 
 
DEFENSE AND BORDER SECURITY 
 
¶10. (SBU) The budget allows for defense spending cuts of A$20.6 
billion (US$15.5b, about 5%) over 20 years, with A$5 billion by 
¶2013. This is expected to primarily affect civilian defense 
contractors.  These savings would help fund the A$100 billion 
equipment expenditure forecast in last week's "White Paper on 
 
CANBERRA 00000446  003 OF 003 
 
 
Defence." Savings will be in 15 reform streams including purchasing 
and travel (A$4.4 billion); maintenance (A$4.4 billion); and 
workforce reforms (A$1.9 billion).  These savings will allow the 
defense procurement budget to increase from A$4.5 to A$5.7 billion a 
year for the next four years.  A "Regional Action Plan" costing up 
to A$500 million is planned to provide for anti-people smuggling 
measures.  It will increase surveillance off Australia's north-west 
coast and train surveillance officers in Indonesia and abroad.  The 
Australian Federal Police is expected to receive A$80 million to 
spend on counter-terrorism measures overseas.  The funding is also 
to finance more boats and aircraft for border security. 
 
¶11. (SBU) COMMENT:  Historically, running deficits has been 
dangerous in the Australian political arena.  The previous record 
public deficit, under the Keating Government in the early 1990s 
(4.1% of GDP) was very unpopular, and the Howard Government and its 
Treasurer Peter Costello crowed about its ability to deliver 
surpluses and cut taxes at the same time.  That was, of course, 
under markedly better economic circumstances than those now facing 
Rudd and Swan; absent draconian cuts that would exacerbate the 
economic slowdown, there is no way for Australia to avoid deficit 
this year.  The Australian Labor Party and others are quick to 
criticize the Howard/Costello approach for squandering much of the 
revenue boom on popular tax cuts and middle class welfare rather 
than funding things such as infrastructure and education.  Still, 
while the second Rudd budget is likely to be received somewhat 
negatively by some Australians grown used to a long series of 
easy-to-deliver budgetary surpluses, tax cuts, and new benefits, 
recent polling suggests that most Australians understand and accept, 
however grudgingly, the economic necessity of a budget deficit, as 
long as they believe the Rudd government will invest the money 
wisely.  The Opposition will of course use this occasion to slam the 
Rudd Government's management of the economy and the budget; all will 
watch to see whether the budget and the Opposition's criticisms put 
a dent in the consistently high favorable ratings enjoyed by Rudd 
personally and for his handling of the economy.  END COMMENT. 
 
CLUNE