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DE RUEHBY #0452/01 1330752
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P 130752Z MAY 09
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC PRIORITY 1481
INFO RUEHWL/AMEMBASSY WELLINGTON PRIORITY 5771
RUEHBN/AMCONSUL MELBOURNE PRIORITY 6332
RUEHPT/AMCONSUL PERTH PRIORITY 4595
RUEHDN/AMCONSUL SYDNEY PRIORITY 4555
RHEHNSC/NSC WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 03 CANBERRA 000452 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV AS
SUBJECT: BUDGET: BIG DEFICIT, RECOVERY BEGINNING IN 2010 
 
¶1. (SBU) SUMMARY: After a decade of almost continuous budget 
surpluses, the 2009-10 budget announced May 12 projects a 
deficit of A$$58 billion or 4.9 percent of GDP, the largest 
in the postwar period.  The budget forecasts that 
unemployment will peak at 8.5 percent in 2010-11, economic 
recovery will begin in 2010-11, and the budget will return to 
surplus in 2015-16.  With government revenue declining 
significantly, the government will cut some "middle class 
welfare" benefits from the previous government.  However, the 
budget continues the Rudd Government's recent approach of 
stimulating the economy and protecting jobs.  Infrastructure 
funding will be boosted.  Tax cuts promised during the 2007 
election will be made, and pension benefits for the elderly 
will increase.  A taxpayer-funded paid maternity leave 
scheme will be introduced in January 2011.  While this was 
forecast by the Government as a "tough" budget, it targeted 
only wealthier taxpayers who had benefited under the Howard 
Government.  Most pundits see the budget's economic growth 
forecasts as optimistic, but Sydney bankers actually believe 
it is too pessimistic. END SUMMARY. 
 
KEY INDICATORS 
 
¶2. (SBU) The Rudd Government's second budget, unveiled May 
12, projects a A$57.6 billion deficit (US$43 billion at 
today's exchange rate of A$1 = US$.77) next financial year 
(July 1-June 30) and up to A$200 billion of Federal debt 
accrued in the next four years.  Treasurer Wayne Swan 
stressed that the deficit is primarily the result of the 
"brutal" global recession, with forecast A$210 billion drop 
in taxation revenue until 2013-14. 
 
¶3. (SBU) The GOA's stated overall strategy is to maintain 
growth and employment through stimulus packages and an 
expansionary budget, hoping that world growth will resume 
relatively quickly, allowing tax revenue to recover.  A 
slower than forecast recovery could markedly increase the 
deficits and necessitate much sharper spending cuts or 
greater deficits down the road.  Swan specifically rejected 
the idea that Treasury forecasts were less reliable that 
those of the IMF, noting at his National Press Club address 
today that in mid-2008 the IMF was revising its predictions 
for growth in 2008 upwards, and then had to make five 
downward revisions.  Treasury's prediction of a A$22 billion 
surplus last May was well off the mark due to the global 
financial crisis that began less than three months into 
Australia's fiscal year. 
 
AUSTRALIA'S DEBT INCREASES BUT AAA RATING SECURE 
 
¶4. (U) Australian Commonwealth (federal) debt is forecast at 
0.4% of GDP for 2008-09.  It is predicted to peak at 13.6% of 
GDP in 2012-13 before dropping to 3.7% in 2020.  The GOA 
plans to sell a record A$60 billion in bonds in the upcoming 
financial year. There will be about A$133 billion of 
Australian Government bonds outstanding as of June 30, 2010. 
These debt figures, high by recent Australian standards, are 
low by OECD standards, with most member countries forecast to 
have debt levels of 80% of GDP by 2014.  Two major credit 
agencies, Standard and Poor's and Fitch Ratings, said the 
budget did not threaten Australia's AAA rating because the 
country's finances remain sound. 
 
GROWTH, UNEMPLOYMENT AND DEFICIT PROJECTIONS 
 
¶5. (U) The budget projects: 
 
- Economic growth of -0.5 percent for 2009-10, 2.25 in 
2010-11, 4.5 percent in 2011-12, and 4.5 percent in 2012-13; 
Q2010-11, 4.5 percent in 2011-12, and 4.5 percent in 2012-13; 
 
- Inflation at 1.75 percent for 2009-10; 
 
- Unemployment at 8.25 percent in 2009-10, 8.5 percent in 
2010-11, and 7.5 percent in 2011-12 (the GOA says 
unemployment would have reached 10 percent if it had not 
taken the stimulus measures it did in October 2008 and 
February 2009); 
 
- Government revenue revised down by A$210 billion over the 
next four years; 
 
- A budget deficit of A$32 billion in 2008-09, A$58 billion 
in 2009-10 (4.9 percent of GDP), A$57 billion in 2010-11, 
A$45 billion in 2011-12, A$28 billion in 2012-13; and 
returning to surplus in 2015-16; and 
 
 
CANBERRA 00000452  002 OF 003 
 
 
- Net government debt peaking at A$188 billion in 2012-13, 
around 14 percent of GDP. 
 
THE GOOD NEWS 
 
¶6. (U) The centerpiece of the budget is A$22 billion in 
"nation building" infrastructure spending for road, rail, 
port, university, hospital, clean energy and broadband 
projects across the nation.  The Rudd Government will deliver 
the tax cuts the Australian Labor Party (ALP) promised at the 
2007 election.  All 3.3 million of Australia's elderly, 
disabled, their care-givers, widowed pensioners, and veterans 
receiving income support will receive a raise of up to 10% 
(A$32.49 a week for singles) at a cost of A$14.2 billion over 
four years.  A taxpayer-funded paid parental leave scheme, a 
first for Australia, will be introduced in January 2011.  The 
boost to the first home buyers grant, part of the 
government's first stimulus package, will be extended for 
another six months.  Business will receive further tax breaks 
on the purchase of equipment. 
 
CLIMATE CHANGE, SCIENCE AND ENERGY POLICY INITIATIVES 
 
¶7. (U) Swan announced A$4.5 billion will be invested in a 
Clean Energy Initiative to support low-emission technologies 
and create green jobs.  Two to four industrial-sized 
coal-fired power plants will be built using cleaner 
technologies including Carbon Capture and Storage.  Four 
large solar power plants will also be built, at a cost of 
A$1.5 billion over six years (and generating 1000 megawatts 
of electricity).  The budget also increases science, 
research, and development funding by A$3.1 billion over the 
next four years, an increase of over 25 percent compared to 
the 2007-08 fiscal year. 
 
MIDDLE CLASS BENEFITS CUT, PENSION AGE LIFTED 
 
¶8. (U) The 30 percent taxpayer-funded private health 
insurance rebate (a benefit for those who can afford private 
health insurance) will be means-tested from July 1 2010 and 
phased out for singles earning over A$120,000 a year and 
families over A$240,000.  The maximum contribution into 
retirement schemes at a reduced tax rate will be slashed. 
The government's co-contribution retirement scheme, which 
tops up contributions from low and middle-income earners, 
will be less generous.  Welfare payments to families will 
rise more slowly, and the thresholds for phasing out family 
welfare payments will be frozen for three years.  Some tax 
loopholes for the wealthy will be closed.  From 2017, the 
qualifying age for the aged pension will be progressively 
increased from 65 to 67. 
 
COMMENT: NOT THAT "TOUGH" 
 
¶9. (SBU) The government talked up a "tough" budget before its 
release, as did Treasurer Swan during his speech to 
Parliament.  But it was not that tough.  The reaction of key 
groups, such as the Chamber of Commerce and the Australian 
Council of Trade Unions, was generally positive.  It is a 
budget that will appeal to Labor "true believers:" funding 
public works, reducing subsidies for private health 
insurance, hitting high-income earners, boosting pensions 
(although not for the unemployed and single parents) and 
providing taxpayer funded maternity leave.  Several of the 
infrastructure projects are located in key parliamentary 
seats. 
 
¶10. (SBU) The Opposition will continue to contrast the 
economic numbers Rudd inherited with those he presides over, 
and claim that the cuts to middle class benefits are a result 
of Labor's "reckless" economic stimulus spending.  Opposition 
Qof Labor's "reckless" economic stimulus spending.  Opposition 
Shadow Treasurer Joe Hockey maintains the Government has lost 
control of the nation's finances. 
 
¶11.  (SBU) The Australian Industry Group and others have 
warned that the projected future economic growth rates are 
too optimistic, and many that last year criticized the GOA 
for "talking down" the economy (the fact that the GOA turned 
out to be correct to fear a slowdown does not seem to matter) 
now accuse them of being too optimistic.  But polls indicate 
that voters believe the GOA claims that it has done a good 
job in the context of the "worst global recession in 75 
years."  On the other hand, some Sydney bankers tell us that 
they think the earlier years numbers are too pessimistic; 
they see growth in FY2009-10 of 0.7 percent rather than 
falling back 0.5 percent, and speculate that the GOA is 
 
CANBERRA 00000452  003 OF 003 
 
 
setting itself up for an upside surprise. 
 
¶12. (SBU) If unemployment exceeds expectations - and the GOA 
has been open in saying they expect it to hit 8.5 percent - 
despite deficit spending and stimulus plans, it could dent 
the Government's popularity.  There are also political 
challenges for the Opposition.  If it takes the side of the 
budget "losers" and opposes some of the spending cuts, it 
will be accused of undermining its position on reducing debt. 
 On the other hand, by supporting the cuts it may be viewed 
as tacitly accepting Treasurer Swan's assertion that the 
Howard government spent "as if the mining boom was never 
going to end."  Furthermore, by continuing to criticize the 
extent of government spending, the Opposition opens itself up 
to a fear campaign about cuts to essential services and job 
losses.  If the Liberal/National Coalition were in power 
today and faced these economic conditions, it too would run a 
significant deficit, as Hockey admitted on radio this 
morning.  We accept Swan's assertions that to slash spending 
and/or raise taxes during the economic downturn would be 
irresponsible.  It would also be politically foolish, since 
it would likely contribute to a deeper and longer economic 
downturn in Australia.  End comment. 
 
CLUNE