VZCZCXRO9222
RR RUEHPT
DE RUEHBY #0982 3082055
ZNR UUUUU ZZH
R 042055Z NOV 09
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC 2210
INFO RHEHAAA/WHITE HOUSE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHOT/AMEMBASSY OTTAWA 0005
RUEHBN/AMCONSUL MELBOURNE 6755
RUEHPT/AMCONSUL PERTH 5021
RUEHDN/AMCONSUL SYDNEY 5020

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