RPT-UPDATE 3-Australia forecasts early return to surplus; cuts personal taxes in budget

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CANBERRA, May 8 (Reuters) – Australia’s center-right government confirmed expectations in its annual budget on Tuesday that it would return the country’s finances to a small surplus in 2019/20, a year earlier than planned and after almost a decade of deficits.    

People cross a street in Sydney, Australia May 8, 2018. REUTERS/Edgar Su

The ruling Liberal-National coalition also unveiled some big spending measures, including a package of personal income tax cuts for low and middle income earners, as a revenue windfall from company taxes enabled a shift away from its previous “debt and deficit disaster” rhetoric.     

“We are no longer borrowing to pay for everyday expenses,” Treasurer Scott Morrison told reporters. “We have reached a turning point for debt.”    

Morrison predicted a budget surplus of A$2.2 billion in 2019/20, a remarkable turnaround on the A$2.6 billion deficit forecast in the government’s mid-year review in December. The projected surpluses increase to A$11 billion in 2019/20 and A$16.6 billion in 2020/21.    

Net debt is seen peaking at 18.6 percent of Australia’s A$1.8 trillion ($1.4 trillion) gross domestic product (GDP) in 2017/18, also a year earlier than forecast, before falling to 3.8 percent by 2028/29.    

The marked improvement in the finances will likely be positive news for Prime Minister Malcolm Turnbull after a series of political setbacks, given the budget is widely viewed as the unofficial campaign kick-off for federal elections due in the first half of 2019.    

The early return to surplus will also likely be welcomed by ratings agencies who have retained Australia’s sovereign rating at a top-notch triple-A.    

People pass a construction site for the Sydney Light Rail system in Sydney, Australia May 8, 2018. REUTERS/Edgar Su

Still, Standard& Poor’s put Australia on a “negative watch” in mid-2016, citing deteriorating government finances, and some economists have warned that more spending before a federal election could put the pristine rating at risk.        

Morrison maintained the government continued to “live within its means” despite the budget spending splash.     

The government estimated total 2018/19 revenues would rise to A$486.1 billion, or 25.5 percent of GDP, largely from corporate taxes and as a crackdown on black economy and multinational tax avoidance bears fruit.    

Despite the additional expenditure, spending levels were at just below the 30-year average of 24.8 percent.        

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SUSTAINED GROWTH    

Australia’s economy, which has outperformed many rich world peers since the global financial crisis, has now entered a 27th straight year of growth, but the pace has slowed significantly as the country recalibrates following the end of a once-in-a-generation mining investment boom.    

The government predicted domestic activity to accelerate at 3 percent through the forecast period ending 2021/22 in the budget, unchanged from December. Its outlook for unemployment and inflation were also unchanged.    

The budget included a number of voter-friendly spending plans, as Turnbull seeks to restore his popularity after a dual citizenship crisis and a sex scandal involving his deputy, that have seen his popularity plummet in polls from record highs of late 2015.    

Revelations of serious misconduct in Australia’s powerful banking sector – during an ongoing inquiry the government initially resisted as unnecessary – have ramped up the pressure.    

The budget did not address that crisis in detail, saying only the government would continue to roll out stronger penalties, powers and enforcement for the sector. It also steered clear of discussing a plan to lower taxes for big businesses which did not have parliamentary support anyway.        

VOTER SWEETENERS    

An A$13.4 billion four-year income tax package included immediate cuts for low- and mid-income households, and a proposal to flatten the overall tax structure by abolishing the high income bracket in 2024/25.    

The extra money will be a boon for Australia’s heavily indebted households. Monthly retail sales data released earlier in the day showed spending falling on everything from clothes to restaurants.    

The government will continue its A$75 billion ten-year infrastructure plan to build new rail and road projects and a A$30 billion five-year investment plan in hospitals.    

It will also invest A$2.5 billion in public technology infrastructure, A$1.6 billion in residential aged care and A$294 million to improve national security.        

Reporting by SwatiPandey and Jane Wardell; Editing by Richard Borsuk, James Dalgleish & Shri Navaratnam

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