Australian budget targets shortage of workers

Unemployment rate expected to fall to 3.75 per cent by 2012
By James Grubel
||Last Updated: 05/10/2011

CANBERRA (Reuters) — Australia's minority government will deliver its first budget since last year's dead-heat elections on Tuesday, with a focus on addressing a shortage of workers and mapping out a return to surplus as the economy rides a mining boom.

Treasurer Wayne Swan is promising a return to surplus by 2012-13 to help ease pressures on inflation, caused in part by the ongoing resources boom.

With Australia's central bank warning of rising prices and possible interest rate hikes in the second half of 2011, Swan said the budget would help control inflation and prepare more people for work in an increasingly tight labour market.

"Critically, given the economic circumstances we will hit in the years ahead, it means bringing the budget back to surplus, so we don't add to the inflationary pressures that come with that huge investment pipeline," Swan told reporters, referring to billions of dollars of investment lined up for Australian resource projects.

The budget will be Swan's fourth, but the first under Prime Minister Julia Gillard, who toppled former Prime Minister Kevin Rudd last June before scraping back into office in a dead-heat election in August.

Gillard's government relies upon the support of three independents and the Greens, who have promised not to block the budget, although they may try to amend some measures.

After a series of deficits due to stimulus spending during the global financial crisis, this year's budget has been hit by a series of natural disasters that disrupted coal exports and destroyed key infrastructure in the mining state of Queensland.

Government tax revenues have also been hit by a fall in demand from the country's second-largest trading partner, Japan, after it was struck by a huge tsunami and a nuclear disaster, and by a record high Australian dollar crimping export profits and tax revenue.

Financial markets see few surprises

Financial markets expect few surprises and little reaction from the budget.

"The budget is expected to have few implications for financial markets, as we expect the status quo to be broadly maintained. That is, a return to a small surplus by 2012-13," said Paul Bloxham, HSBC's chief economist for Australia and New Zealand.

"The budget bottom line is widely expected — thanks to press leaks — to be largely unchanged from last November's fiscal update, with a small surplus not reached until 2012/13. This won't be tight enough to prevent rate hikes. We still expect RBA (Reserve Bank of Australia) hikes of 100 bps by mid-2012."

Economists expect the deficit for the year to June 30 to be around A$50 billion, or 3.6 per cent of GDP, with forecasts of between A$15 billion and A$20 billion for the deficit for 2011-12.

The deficit is expected to peak at less than four per cent of GDP in the current budget year, below half the U.S. shortfall and well below 10 percent in Britain. Net government debt should peak at around 6 percent of GDP, well below rates of 60 to 80 percent in some key European economies.

Swan has already said the budget would forecast unemployment, currently at 4.9 per cent, to fall further to 4.5 per cent, while economic growth will be hit by this year's natural disasters before rebounding in the 2011-12 year.

HSBC said it expected GDP growth to be in line with central bank forecasts of 2.5 per cent this year, 4.5 per cent for 2011-12 and 3.75 per cent for 2012-13.

The centrepiece of the budget will be a package to boost workforce participation and increase skills training, designed to move people off welfare.

The budget will also include details of Australia's skilled migrant intake for the coming year, with business urging the government to dramatically increase the number of skilled immigrants to help fill worker shortages, particularly in the mining and construction industries.

With the employment department saying Australia will need an extra 1.3 million workers by 2016, Swan said the budget would help increase the workforce by 500,000 people.

Swan has promised a tough budget with a tight rein on spending, but pre-budget leaks have said little about expected areas to be cut.

Some tax perks for middle and high income earners are likely to be cut, and the government has already announced cuts to fringe benefits tax concessions for company cars.

Welfare changes will force teenage mothers back into the workforce or training, and will impose new work and training requirements on the long-term unemployed.

Media reports said the government would also spend up to A$2 billion more on mental health services, and increase parenting allowances for older teenagers who remain in school or training programmes.

The opposition has criticised the budget because it will not include details of a planned carbon tax, due to start in July 2012. The government said the carbon tax cannot be included, because details of the scheme are still being worked out.

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