INTERVIEW: Australia’s Costello Warns Of Tough 07 Budget
16 November 2006
By Barbara Adam Of DOW JONES NEWSWIRES
MELBOURNE, Nov 16, 2006 — Preparing to step into the international spotlight as host of the G-20 in Melbourne, Australian Treasurer Peter Costello Thursday said next year’s pre-election budget would be “difficult.”
With an election due by the end of 2007, the government will want to be generous in the May budget. But with the Reserve Bank of Australia struggling to keep inflation in check, Canberra has been signaling another round of tax cuts next year are unlikely.
“It (the budget) will be hard to put together,” Costello said in an interview with Dow Jones Newswires. “What we will have to do is we will have to make sure we run a significant surplus. That’s my aim.”
Costello has previously said he plans to deliver surpluses of about 1% of GDP each year. Treasury has forecast the underlying surplus to fall to A$10.8 billion for the year ended June 30, 2007 from A$15.8 billion in fiscal 2006.
The government has allocated an extra A$2.3 billion to drought relief this year and is expecting the extremely dry weather to trigger a rural recession.
“When you put all of that together it makes the outlook quite difficult,” Costello said.
Costello wouldn’t comment further on the budget or on the outlook for interest rates, which have been hiked three times this year by the central bank, which sets monetary policy independently of the government. The latest hike this month took interest rates to 6.25% from 6%.
Charged with keeping core inflation between 2% and 3%, the RBA has said it expects core inflation to remain at the top end of this band throughout 2007.
Some economists say the A$36.7 billion in tax cuts over four years announced in last year’s budget has added to inflation by increasing consumer spending.
Australia is enjoying its 16th year of uninterrupted economic growth with unemployment falling to a 30-year low of 4.6% in October.
Economic growth and company profits are being boosted by a China-driven commodities boom, which Costello has warned is near its peak.
Costello welcomed this week’s wage price index data which showed a less than expected gain of 0.8% in the third quarter.
“That is a good thing in an economy that is close to full employment, to see the wages outcomes are still reasonably moderate is a good thing,” he said.
Costello dismissed criticism of Australia’s tax system by News Corp. (NWS) founder and chairman Rupert Murdoch which made headline news earlier in the week.
Murdoch told a shareholders meeting in Adelaide on Wednesday he thought tax rates should be lower to encourage people to start businesses.
But Costello said Australia’s corporate tax rates are much lower than those in the U.S., where News Corp.’s operations are now based, after shareholders approved the international move in 2004.
“The Australian company tax rate is 30%, in America it’s 39%,” Costello said.
“We have full dividend imputation so you get a full credit for that company tax against the individual’s tax liability. In America they don’t.”
Costello denied Murdoch’s comments were embarrassing, coming just days before he meets with finance ministers and central bank governors from the G-20 group of developed and developed nations.
“If I worried about people expressing views critical of the Australian government I would have gone out of business a long time ago,” he said.
Costello said he planned to appoint someone to fill the yearlong vacancy on the central bank board soon.
“I’ve got to get through the G-20 and some other things first, then I’ll turn increasing amounts attention to that,” he said.
The G-20 meeting will be held this weekend in Melbourne, Costello’s hometown.
-By Barbara Adam, Dow Jones Newswires; 61-2-6208-0901; firstname.lastname@example.org
-Edited by Graham Morgan