Australia may forecast low growth

By Iain McDonald

CANBERRA (Dow Jones): The Australian government is likely to understate the economy's bright outlook when it releases later in November a midyear review of its economic and fiscal forecasts, according to analysts.

The Reserve Bank of Australia and several private-sector analysts see a more buoyant economy in the year ahead than does the Australian Treasury, which remains cautious about the outlook for the global economy and for domestic business investment.

And some analysts also think the government may deliberately pitch its growth forecasts on the low side to help gain support for planned changes to corporate taxes.

Higher growth means a higher government budget surplus, which opposing political parties could call on the government to use to water down the government's planned crackdown on business tax avoidance.

"Given that there's a number of negotiations to be made on the business tax reform package, I don't think they'd be keen to overinflate the budget surplus forecast," says Societe Generale Australia Ltd. senior economist Glenn Maguire.

The government wants to cut the company tax rate to 30 percent from 36 percent and also significantly reduce capital gains tax rates, while simultaneously cracking down on a number of tax avoidance measures. But it needs the support of either the Australian Labor Party or Australian Democrats to pass the changes into law.

Australian Treasurer Peter Costello is expected to raise the current fiscal year growth forecast to 3.5 percent from 3.0 percent in the midyear review, to be release on an as yet unspecified date later in November. But private economists see much higher growth, with Warburg Dillon Read chief economist Mark Rider predicting growth of 4.8 percent for the fiscal year, which ends June 30, 2000. The economy grew 4.5 percent last fiscal year.

Though it doesn't release its forecasts, analysts say the Reserve Bank of Australia also has a more buoyant outlook than the government. Its action earlier this month to raise the official cash rate by 25 basis points to 5.0 percent along with its upbeat semiannual statement on monetary policy suggest its growth forecast for 1999-2000 is well above 3.5 percent.

"At the moment Treasury thinks the economy is slowing," says Rider. "On the other side of the official family, the Reserve Bank thinks the economy is picking up."

The government is also expected to raise its inflation forecast for 1999-2000 to an average rate of 2.25 percent from its May forecast of 2.0 percent. But more importantly, the government will also outline its forecast for inflation in 2000- 2001 -- a year in which prices will be hit by a new 10 percent goods and services tax.

Treasurer Peter Costello in a speech last week said that while the GST will have a long-term impact of raising prices by 1.9 percent, inflation in 2000-2001 -- the first year of the GST's operation -- will likely reach 5.25 percent.

Confirmation by Treasury that inflation in Australia will be well above U.S. inflation "could worry people, particularly offshore investors," says Deutsche Bank's Meer. It could also act to push out the spread between U.S. and Australian bond yields, he says.

Still, a likely modest upgrade to its growth forecast will allow the government to hang onto its budget surplus despite unplanned-for expenses in East Timor.

Analysts on average expect the government will increase its forecast underlying budget surplus for 1999-2000 to A$5.5 billion from its previous forecast of A$5.2 billion.

That is despite expectations that Australia's leadership of a multinational peacekeeping force in East Timor, which includes sending nearly 5,000 people to the former Indonesian province, could cost the government up to A$2.5 billion a year -- costs the government didn't plan for when setting its budget in May.

Looking further ahead, the picture is less clear with some saying the government's forecast A$3.1 billion surplus in 2000- 2001 is under threat and others forecasting there will be no surplus at all.

Private-sector forecaster Access Economics forecasts a sharp swing from a A$5.2 billion surplus in 1999-2000 to a A$500 million deficit in 2000-2001 -- the first deficit since 1996- 1997. Access says income tax cuts already pledged for July 2000 are over generous and, combined with spending on Timor, will push the budget into deficit.

Window: Still, a likely modest upgrade to its growth forecast will allow the government to hang onto its budget surplus despite unplanned-for expenses in East Timor.