Howard signals shift in economic focus
By Iain McDonald
CANBERRA (Dow Jones): After years of aggressive steps to make Australia's economy more flexible and open, the government is expected to ease off next year and increase social spending ahead of a general election in 2001.
Extra spending on social services, which could almost eliminate large underlying budget surpluses previously forecast for the coming years, could worry financial markets used to pro- business government policies. But analysts expect the government will narrowly target any additional spending on services to avoid a major budget blowout.
Prime Minister John Howard signaled the shift toward a more socially concerned government in last week's end-of-year address to the National Press Club.
There is a "special obligation on all of us to make sure that all sections of the community as best we can enjoy and share in the benefits of that national economic well-being and economic strength."
Analysts say that's code for directing a greater flow of the country's growing economic wealth toward rural and regional Australia.
The government is "making sure some of the benefits, instead of trickling down, start flowing down" to the country's regional areas, says Deutsche Bank senior economist Bruce Hockman.
No one expects the government would allow the budget surplus to swing to deficit on any additional spending, so bond markets needn't fear a sharp increase in supply. In fact, more worrying for bond traders is that the government hasn't yet indicated how it will apply past proceeds from the part-sale of Telstra Corp. (TLS) to debt reduction while sticking to its aim of maintaining a liquid government bond market.
Since its election in March 1996, the conservative Liberal- National coalition government has pursued policy changes that have produced a more flexible, open economy able to resist external crises and grow at a faster rate without high inflation.
The latest major structural change -- overhauling the country's tax system -- is set for implementation in 2000 and includes broadening the tax base through the introduction of a 10 percent goods and services tax and a cut in tax exemptions for business that together will pay for significant cuts in tax rates on company profits and personal income.
But Australians appear to be tiring of major economic changes, which have produced unevenly-distributed economic benefits. Howard himself noted that while unemployment rates in parts of Australia's largest cities are down to 2 percent, the proportion of working-age Australians that are jobless outside the large cities is much higher.
"The political signals tell you the community has had enough of major reforms," says Macquarie Bank Ltd. chief economist Bill Shields.
Not only are Australia's regional and rural voters having a hard time, but "the bigger issue is the growing divide between the haves and the have-nots," Shields says.
To narrow that gap, Shields says the government will likely target extra infrastructure spending and more health and education services for regional areas.
But the government isn't likely to let the budget slip into deficit through massive spending pledges, he says. "If they maintained a selective approach, it's not necessarily going to be a big spending approach," he says.
The government's budget is already under pressure from unplanned commitments in the former Indonesian province of East Timor, which the government says will blow a A$3.68 billion hole in the budget over the next four years.
Rating agency Standard & Poor's told Dow Jones Newswires a week ago that a turnaround in forecast budget surpluses to deficits "would ring an alarm bell."
Treasurer Peter Costello forecasts a modest underlying surplus of A$500 million in 2000-2001, down from his earlier forecast of a A$3.1 billion surplus and a forecast A$3.4 billion surplus in 1999-2000.
"There will be things for regional cities and the bush," says HSBC Markets chief economist John Edwards.