Australia plans to cut business tax and balance books

CANBERRA, Australia (AP) — Australia announced cuts to foreign aid, lower taxes for small businesses and cheaper child care in an annual budget that tries to balance paying off debt with energizing an economy that’s being sapped by China’s slowdown.

Treasurer Joe Hockey revealed to Parliament on Tuesday a budget blueprint that will deliver a surplus in the 2019-20 fiscal year despite a recent slump in the price of iron ore, Australia’s most lucrative export.

The deficit for the current fiscal year ending June 30 is forecast at AU$39.4 billion, less than the AU$40.4 billion predicted in December but AU$10 worse than the government had forecast a year ago.

Cuts in spending will be used to finance new programs including AU$5.5 billion to give more than 2 million small businesses tax breaks and AU$ 4.4 billion to help 165,000 working parents pay for child care.

Indonesia is the biggest loser from Australia’s plan to slash its foreign aid budget by almost 20 percent to 4.1 billion Australian dollars ($3.2 billion) in the next fiscal year which begins on July 1.

Weeks after recalling its ambassadors from Jakarta in protest at the executions of two Australian drug traffickers, the government plans to cut Indonesian aid by 40 percent next year to AU$323 million.

Most aid recipients in East Asia are to receive similar cuts, while Cambodia, which has agreed to resettle refugees rejected by Australia, is alone in maintaining its funding at AU$52.4 million.

The government also hopes to raise billions of dollars through new laws that would make 30 multinational companies, who have not been named, pay double the tax they owe if they try to shift profits earned in Australia to countries with lower tax rates.

Budget documents show that a near halving of the iron ore price was the biggest factor in lower Australian tax receipts in the past year, reducing revenue forecasts by AU$14 billion for next fiscal year and by AU$52 billion over four years.

Australia produces a third of the world’s iron ore and China buys 80 percent of Australian production. Iron ore sales have provided 15 percentage points of Australia’s GDP growth during the mining boom years of the past decade.

In the budget, the Treasury Department’s forecast for the iron ore price is reduced from $96 a metric ton to $48. The price peaked at $185 in 2011.

Hockey said the forecasts were the best available.

“I’m more bullish about China than a number of other people,” Hockey told reporters. “I have always been cautious about our forecasts.”

The budget predicts the deficit will continue to shrink annually.

The budget documents also predict that net Australian debt will peak at 18 percent of GDP in 2016-17 or $313 billion. Goss debt is expected to reach $573 billion in 2025-26.

Unemployed rose to 6.2 percent last month and is forecast to peak at 6.5 percent next fiscal year before falling to 6 percent in 2017-18.

Australia’s central bank cut the benchmark interest rate to a record low 2 percent last week in a bid to jolt businesses outside of mining and gas industries into filling the void in economic activity left by the slump in commodity prices.

The budget documents forecast that growth will increase from 2.5 percent in the current fiscal year to 2.75 percent next year. Growth will reach the Australian long-term average of 3.25 percent in 2016-17.

The budget measures will have to be approved by a hostile senate in the coming weeks before the budget plan can take effect.

Last year’s budget was widely seen as unfair and was blamed for a decline in business confidence in the months that followed. A hostile senate blocked key money-saving measures.

Prime Minister Tony Abbott survived a challenge to his leadership from within his ruling party in February in response to the coalition government’s poor opinion polling. He risks a second challenge if another unpopular budget is stalled in the senate.

The Australian government posted budget surpluses thanks to the mining boom for several years until the 2008 global financial crisis demanded stimulus spending to keep the AU$1.7 trillion economy growing into a 25th continuous year. However Australia’s debt level remains relatively low compared to other wealthy countries.

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