Treasurer says economy 'whacked'

Strong dollar hits Australia

Bloomberg, AFP-JIJI

The strong Australian dollar gave an “unprecedented whack” to tax revenue the government needed to return the nation’s budget to surplus, Treasurer Wayne Swan said Sunday.

Spending on disability payments and a program to improve schools are the “big-ticket items” in the budget to be announced on Tuesday for the year through June 2014, Swan said in his weekly economic note.

“Our economy has outperformed the developed world over the past five years,” he said. “But it’s true too that this strength has also resulted in a sustained high dollar, bringing with it a set of new challenges, and contributing to an unpredictable and unprecedented whack to our revenue base.”

The local dollar’s resilience has slashed government earnings, spurring Prime Minister Julia Gillard to drop plans to boost help for low-paid families even as her Australian Labor party trails in polls before elections due in September.

The party’s credibility was damaged after the government in December backtracked on returning the budget to surplus this fiscal year.

“The responsible course of action when faced with that is to support jobs and growth,” Swan said Sunday in an interview on Channel Nine. “I’ve taken the responsible course. I’ll take my medicine. I accept the politics are very uncomfortable.”

Swan’s economic stewardship through the global downturn earned him Euromoney’s Finance Minister of the Year award in 2011, and he boasted that Australia would again beat the world — this time by returning to surplus in 2013.

Labor fell a further 2 percentage points behind Tony Abbott’s Liberal-National coalition and is now trailing by 12 points on a two-party preferred basis, according to a Newspoll published in the Australian newspaper on May 7.

The spending plan will outline a “pathway back to surplus,” Swan said.

Gillard’s government faces revenue writedowns of about 17 billion Australian dollars ($17 billion) in this week’s budget, Swan said.

The Australian budget will target multinational corporations that funnel investments through the country to eliminate their domestic tax liabilities, the Australian Financial Review reported Saturday.

The government plans to close a loophole allowing companies to load up their Australian operations with debt and claim large tax deductions, the newspaper said.

“There needs to be a very substantial clampdown on tax havens, on high-wealth individuals hiding their money in tax havens and profit shifting, which occurs for many multinational companies,” Swan said Sunday.

Australia will revise a tax treaty with Switzerland for the first time since it was signed in 1980, helping to strengthen ties between revenue authorities in the two countries and overcome “bank secrecy provisions,” Assistant Treasurer David Bradbury said Sunday in an emailed statement.

The Australian dollar dropped below parity with its U.S. counterpart for the first time in more than 10 months on Friday, three days after Australia’s central bank cut interest rates to a record low.

The so-called Aussie’s stretch above parity, the longest since exchange controls were scrapped in 1983, sparked calls for policy action from union leaders and businesses including Orica Ltd., the world’s biggest producer of industrial explosives.

A decline in the Australian dollar is needed to help manufacturers compete with cheaper imports, Orica Chief Executive Officer Ian Smith said in an interview Sunday with the Australian Broadcasting Corp.’s “Inside Business” program.

The Reserve Bank of Australia should do “everything in their power to get it down,” Smith said. “The overall state of the economy is being hollowed out.”

Three of Australia’s four major lenders, including National Australia Bank Ltd., on May 7 passed on in full the central bank interest-rate cut for the first time in 17 months, sending benchmark home-loan costs to the lowest since 2009.

NAB, the country’s largest lender by asset value, sees scope to cut mortgage rates regardless of central bank decisions as the country moves into “a more benign funding environment,” Chief Executive Officer Cameron Clyne said in an interview broadcast on Channel Nine’s Financial Review Sunday.