Re-election pledges to tip Australian budget back into red

By Stella Qiu

SYDNEY (Reuters) -Australia is set to deliver a budget deficit this week, snapping two rare years in the black as Prime Minister Anthony Albanese doles out household relief to boost his re-election chances and global risks cloud the economic outlook.

Ahead of his fourth budget on Tuesday, Treasurer Jim Chalmers has said the budget would be "responsible", with targeted cost of living measures front and centre in the budget.

"It's a budget which is all about the cost of living, but also making sure our economy is more resilient in the face of all this global economic uncertainty," Chalmers said in a TV interview on Sunday.

The government on Sunday announced extended electricity rebates for households until the end of 2025, costing the budget bottom line of A$1.8 billion ($1.13 billion). It would also help more first home buyers enter the property market through a shared equity scheme.

It would also bring forward A$1 billion in defence spending to accelerate its military capability at a time when other U.S. allies are also boosting their spending on defence.

Most major initiatives - such as an A$8.5 billion investment in the public health system and A$7.2 billion to upgrade a major highway in Queensland - have already been announced. Chalmers has said there would be fewer surprises on budget day than in the past.

The increased spending means the underlying fiscal bottom line for the financial year of 2024/25 will be back in the red after two years of surpluses.

However, analysts expect the shortfall will not be as large as the A$26.9 billion deficit first flagged by the government in its mid-year economic projections in December. Australia's debt to GDP ratio is still relatively low compared with its global peers.

ANZ expects a deficit of A$20 billion, AMP tipped A$17 billion, while the Commonwealth Bank of Australia predicted A$22.5 billion.

"Although there may be adjustments to the near-term growth outlook, the post-pandemic upside revenue surprises of recent years are unlikely to continue," said Cherelle Murphy, chief economist at EY Oceania.

For the years to come, the deficit is expected to swell as spending on healthcare, defence, aged care and interest payments ramp up.

MIXED FORTUNES

Australia is due to head to the polls no later than May 17, with Albanese struggling to soothe voters' angst over high living costs, still elevated borrowing costs and worsening housing affordability. Polls showed his centre-left Labor Party neck and neck with the conservative Coalition opposition.

At the same time, the economy has moved past its trough, expanding at the fastest pace in two years last quarter. The labour market has stayed surprisingly resilient, with the unemployment rate hovering at a historically low 4.1%.

The central bank also cut interest rates for the first time in over four years last month, helping Labor claw back some ground with disgruntled voters. However, it did warn prospects of further policy easing are not guaranteed.

Investors have not fully priced in another rate cut until July.

Even though the economy is still on track for a soft landing, the outlook is increasingly uncertain. U.S. President Donald Trump’s economic policies could trigger a global trade war, and Australia, most reliant on trade with China, would stand to lose.

($1 = 1.5898 Australian dollars)

(Reporting by Stella Qiu; Editing by Sam Holmes)