Australia Needs to Make ‘Difficult’ Budget Decisions, Swan Says

Australia needs to curb spending and make “difficult budget decisions” because tax revenue won’t grow as quickly as it did between 2004 and 2007 during the mining industry’s previous boom, Treasurer Wayne Swan said.

“We shouldn’t expect to see a repeat of the rivers of gold that flowed into the government coffers” when an additional A$334 billion ($359 billion) in tax revenue was generated, Swan said yesterday in his weekly economic notes. “The revenues will still be there, but we shouldn’t expect” a similar surge.

A rising Australian dollar and consumer caution after the global financial crisis are hurting parts of the economy, Swan said. The Australian dollar today advanced to $1.0776, the highest since it was freely floated in 1983. The currency’s gains, spurred by revenue from shipments of coal and iron ore to China, have hit Australian tourism, manufacturing and education.

The March 11 earthquake and tsunami disaster in Japan is forecast to cut commodity export revenue by about A$2 billion, while floods and a cyclone in Queensland state earlier this year will likely cost the economy A$9 billion, Swan said.

Prime Minister Julia Gillard pledged to return the budget to surplus in the fiscal year ending June 30, 2013. Swan in November forecast a A$41.5 billion deficit in the current fiscal year, followed by a A$12.3 billion shortfall the next year. The government projects a A$3.1 billion surplus in 2012-13.

The budget is scheduled to be presented to parliament on May 10. Gillard’s Labor Party lost its majority at the August 2010 general election and needs the support of four non-party lawmakers to pass legislation in the lower house.

Rapid Expansion

Australia benefited from a “massive, A$334 billion upward revision to tax revenue” in the last mining boom, Swan said.

“These near-term challenges are only part of the story,” the treasurer said in his report yesterday. “The outlook for our economy over the years ahead is much more positive, and this brings a different set of challenges.”

The “unprecedented” pipeline of mining and energy projects being undertaken in Australia now is expected to boost prices and wages, he said. Australia has about A$133 billion of minerals and energy projects planned by companies including BHP Billiton Ltd., Rio Tinto Group, Santos Ltd. and Chevron Corp., Resources Minister Martin Ferguson said in November.

“The right thing to do in these circumstances is to restrain spending and budget for surpluses in the years ahead so we don’t compound these pressures on our economy,” Swan said. “This means taking difficult budget decisions now to keep ahead of the challenges, rather than playing catch up down the track when the consequences of inaction could be much more severe.”

‘Cry Poor’

The Australian government wants to use revenue from taxing profits at mining companies such as BHP and Rio partly to lower the corporate tax rate to 29 percent from 30 percent.

The Greens, which will hold the balance of power in the Senate from July, oppose the proposed tax cuts “for big business,” Bob Brown, the party’s leader, said March 29.

Lowering the corporate tax rate to 29 percent would cost the government A$3.1 billion, Greens lawmaker Adam Bandt said yesterday on Channel Ten’s “Meet the Press” program.

“The government cannot cry poor while at the same time cutting off a significant income stream,” Bandt said in e- mailed statement following the television interview. www.bloomberg.com

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Treasuries Advance on European Sovereign-Debt Crisis, Decline in Equities

Treasuries rose, pushing 10-year note yields to the lowest level in more than three weeks, as speculation Greece will be unable to avoid a default and declines in stocks boosted demand for a refuge.

Treasuries also gained on bets a report this week will show U.S. home sales failed last month to recoup February’s losses. Greece’s 10-year yields climbed to a euro-era record even as officials said restructuring isn’t an alternative. Finland’s euro-skeptic bloc won support in yesterday’s election, fueling concern plans to resolve the region’s debt crisis will flounder.

“Any time you have additional information that creates more uncertainty as it relates to the sovereign-debt crisis, it’s going to increase demand for safe-haven securities,” said James Barnes, a money manager in Wyomissing, Pennsylvania at National Penn Investors Trust, which oversees $1 billion in fixed-income assets.

Yields on 10-year notes fell three basis points, or 0.03 percentage point, to 3.38 percent at 8:59 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.625 percent securities maturing in February 2021 gained 1/4, or $2.50 per $1,000 face amount, to 102 1/32.

The benchmark note’s yield touched 3.36 percent, the lowest level since March 24. The two-year note yield slipped one basis point to 0.69 percent and touched 0.67 percent, also the lowest since March 24.

“Safe-haven flows are continuing to play a role, and that’s temporarily holding back Treasury yields,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, Netherlands. “There’s somewhat of a slowdown in the U.S. economy, but I think most people already have taken that into account.”

Stocks Slide

The Stoxx Europe 600 Index slid 0.8 percent following last week’s 1.4 percent decline. Standard & Poor’s 500 Index futures expiring in June decreased 0.7 percent.

The cost of insuring Greek sovereign debt jumped 56 basis points to a record 1,221, according to CMA prices for credit- default swaps, indicating there’s a 64.5 percent probability of default within five years. Swaps on Portugal climbed to an all- time high of 616.5, according to CMA, and contracts on Ireland increased to 580.

“Euro-zone peripheral concerns are behind this morning’s rally,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “We see that echoed in weakness in European equities and wider credit-default swap spreads on Greece, Ireland and Portugal’s debt.”

Greek Request Reported

Greece’s government asked the International Monetary Fund and the European Union to extend the maturities of all the country’s debt, the Eleftherotypia newspaper said. Finance Minister George Papaconstantinou brought the request to EU finance ministers at their meeting in Hungary on April 8-9 and to representatives of the EU, European Central Bank and IMF who visited Athens in April, the Athens-based newspaper said, without saying where it got the information.

“Restructuring is not an issue we’re discussing,” Papaconstantinou said April 16 in Washington. “The pain and the cost” of doing so would be greater than repaying lenders.

A debt restructuring would be harmful for the country, and the government rejected it, said a Greek government spokesman, George Petalotis, responding to questions today in Athens.

In the U.S., purchases of existing homes climbed 2.5 percent in March after dropping 9.6 percent in the previous month, according to the median forecast in a Bloomberg News survey before the National Association of Realtors’ report April 20. Separate figures tomorrow may show housing starts rose 8.6 percent last month following a 23 percent plunge in February.

U.S. Core CPI

Treasury 10-year note yields slid nine basis points on April 15 after the Labor Department said the consumer price index excluding food and energy rose 0.1 percent in March, less than the 0.2 percent increase forecast by economists.

“There’s a better inflationary tone to the market,” National Penn’s Barnes said in a telephone interview. “We have some room in Treasury prices to appreciate based on inflation expectations.”

Investors are paying the smallest discounts for Treasuries other than the newest, most-traded bonds since the start of the financial crisis, a sign of growing demand even as the Federal Reserve’s $600 billion buying program approaches its conclusion.

Yields on older notes with 10 years left to maturity have fallen to within 11.4 basis points, or 0.114 percentage point, of those on the newest securities of the same maturity, down from the peak of 66.1 in January 2009, according to data from Barclays Plc. The difference for so-called off-the-run notes narrowed to as little as 6.6 basis points in February, the least since May 2007.

Unlikely to Soar

While investors typically pay the most for benchmark Treasuries, the shrinking gap suggests that U.S. borrowing costs are unlikely to soar when the central bank’s second round of so- called quantitative easing ends in June. The Barclays data show that the spread in yields is less now than in the five years before the credit crisis began in 2007.

“There will not be major disruptions in the functioning of the Treasury market,” said Eric Pellicciaro, the New York-based head of global rates investments at BlackRock Inc., which manages about $3.56 trillion in assets. Participation in the Treasury market will “remain high, if not higher,” he said.

Traders became more bearish on Treasuries through the end of June, according to a survey by Ried Thunberg ICAP Inc. The company’s sentiment gauge fell to 46 for the seven days ended April 15 from 47 the week before. A figure less than 50 indicates investors expect prices to decline. www.bloomberg.com