AUSTRALIAN Treasurer Wayne Swan will eschew European-style austerity as a stronger currency slows growth, wagering the government can win a September 14 election fought on jobs and absorb the political pain of a broken fiscal surplus promise.

The underlying cash deficit will be A$18 billion in the 12 months to June 30, 2014, Swan said in Canberra last week. The A$19.4 billion shortfall this fiscal year is 1.3 per cent of GDP, compared with a projected A$1.1 billion surplus released in the government’s mid-year review seven months ago.

“To those who would take us down the European road of savage austerity I say the social destruction that comes from cutting too much, too hard, too fast is not the Australian way,” Swan said in a speech to parliament.

“The alternative, cutting to the bone, puts Australian jobs and our economy at risk.”

Swan outlined a longer path back to the black that funds pledged spending on infrastructure, education and disability care, while saying restraint gives the Reserve Bank of Australia scope to cut record-low interest rates even further. Prime Minister Julia Gillard’s Labour government trails Tony Abbott’s opposition by double digits and has seen its economic credibility weakened as a stronger currency dents tax revenue and weighs on exporters and manufacturers.

“Challenging global conditions and the high Australian dollar have put huge pressure on the budget and led to a significant reduction in expected tax receipts,” Swan said, announcing a revenue shortfall of A$16.6 billion in fiscal 2014. “This government is providing a buffer to continued global uncertainty and giving the Reserve Bank of Australia more scope to cut interest rates, should it want.”

Treasury projects Australia’s unemployment rate will rise to 5.75 per cent by June 2014, up from 5.5 per cent last month, as the economy undergoes a ‘substantial transition’ from resource investment to growth-led by industries like housing construction.

Australia’s 2013-14 deficit will amount to 1.1 per cent of GDP, the budget showed. That compares with a US deficit equivalent to 5.4 per cent of the economy, Japan’s shortfall of seven per cent and the euro area’s gap of 2.6 per cent of GDP in the period, according to the International Monetary Fund’s fiscal monitor.

Two speed: Gillard and Swan, also her deputy, have struggled to protect the ruling Labour party’s electorate from the two-speed economy — a phrase officials use to distinguish resource-rich regions in the North and West that powered growth and hired workers during the mining investment bonanza, from struggling tourism, manufacturing and retailers of the South and East.

To help woo voters in the outer suburbs ahead of the election in four months, the government plans to spend A$24 billion on roads and railways in Sydney, Melbourne, Brisbane and Adelaide.

“Traffic congestion costs commuters time with their families and is estimated to cost our economy up to A$20 billion a year by 2020 if not addressed,” Swan told parliament.

Funding a return to surplus and savings to offset pre- election announcements of a disability care programme, overhaul of education and the upgrade of transport infrastructure, are measures including tightening company tax breaks for a saving of A$4.2 billion through June 2017. It will also scrap a cash payment to the parents of newborns and cap family payments for a saving of A$2.4 billion.

“This year we face the second largest revenue write-down since the Great Depression,” Swan said in the speech. “This budget sets a sensible pathway to surplus, while making room for the big investments in our nation’s future.”

The government won’t proceed with proposed family tax benefit that would’ve cost A$2.5 billion, and will link cigarette-price increases to faster-rising wages instead of inflation. It didn’t disclose the extra cash raised from the measure.

Treasury forecasts the economy will expand 2.75 per cent in the 12 months beginning July 1 and accelerate to three per cent the following year. Consumer-price growth will slow to 2.25 per cent in the 12 months to June 30, 2014, from 2.5 per cent this fiscal year, the budget papers show.

Mining projects: Treasury predicts resource investment will reach a record of more than eight per cent of GDP in 2013-14 and said projects worth A$260 billion are currently committed or under construction. It said the central bank’s two percentage points of rate reductions over the past 19 months are having an impact, with dwelling investment ‘already showing signs of a recovery’.

Governor Glenn Stevens last week cut the overnight cash-rate target by a quarter percentage point to a record-low 2.75 per cent. Traders are pricing in about a 30 per cent chance he will lower borrowing costs another quarter point to a fresh record 2.5 per cent at the June 4 meeting, according to swaps data compiled by Bloomberg prior to the release of the budget. They show about a 70 per cent chance Stevens will do so by September, on the eve of the election.

Rate cuts: “There’s no doubt that a key issue for voters in marginal electorates is the level of mortgages rates, so an ideal situation for the government would be to see another interest- rate cut around August, or better still September, which is quite possible,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has about $130 billion under management. “A lot of marginal voters wouldn’t really care if there’s a surplus.”

Australia still has one of the highest benchmark rates among major developed nations. Central banks from Europe to New Zealand to Canada have policy rates ranging from 0.5 per cent to 2.5 per cent. Rates in Japan and the US are near zero.

The Australian dollar has soared 66 per cent from its 2008 crisis low on October 27 as quantitative easing in the US and Japan to stimulate their economies unleashes cash seeking yield.

Dollar squeeze: Manufacturers are beginning to buckle under the sustained strength of the local dollar, with General Motors Co.’s Australian Holden unit announcing the loss of about 500 jobs last month. The impact on the ruling Labour party’s blue-collar supporters has taken a political toll on Gillard. Her Labour Party trails Abbott’s Liberal-National coalition by 12 percentage points, according to a newspoll published in The Australian newspaper on May 7.

Treasury projects the economies of China and Japan, two of Australia’s key export destinations, will ease next year.

“We’re coming into a difficult time for the economy,” AMP’s Oliver said. “It is quite a difficult budget for the government, a sort of balancing act, we no longer have the luxury of an easy revenue flow coming through.” —Washington Post/Bloomberg