By Stella Qiu
SYDNEY, May 12 (Reuters) - Australia is set to deliver a narrower than previously flagged budget deficit on Tuesday as the government banks commodity-driven revenue windfalls, while seeking to bring forward politically sensitive reforms without stoking inflation.
Figures from Treasury showed budget deficits would be lower in each financial year, compared with the government's last economic projections in December. The bottom line is forecast to be A$44.9 billion better than initially
thought.
Details of the budget will be announced by Treasurer Jim Chalmers in parliament at 1930 local time (0930 GMT).
"There will be more than the usual amount of savings and more than the usual amount of reforms in the face of more than the usual amount of global economic uncertainty," he told reporters in Canberra on Tuesday.
Chalmers added there will be five major packages in the budget, focusing on fuel security, cost of living and housing, productivity, tax reforms and savings.
SPENDING RESTRAINT
The budget will feature a major overhaul of its disability welfare programme, whose ballooning costs are projected to blow a hole in the budget bottom line. That is expected to deliver savings worth more than A$35 billion over the next four years.
Higher commodity prices from the Iran war and elevated inflation would also lift revenues, but the government is under pressure to rein in public spending to avoid fanning inflation, which was already running too hot before the Iran war broke out.
The Reserve Bank of Australia has lifted interest rates three times this year to 4.35% to head off the war-driven energy shock, warning growth will stay anemic and unemployment will rise further.
"Our concern with the budget is that there will be new spending initiatives delivered and these will be offset by planned, rather than already delivered, spending cuts elsewhere," said Paul Bloxham, chief economist, Australia, NZ at HSBC.
"If fiscal policy does end up being expansionary, the risk is that the RBA has to hike further yet, increasing the risk that a recession will be delivered to get inflation back to target."
INTERGENERATIONAL EQUITY
Australia's low debt to GDP ratio and coveted AAA sovereign credit rating usually mean the federal budget holds few surprises for markets. However, this year will be closely watched due to possible changes to property and investment taxes, the very proposals that cost Labor a national election just seven years ago.
Hopes are high that Chalmers will unveil changes to capital gains tax discounts and negative gearing, policies long criticised for skewing housing ownership towards older wealthy investors as young Australians struggle to get into the property market.
While details are thin, local media reports the government may scrap the 50% capital gains tax discount on assets held for more than a year and return to the pre-1999 policy of taxing inflation-indexed gains. Negative gearing, which allows investment losses to be offset against taxable income, is likely to be limited.
The budget will also set aside A$10 billion ($7.22 billion) to establish permanent government-owned fuel reserves to prevent the kinds of localised fuel shortages across the country seen recently due to the Iran war.
The government has also committed an extra A$53 billion in defence spending over the next decade, including a A$14 billion lift over the budget forecast period.
(Reporting by Stella Qiu; Editing by Sam Holmes)
