Stocks rise after Australia rules out fresh austerity measures

Australia's stock market responded with modest gains after treasurer Joe Hockey, a year after declaring the days of "borrow and spend" were over, shifted the government's strategy to boosting the economy by ruling out fresh austerity measures.

Delivering his second budget against the backdrop of a collapse in commodity prices and lacklustre growth, Mr Hockey on Tuesday cut taxes for small businesses and increased spending on childcare and infrastructure in a bid to create jobs.

Mr Hockey proposed to pay for the new spending measures by redirecting funds from existing programmes, raising revenue from multinational companies avoiding tax and levying sales taxes on overseas digital services.

"Every nation must live within its means, and Australia is no different. But we cannot tax our way to prosperity," he said.

Amid a general sense of relief at the absence of any nasty surprises, Australia's S&P/ASX 200 added 0.2 per cent in early trading on Wednesday. Overnight, the Australian dollar settled 1.1 per cent higher at US$0.7976, its best Budget-day performance in two decades.

The government forecast at least four more years of budget deficits, although it expects the deficit to fall from its current level of A$41.1bn to A$35.1bn in 2015-16 and A$25.8bn in 2016-17. As a percentage of gross domestic product the forecast deficits are equivalent to 2.5 per cent, 2 per cent and 1.3 per cent respectively.

Last year's budget projected the deficit in 2015-16 to be A$17bn, half the estimate this time.

The switch of emphasis to stimulating growth from previous proposals of swingeing cuts to welfare is a response to the barrage of criticism the government faced following its first budget last year. Billions of dollars of proposed savings were blocked by the Senate, delivering a near-fatal blow to Prime Minister Tony Abbott, who faced a leadership challenge within his party earlier this year.

"This is a critical budget," said Ian McAlistair, politics professor at Australian National University. "If it gets blocked by the Senate like the last one Abbott is gone. That is why he is playing it safe."

Australia's economy is facing difficulties from the end of a decade-long mining investment boom, which boosted national income and delivered several years of surplus budgets. A slowdown in its biggest trading partner, China, falling commodity prices and fragile business confidence are all weighing on the economy.

The deficit projections in the budget are worse then those contained in last year's budget and a midyear economic review published in December. This is in part due to the government's failure to pass some of last year's budget cuts, a fall in the value of iron ore - Australia's biggest export - and subdued growth.

The government downgraded its economic growth forecast to 2.75 per cent for 2015-16 from a December forecast of 3 per cent. It predicts Australia's debt to GDP ratio will peak at about 27 per cent in 2016-17.

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"The government tried to be innovative last year and got whacked for its trouble," said Mark Melatos, economics lecturer at the University of Sydney. "There's an election coming soon, so they won't want to rock the boat politically."

Asked by reporters if the government was abandoning its pledge to tackle the budget deficit, Mr Hockey said the budget was about "growing the economy". "Despite the headwinds, our timetable back to a budget surplus is unchanged from last year," he said.

Last year he predicted the budget would return to surplus in 2019.

Five budget highlights

Fighting terrorism: an extra A$450m for intelligence services and a further A$750m for military operations in Iraq. Overall defence spending will increase by A$9.9bn in 2015-2019, compared with 2014-18.

Small business tax cut: businesses with an annual turnover of less than $2m will have their tax rate lowered to 28.5 per cent from 30 per cent. Extra tax deductions on purchases worth up to $20,000. Self-employed people get a tax discount worth up to $1,000 a year.

Netflix tax: overseas companies selling digital services in Australia, such as Netflix and Google, will from 2017 have to levy a 10 per cent goods and services tax, which will flow to states.

Tax avoidance: multinationals that shift profits out of Australia will be forced to pay taxes or face fines of 100 per cent of unpaid taxes. The legislation, which will be implemented in January - ahead of multilateral efforts to tackle tax avoidance led by the OECD - will initially target 30 large foreign companies that pay little or no tax.

Childcare: $3.5bn earmarked to boost the childcare system. But parents will no longer be able to supplement a state-paid parental leave scheme if their employer provides a more generous scheme.

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