Australia budget concerns a 'real issue': central bank

SYDNEY - Australia's central bank governor Friday called on the nation's politicians to tackle the "real issue" of the country's growing budget deficit, saying action was needed to retain credibility in financial markets.

Treasurer Joe Hockey is expected to unveil a further blowout in the government's federal deficit in his mid-year economic and fiscal outlook Monday, with some estimates of a Aus$5 billion (S$5.43 billion) increase to Aus$35 billion.

Government revenue has been hurt by sharp declines in commodity prices in a resources-driven economy where iron ore is the country's largest export.

Weakening demand from Australia's largest trading partner China has also weighed on growth.

"I think much of the public debate about the fiscal position still is carried on as though that reality isn't actually real," Reserve Bank of Australia chief Glenn Stevens told The Australian Financial Review.

"But it is real, as best we can tell on the best estimates that Treasury and Finance can do. That is a real issue.

"The conversation we need to have is about heading that problem off before we hit it so that we don't ever get into the position of losing credibility in capital markets and then be forced to be much more pro-cyclical with our policies." Stevens said there has been an "over-simplification" in debates about the government deficit, which saw the Tony Abbott-led administration unveil a tough budget in May that seeks to cut back spending and welfare.

Community disquiet about some spending cutbacks by the conservative government, which was elected to power last year, has seen some measures designed to reduce the budget deficit remain stalled in the upper house Senate.

Some revenue-generated policies such as carbon and mining taxes have been scrapped following election promises by the government.

Falling oil price 'good news' 

Stevens said while plunging oil prices were bad for producers, it was a "bullish point for global growth".

"Historically, low oil prices have been good for the global economy. In my opinion on the whole, this is good news, not bad news," he said.

US oil prices on Thursday fell below US$60 a barrel for the first time since July 2009, taking the loss to 44 per cent since June.

The slump on crude has hit Australian energy producers, with listed Red Fork Energy, which develops US shale oil projects, falling into receivership Thursday.

The central banker added that as commodity prices plummet, his country needed a weaker exchange rate to support non-mining industries.

"If I had to pick a figure now, I would say probably 75 is better than 85," he said. Stevens said last December the Australian dollar needed to decline to 85 US cents.

"I think the adjustment we have been seeing is taking us closer to where most fundamental metrics would have you be. But I doubt that adjustment is yet complete."

The local unit sank to a new four-and-a-half year low of 82.15 US cents (S$1.08) after the interview was published Friday.

Stevens kept the door open to the possibility of interest rates falling below their current record low of 2.5 per cent, but also played down market anxiety about weakness in the economy.

Pressure has increased on the Reserve Bank to ease rates as the economy tries to grow its non-resources sectors amid an expected sharp fall-off in mining investment next year.