May 7, 2018 / 10:00 PM / 4 months ago

Tax cuts, spending boost likely in budget as Australia eyes return to surplus

* Budget to include big infrastructure spending and tax cuts

* Speculation government could announce quicker return to surplus

* Centre-right coalition pressured by weak polls, banking scandal

* Treasurer to give 2018/2019 budget at 7.30 pm Tuesday (0930 GMT)

By Swati Pandey and Jane Wardell

CANBERRA, May 8 (Reuters) - Australia’s centre-right government is expected to announce hefty health and infrastructure spending and deliver some voter-sweetening tax cuts in an annual budget on Tuesday that unofficially kicks off campaigning for elections next year.

Speculation is also growing that recent growth in government coffers, largely from company taxes, will let the Liberal-National coalition fulfil its promise of returning the finances to surplus a year earlier than planned. There has been almost a decade of deficits.

Prime Minister Malcolm Turnbull needs a positive response to the budget after a series of setbacks, including a dual citizenship crisis and a sex scandal involving his deputy, that have seen his popularity plummet in polls from record highs of late 2015.

Revelations of serious misconduct in Australia’s powerful banking sector - during an ongoing inquiry the government initially resisted as unnecessary - have ramped up the pressure.

While Treasurer Scott Morrison recently laughed off suggestions he would be playing Santa on Tuesday, warning instead that tax cuts targeting lower incoming earners would not be “mammoth”, he has moved away from his “debt and deficit disaster” rhetoric of recent years.

“Our budget is one that stays on track to a balanced budget, but it is also one that is strengthening the economy so we can do these things,” Morrison said on Sunday, justifying higher debt and spending to boost economic growth.

In its mid-year review in December, the government forecast a A$10.2 billion ($7.69 billion) surplus in 2020/21, the first since 2007/08, from an estimated A$20.5 billion deficit for 2018/19.

In the 12 months to March, Australia’s budget deficit shrank to A$14 billion, or around 0.8 percent of GDP, the smallest annual shortfall for nine years, official data shows. That’s lower than Morrison’s projection of a deficit of around A$20.5 billion for this financial year.

Morrison declined to say if the 2019/20 budget will forecast a surplus, noting only the intent to “return to that level as soon as possible”.

AAA RATING

Australia’s A$1.8 trillion ($1.4 trillion) economy has outperformed many rich world peers since the global financial crisis, but in recent years it has struggled to manage the end of a mining investment boom that underpinned much of its wealth.

The country still holds a coveted triple-A sovereign rating from Standard & Poor’s, Moody’s and Fitch.

But S&P put Australia on a “negative watch” in mid-2016, citing deteriorating government finances, and some economists warn that more spending before a federal election due in 2019’s first half could put the pristine rating at risk.

Annette Beacher, Asia-Pac macro-strategist at TD Securities, predicted “there won’t be anything in the budget to shift S&P off its negative outlook”.

Net debt is seen blowing out as the government is expected to spend around A$24 billion on national infrastructure over the next 10 years, several economists said.

The government also ditched plans for an A$8 billion levy on voters while still promising to fully fund a new national insurance project to financially support people with disabilities and their caregivers.

Morrison has already flagged cutting the corporate tax rate to 25 percent from 30 percent, despite failing to push the measure through parliament amid headwinds from the banking industry scandal.

He has argued the cut is needed to keep Australia competitive for investors, but the opposition Labor Party has said it is a meaningless “zombie cut” without parliamentary support.

Morrison is also expected to upgrade forecasts for economic growth. The Reserve Bank of Australia last week predicted domestic activity would accelerate this year to 3.25 percent from 2.4 percent in 2017. (Reporting by Swati Pandey and Jane Wardell; Editing by Richard Borsuk)

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