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As Australia’s decadelong mining boom evaporates, the government is girding for what the finance minister calls a harsh “new reality.”

May 1, 2013, 6:22 a.m. ET

Australia’s ‘New Reality’ Sets In as Mining Boom Wanes

By ENDA CURRAN

SYDNEY—Australia faces a harsh “new reality” as a decadelong mining boom evaporates, forcing future governments to seek unpopular savings to avert steep deficits, Finance Minister Penny Wong said. “We have to deal with this new reality,” Ms. Wong said from her Sydney offices ahead of a budget in two weeks that the government already has warned will miss its revenue forecast by about 12 billion Australian dollars (US$12.4 billion). “The new norm is, certainly in the near term, a lower level of revenue growth,” she said. “This budget has to deal with that economic reality, and that is not a popular thing to go out and sell to the public.” And controlling deficits will become even harder in future, Ms. Wong said., as the mining boom fueled by Asia’s demand for Australian raw materials peaks this year and begins to cool.

Prime Minister Julia Gillard‘s Labor government late last year abandoned a promise to return the budget to surplus, after getting less revenue than expected from taxes on Australia’s resource-rich mining companies.

The nation’s strong currency—running for almost the past three years near record highs against the U.S. dollar—has worsened matterssqueezing corporate tax receipts as manufacturers and other companies that rely on overseas markets make less profit.

The anticipated revenue shortfall this year, worsened by a sharp drop in commodity prices in 2012 alongside China’s slowdown,has complicated the Labor party’s plans to plow billions of dollars into health and education reforms ahead of a September election most opinion polls indicate it will lose badly to the center-right Liberal-National coalition.

Triple-A-rated Australia, the world’s 12th-largest economy, has been viewed as among star performers in the world economy, notching up two decades of uninterrupted annual growth and surviving the global financial crisis without a recession.

Its economy has been buoyed by the voracious appetite of China, its biggest trading partner, for resources such as coal and iron ore. Last year, it recorded a A$44 billion deficit. Some analysts now expect treasurer Wayne Swan to forecast a deficit of as much as A$25 billion—close to 2% of gross domestic product.

The government pledged before an election in 2010 to deliver a budget surplus this fiscal year, which ends June 30, of close to A$1 billion.

Ms. Wong said the coming budget won’t be decked with measures to spur growth in nonmining sectors of the economy, a task the Reserve Bank of Australia has taken upon itself in recent months.

Still, she said the government’s disciplined fiscal policy overall had made it easier for the central bank, if needed, to cut rates further to stimulate the economy, as the mining boom ebbs.

The central bank has lowered the benchmark interest rate six times since late 2011 to a near-record-low 3%, hoping to revive consumer spending as mining companies reaching full capacity scale back their investments.

It has warned that unemployment may rise sharply this year from the current 5.6% level, still low by U.S. and European standards.

The government wouldn’t be tempted to exaggerate the health of the nation’s finances in an election year, Ms. Wong said.

“The mood in government is you have to make the right economic calls for the future even if it’s not the popular political course.”

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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