World News Engine: Australia told to brace for painful budget

Australia told to brace for painful budget

Australian Prime Minister Julia Gillard has warned the first budget under her leadership will be tough and painful, as the government strives to return to surplus despite costly natural disasters.

Gillard, who became prime minister last June, said the government needed to make hard decisions as it seeks to reduce inflationary risks caused by an unprecedented Asia-driven mining boom.

"We can take these tough decisions now to bring the budget back to surplus or we can put them off to the never-never which will just make these decisions harder and the cuts more severe when the time comes," she said.

"Taking some pain now will ensure that households avoid a lot more pain in the future," she told a Sydney event late Thursday.

Gillard said her centre-left Labor government would return the budget to surplus in 2012/13 as promised, even as it continued to roll out its A$36 billion national broadband network and rebuild flood and cyclone-hit towns.

The prime minister made no mention of where the cuts would fall on May 10 or how much the massive floods which swamped the coal-producing and farming state of Queensland and farmlands in Victoria in December and January would cost.

The government has already said that Australian growth, based on soaring commodities exports to Asia, will be hit by the floods disaster, which covered an area bigger than France and Germany combined in Queensland.

Gillard said offsetting this was the mining industry which was experiencing its biggest boom in 150 years, with investment in the sector increasing five-fold since 2004.

"The challenge for the country and for the economy is to manage that boom well - to nurture it so that it lasts -- by investing in productivity while preventing inflationary pressures from running out of control," she said.

Australia, dubbed the "wonder from Down Under", was the only major Western economy to avoid recession during the financial crisis thanks mainly to its coal and iron ore exports and emergency stimulus package.

It now has unemployment of just 5.0 per cent and a currency at historic highs against the US dollar, although interest rates have risen rapidly since dropping dramatically during the crisis. They are currently at 4.75 per cent.

"When the private sector was in retreat, the government stepped forward to fill the gap - it was controversial but it was right," Gillard said in reference to the stimulus package which included cash payments to taxpayers.

"Now that the private sector is charging forward, it's time for the government to pull back on spending," she said.

Parliament last month approved a one-off, A$1.8 billion tax to help pay for the floods damage, and keep the government on track to balance the budget.

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