Wayne Swan, Australia’s treasurer, pauses during a news conference at Parliament House in Canberra, Australia, Tuesday.

Australia faces record budget deficits until 2016 as it embarks on the biggest building program in its history, spending on roads, rail lines and Internet to blunt fallout from the worst recession in 75 years.

To pay for the stimulus plan, Swan will cut tax breaks, welfare payments and raise medical insurance costs for high-income earners as well as sell a record A$60 billion of bonds next fiscal year. To achieve long-term savings, he will raise the pension age to 67 years from 65 by 2023 in the first increase since the introduction of government payments to retirees in 1909.

“This is not an easy budget for easy times,” Swan, 54, told parliament Tuesday. “It contains the hard choices that chart the course back to surplus.”

The budget deficit will rise to A$57.6 billion in the 12 months through June 2010, almost double the A$32.1 billion shortfall in fiscal 2009 and equivalent to 4.9 percent of gross domestic product, Swan said. A year ago, the government forecast a surplus of A$22 billion in fiscal 2009.

The shortfall will hold at A$57.1 billion in 2011 before dropping to $44.5 billion in 2012 and $28.2 billion in 2013, Swan said.

Australia’s currency maintained gains, trading at 76.53 US cents as of 7:40 p.m. Sydney time Tuesday, from 76.55 cents before the budget was announced and 75.86 cents in New York on Monday.

Economy contracts

The economy will shrink 0.5 percent in the 12 months through June 2010 after stagnating in fiscal 2009, the budget papers said. It will grow 2.25 percent in fiscal 2011, before expanding 4.5 percent in both 2012 and 2013.

“The global recession has been unleashed on Australia with a brutal, uncompromising force,” Swan said. “Never before has a government had to frame a budget with an A$210 billion shortfall” in tax receipts over five years.

Swan also said it would be “crazy” to cut government services or raise taxes amid a slumping global economy.

In the US, President Barack Obama has proposed raising income-tax rates to help narrow a record budget shortfall and pay for a planned overhaul of health care. UK Chancellor of the Exchequer Alistair Darling this month raised taxes for top income earners to pay for government efforts to stimulate the economy.

Election looms

Tuesday’s budget may be Swan’s penultimate before Prime Minister Kevin Rudd’s Labor government, which won power in 2007, faces an election by the end of 2010. Rudd may call an early vote if the upper house Senate, which he doesn’t control, refuses to pass all of Tuesday’s budget measures.

Some voters “will be unhappy with the hard choices we’ve taken,” Swan said. “Especially those we have asked to contribute more, because they can afford to do so.”

To save about A$5.5 billion over four years, the government will reduce a rebate on private health insurance for people earning over A$75,000, reduce tax breaks for workers who make additional contributions to their compulsory pension funds, and limit welfare payments to wealthy families.

Between 2017 and 2023, the government will also gradually increase the pension age from 65 to 67 to offset the cost of an ageing population that will cut the ratio of workers to pensioners from 5 to 2.5 by 2050. “We have to put in place an essential reform to face this demographic timebomb,” Swan said.

Government debt

The savings will “put us on the path to surplus by fiscal 2016 and ensure Australia’s public finances remain among the strongest in the world,” he said.

Australia’s net debt is forecast to peak at 13.8 percent of GDP in fiscal 2014, Swan said. By contrast, most advanced economies will have a debt-to-GDP ratio of 80 percent, he added.

The government says a drop in global demand for commodities from Australia, the world’s biggest shipper of iron ore and coal, will trigger a rise in unemployment as companies such as BHP Billiton Ltd. fire workers and shelve expansion plans.

“The mining boom is unwinding,” Swan said.

The jobless rate will peak at 8.5 percent by June 2011, from 5.4 percent last month and a three-decade low of 3.9 percent in February 2008, the government said.

By contrast, most advanced economies face “double-digit rates” of unemployment, Swan said.

To spur an economy in its first recession since 1991, the government will spend an extra A$8.5 billion on roads, railways and ports and A$3.5 billion to boost the use of energy from clean sources. It will also spend A$2.6 billion on universities, A$3.2 billion on hospitals, and an initial investment of A$4.7 billion on a national broadband network.

Homebuyer grants

The government will also extend increased cash grants for first-time home buyers of as much as A$21,000 by six months until December 31 to prevent a slump in property prices and spur construction.

“We have gone for jobs and nation building for a recovery,” Swan told reporters.

The increased spending in this year’s budget is forecast to save as many as 210,000 jobs and add 0.75 percentage points to GDP in fiscal 2010, “when the economy is expected to be at its weakest,” he added.

Without the government’s stimulus, the economy would be 2.75 percent smaller in 2010 and 1.5 percent smaller a year later.

The Treasury department predicts the “current downturn in the Australian economy” is “expected to extend to three years of below-trend growth,” compared with one year during a recession in the early 1980s and two years in the early 1990s.

Source: Bloomberg