Tony Abbott’s government tries to restore its political fortunes

BEFORE he led the conservative Liberal-National coalition to power in 2013, Tony Abbott had promised to fix Australia’s “budget emergency” by turning a string of deficits under the previous Labor government into surpluses. He endorsed a pledge by Joe Hockey (pictured), now the treasurer, to deliver a surplus in each year of his government’s first three-year term. Surpluses, the prime minister claimed, were in the coalition’s “DNA”.

On May 12th Mr Hockey delivered the government’s second budget—and second deficit. It has soared to A$41 billion ($32 billion) for the current fiscal year, from a projected A$30 billion a year ago. It has been estimated at A$35 billion for the coming fiscal year. But much will depend on how an economic slowdown in China, Australia's biggest trading partner, affects the country.

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A resources boom helped Australia chalk up a quarter-century of continuous economic growth this year. But even before the Abbott government came to power, revenue from iron ore and coal, Australia’s two biggest exports, had started to drop off. The budget papers reveal that iron-ore prices have almost halved since last year, cutting about A$90 billion from forecast export-revenue. The government has also written off A$52 billion in tax revenue since last year, more than a third of that due to the collapsing price of iron ore; feeble wage growth has also limited revenue from income tax.

Australia’s economy is fairly sound on other fronts: its central bank expects its unemployment rate to creep up a quarter of a percentage point to 6.5% by mid-2016; the treasury forecasts GDP growth of 2.75% for the year, down from an earlier prediction of 3%. But the central bank has also predicted mining investment to “fall sharply” over the next two years, as Chinese demand for Australia’s commodities weakens. A week before the budget, the bank lowered the cash rate by 25 basis points to 2%—sensing, perhaps, that more than Mr Hockey’s budget will be needed to stimulate a flagging economy.

Indeed, Mr Hockey has steered a safe course with his second budget, after a political backlash from the first that almost cost Mr Abbott his position as leader of the conservative Liberal Party. The first budget imposed big spending cuts that fell most heavily on Australians least able to bear them, against pre-election promises; the government has trailed the opposition Labor Party in opinion polls ever since.

This time Mr Hockey has taken a more populist approach. He has promised to crack down on multinational companies avoiding taxes in Australia. Authorities have already identified 30 firms (unnamed as yet) suspected of diverting profits from Australia. From next year a new law will force wrongdoers to pay double what they owe. Mr Hockey expects potential revenue in the “billions”. Companies selling digital products from overseas, such as films and books, will now have to apply Australia’s consumption tax to them. A tax-free threshold of A$20,000 on the earnings of working holiday-makers will be axed. At the same time, the government has pledged tax breaks for small businesses and A$3.5 billion on child care.

Warren Hogan, chief economist with ANZ Bank, one of Australia's biggest, says the political fallout from the first budget was “extraordinarily damaging” for business and consumer confidence in the country. The test of the latest budget will be to boost the competitiveness of Australian firms during a “painfully slow” transition away from its mining boom.