Reuters International

Australian Prime Minister Malcolm Turnbull announces the federal government's Cyber Security Strategy at the Australian Technology Park in Sydney, April 21, 2016. REUTERS/Dean Lewins/AAP

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By Ian Chua

SYDNEY (Reuters) - Facing a protracted two-month election campaign and rapidly declining popularity, Australia's Prime Minister Malcolm Turnbull is under pressure to set an economic course that will go the distance with voters.

Due on Tuesday, the government's annual budget will be the centrepiece of an election that Turnbull has all but promised to hold on July 2.

The government is running neck and neck with Labor Party, latest opinion polls showed, putting Turnbull in a tough position as he seeks his first mandate since wresting the top job from the hugely unpopular Tony Abbott in a leadership coup last year.

"This budget will not be about a fistful of dollars, it will be about prudence, fairness and responsibility to our future generations," he said, probably aimed at tempering expectations for vote-buying sweeteners.

The government is keen to drive home the message that it alone can be trusted to manage an economy hampered by a once-in-a-century mining downturn and balance public finances after years of deficits.

Figures last month showed economic growth picked up momentum in the fourth quarter, providing a political boost to the coalition government.

A rally in prices for some of Australia's top exports, such as iron ore, promises to boost the government's tax take which could prevent another embarrassing miss on the deficit.

Treasurer Scott Morrison should report the red ink matched forecasts at around A$37 billion ($28.2 billion) this financial year and allow him to offer the aspirational goal of small fiscal surpluses from 2021-22 onwards.

"We will continue to reduce the deficit and we will do that by not spending more than we save on outlays," Morrison said.

Yet spending restraint does not seem to extend to defence.

The budget will come a week after the government announced a A$50 billion (£26.12 billion) deal to build a fleet of 12 new submarines in South Australia, where retaining votes will be critical.

Ratings agency Moody's has warned that spending cuts and revenue-boosting measures are both needed to meaningfully balance the books by 2021. If not, government debt will likely grow further, threatening Australia's prized triple-A credit rating.

"We do not see the rating at risk at this point in time," analysts at ANZ said in a Budget Preview report.

"That said, there is likely to be continued speculation about the rating given the ongoing lack of improvement in the forecast budget trajectory."

NO BOLD REFORMS

Turnbull has ruled out politically sensitive reforms such as lifting or broadening a goods and services tax, or handing more taxing power to the states. That leaves a mix of minor tax changes, spending cuts and fiscal finessing to do the heavy lifting.

A crackdown on multi-national corporate tax avoidance and closing pension loopholes for the wealthy have been widely flagged, while a hike in tobacco tax also looks likely.

But the government has resisted calls to tighten a tax break for property investors overwhelmingly favoured by the rich.

Instead, it is using that contrasting position to attack the Labor Party, which is advocating limiting the benefit to new properties and cutting generous capital gains tax.

"What Labor is proposing is a housing tax that hits mum and dad investors and we won't have a bar of it," Morrison said.

Voters cheered when Turnbull, a well-liked politician and successful businessman, first took over the helm. The Conservative Government soared in opinion polls, taking a solid lead over Labor.

But as the government dithered over reforms and news of infighting captured headlines, the prime minister's personal standing has taken a big hit.

Turnbull, however, remains more popular than Labor leader Bill Shorten.

($1 = A$1.2975)

(Editing by Shri Navaratnam)

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