The drought devastating crops across Australia is going to cut into the country's recent stellar economic performance, the government's finance chief has told parliament.

In his annual mid-year review, Treasurer Peter Costello said growth in 2002-3 was likely to be 3%, not the 3.75% predicted in May.

If the drought breaks, then we'll have growth. If it doesn't, then we'll be winding back these forecasts

Peter Costello Treasurer

The main culprit, he said, is the 60% slump in crop production the dry weather has caused.

But he remained bullish on the prospects for the following year, predicting a return to 4% expansion.

Fry spell

Until now, Australia has escaped the worst of the global downturn which was exacerbated by the events of 11 September last year.

The country managed 4% a year growth amid a housing boom triggered by low interest rates, and export industries have remained in good shape.

But the drought which has now been afflicting some areas for a year and a half - and is expected to last at least until March or April - is finally making itself felt in the figures.

In all, 90% of the country is being affected, the government's agricultural bureau says, and the 57% fall in projected winter grain crops could cut export earnings by as much as 5.4bn Australian dollars (US$3bn; £1.9bn).

Still bullish

Still, Mr Costello refused to be pessimistic about the longer-term prospects.

"Look, 2003-4 depends to some degree on whether or not the drought breaks," he told parliament.

"If the drought breaks, then we'll have growth. If it doesn't, then we'll be winding back these forecasts."

And despite adding A$327m to farm aid over the next three years, he is still predicting a A$2.1bn surplus for the full year after have recorded his first deficit as treasurer in May's budget.

Defence, he said, is the only department which will be allowed to increase spending - although there is nothing yet budgeted for the prospect of US-led war on Iraq.