Surplus gives RBA room to cut: Swan

8 May 2012, 9:37 pm   -   Source: AAP

The federal budget's return to surplus should mean lower interest rates and put downward pressure on the Australian dollar, economists say.

The federal government insists that returning the budget to surplus is right because the economy is in good shape and will help pave the way for further interest rate cuts.

Budget papers, released on Tuesday night, forecast a $1.5 billion surplus for 2012-13, which was widely expected by the market.

That's from a $44.4 billion deficit in 2011-12, which is believed to be the biggest fiscal turnaround in half a century.

The government said the return to surplus is important to maintain confidence in the strength of Australia's public finances.

Treasurer Wayne Swan in his budget speech forecast four years of budget surpluses, which, he said were important in a time when overseas economies face challenges.

"Surpluses that provide a buffer against global uncertainty, and continue to give the Reserve Bank of Australia (RBA) room to cut interest rates for families like it did last week," he said.

The RBA cut the cash rate by a surprise half a percentage point to 3.75 per cent on May 1 after the March quarter headline annual inflation rate came in at a very low 1.6 per cent.

AMP chief economist Dr Shane Oliver said the government's commitment to cut spending and return to surplus would hurt economic growth and add to the case for further interest rate cuts.

"It will take a huge chunk out of the economy, we estimate around a one per cent detraction from the economy," he said.

"That should be enough to justify further interest rate cuts for the Reserve Bank."

However, JP Morgan Australia chief economist Stephen Walters said the budget surplus was unlikely to send the central bank's cash rate even lower in 2012.

"I think the turnaround in the budget balance .... doesn't really change the RBA's thinking," Mr Walters said.

"The RBA has already moved quite aggressively, so the assumption in the budget is that rates will go down whatever the futures markets is pricing, which is about three more rate cuts - and that's plausible.

"But if you need those rate cuts to get your trend growth, then clearly you need a few things to go right."

CommSec chief economist Craig James said it was a credible budget.

"One of the virtues of this budget is that the government is making decisions that improves the bottom line, we haven't seen that for years," he said.

"A government, by measures being announced, is actually improving the budget bottom line rather than making it worse."

"It is a wafer-thin surplus and there's not much that has to go wrong for the budget to get back into the red and for the government to make some harder decisions."

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