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Australia’s best defense against the global economic outlook is to return the budget to surplus and provide flexibility for interest rate cuts to ensure growth, Treasurer Wayne Swan said.
A budget in surplus “ensures that we won’t be adding to the price pressures,” Swan said in his economic note yesterday. “This in turn provides more flexibility for the Reserve Bank to cut interest rates if they think this is warranted.”
The government is working hard to find extra savings in its next budget because tax revenue, as a share of the country’s gross domestic product, will be lower and there will be very little room for any new spending, he said.
Swan, who is preparing Australia’s budget for release on May 8, faces the challenge of balancing a drop in revenue against a government pledge to deliver a surplus in the 12 months through June next year. Prime Minister Julia Gillard said yesterday returning the budget to surplus is “the right thing to do” while pledging to support jobs.
“This is the appropriate strategy for an economy moving back toward trend growth with relatively low unemployment and a record pipeline of investment,” Swan said in his note.
Mining investment in Australia, the world’s biggest exporter of iron ore and coal, is estimated to reach A$120 billion next year, an increase of around 155 percent in two years, Swan said last month.
The Reserve Bank of Australia left its benchmark interest rate unchanged at 4.25 percent on March 6 and reiterated that it has scope to lower borrowing costs if demand weakens “materially.” The next rate decision is due tomorrow.
Swan also said that while Australia’s net debt will peak this year, it will be less than a 10th of the level of major advanced economies.
“Maintaining our credible fiscal policy sends a strong message of confidence to investors across the world in these uncertain times,” he said.
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