Budget set to meet surplus target

The Rudd Labor government is expected to deliver a super-surplus of $20 billion for 2008/09 when it hands down its first budget next week, as the resources boom continues to boost tax revenues and Treasurer Wayne Swan takes the axe to federal spending.

Mr Swan has promised a fiscally responsible budget that will help fight inflation while delivering tax cuts and benefits for working families already struggling under high interest rates.

The government has projected an underlying cash surplus of at least $17 billion, or 1.5 per cent of gross domestic product (GDP), for the new financial year.

But economists believe it will be bigger than that, and outstrip former coalition treasurer Peter Costello's $17.21 billion surplus in 2006/07.

The median of a survey of seven economists by AAP centres on an underlying cash surplus of $20 billion, or 1.7 per cent of GDP.

Mr Swan has already flagged spending cuts of $3 billion to $4 billion in Tuesday night's budget to help put downward pressure on the highest inflation rate in 16 years.

Commonwealth Bank of Australia chief economist Michael Blythe, whose surplus forecast matches the median expectation, said the resources boom was boosting company tax revenue for the government.

"This commodities story is tipping buckets of money into the government coffers," he said.

The Reserve Bank of Australia (RBA) said Australia's terms of trade - the ratio of import prices to export prices - would grow by 20 per cent in 2008 as contract prices for the country's key exports - coal and iron ore - increased.

Three months ago the central was expecting growth of seven per cent.

The most recent fiscal outlook, released ahead of last year's November federal election, had estimated a surplus of $14.3 billion for 2008/09, or 1.2 per cent of GDP.

It also pointed to a $14.4 billion surplus for the current 2007/08 financial year, representing 1.3 per cent of GDP.

The new government has promised Australians $7.1 billion of tax cuts in 2008/09, as part of its election promise to deliver $31 billion in cuts over three years.

Macquarie Group senior economist Brian Redican, who sees the government meeting its surplus target, said slower economic growth and a share market slump would weigh on revenue, as capital gains and superannuation tax revenues fell.

"At the same time, downward revisions to GDP growth forecasts will also crimp expected tax revenue," he said.

Treasury's forecasts in the budget papers are expected to predict economic growth of at least three per cent in 2008/09, down from its previous forecast of 3.5 per cent, the AAP survey shows.

TD Securities senior strategist Joshua Williamson believes a slowing in the local economy means a $16 billion budget surplus, or 1.4 per cent of GDP, was more likely to be revealed next week.

"The fact we're looking for the economy to slow back down means income and corporate income tax receipts will come down," he said.

"It's nothing particularly insidious, it's just a reflection of economic reality.

"It's the fact the commodities boom is maturing and the fact the economy is going to slow and employment growth will slow."

Westpac senior economist Andrew Hanlan expects a budget surplus of $21 billion, because a jump in the 2007/08 budget surplus had given the government a good starting point.

Lehman Brothers chief economist Stephen Roberts expects a $19 billion surplus, as higher interest rates curtail consumer spending.

"The impact of very tight monetary conditions - that will constrain domestic spending growth," he said.

"The household sector, they'll constrain discretionary spending and that will take economic growth down."

The AAP survey also shows economists expect consumer price index (CPI) growth of 3.25 per cent in the year to June 2009.

That compares to the last official CPI reading of 4.2 per cent for the year to March.

The RBA forecast a rate of 3.5 per cent by the end of June next year.