Surplus to help RBA cut rates
Surplus to help RBA cut rates

Treasurer Wayne Swan has put his faith in the Reserve Bank reducing interest rates to offset the impact of his plans to tighten the Budget into surplus.

Mr Swan gave an insight yesterday into one of the key messages he will deliver in next month's Federal Budget, with a focus on how delivering a surplus will effectively force the Reserve into cutting rates.

The Government has made no secret that it plans to cut existing programs to ensure it delivers a surplus.

At the mid-year Budget update, the surplus was forecast to be just $1.5 billion in the 2012-13 financial year.

That would be after a deficit in the current financial year of almost $40 billion.

The swing from deficit to surplus would be the biggest in Australian fiscal history and has prompted some analysts to argue it could drive some parts of the country into recession.

The Reserve Bank last week kept official interest rates on hold at 4.25 per cent but signalled that barring an inflation breakout it will use its May 1 meeting - held a week before the Budget - to cut rates by at least a quarter of a percentage point.

In a sign Mr Swan is targeting a larger than forecast surplus, the Treasurer said the Budget would give the Reserve room to move on rates.

"Just as it was right to step in and support demand when it was needed, it's right now to be stepping back to provide space for the private sector to grow and to ensure the Reserve Bank has the flexibility to cut interest rates further if it thinks that is necessary," he said.

"This is a key reason why getting the Budget back to surplus in 2012-13 is an economic imperative.

"It's the right strategy for an economy returning towards trend growth with relatively low unemployment and a huge pipeline of investment."

Mr Swan said despite criticism of previous Budget cuts, Australia was second only to South Korea, of the world's largest economies, in terms of growth since the the global financial crisis.

But shadow treasurer Joe Hockey, in a sign of how the Opposition will attack the Budget and its forecast surplus, said Mr Swan was delivering a high level of debt.

He said Mr Swan had come to office with no net debt and $45 billion in savings and translated this into $136 billion in net debt and an interest bill of $7.3 billion.

The West Australian

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