BUDGET 2011 ECONOMY: On course for surplus in 2012/13 - Swan

Federal Treasurer Wayne Swan remains on course to preside over the first Labor government budget surplus since Bob Hawke was returned for a fourth time as prime minister in 1990.

But the impact of this summer's spate of natural disasters - both home and abroad, a strong Australian dollar, and a patchy economy has taken its toll, wiping $16 billion off government tax receipts over both this year and next.

This has resulted in even deeper budget deficits in the near term than forecast in November.

"We'll be back in the black by 2012/13, on time, as promised," Swan told parliament on Tuesday, handing down his fourth budget.

"The alternative - meandering back to surplus - would compound the pressures in our economy and push up the cost of living for pensioners and working people."

If Treasury's forecasts prove correct, the Gillard government will be parading a $3.5 billion surplus in 2012/13, a massive turnaround from substantial deficits this financial year and next, and following a record shortfall in $54.8 billion in 2009/10.

The 2010/11 deficit has blown out to $49.4 billion from the $41.5 billion forecast last November in the mid-year budget review, while in 2011/12 it is now expected to be $22.6 billion rather than $12.3 billion.

Swan has made $22 billion of budget cuts over the next four years, defence taking the biggest hit at over $2.4 billion.

Greater efficiencies among government departments will also rake in $1.1 billion.

He has also restricted growth in government spending to just one per cent over the budget years, the lowest five-year period of growth since the 1980s.

But the major driver for the return to surplus will be economic growth as mining boom Mark II gets into full swing.

Treasury forecasts gross domestic product (GDP) accelerating to a robust 4.0 per cent in 2011/12 , and a still lofty 3.75 per cent in 2012/13, after disaster-hit growth of 2.25 per cent in 2010/11.

Such growth is expected to drive the unemployment rate down to 4.5 per cent by mid-2013 as some 500,000 people join the workforce.

The nation's terms of trade - the performance exports compared to imports - is expected to balloon by 19.25 per cent in 2010/11, and still remain at relatively buoyant levels over the next two years as demand for Australia's resources continues.

"Our economy transitions from sluggish growth to stretching at the seams, our budget from deficits in the tough times to surpluses in better times," Swan said.

But those better times will also bring inflationary pressures, although Treasury's outlook is somewhat more optimistic than that of the Reserve Bank.

Treasury is forecasting 2010/11 inflation at 3.25 per cent, above the central bank's two to three per cent target band, and as a result of higher food prices from the natural disaster and rising oil prices.

But it expects price pressures to subside in 2011/12 to 2.75 per cent, while underlying inflation is expected to remain contained over the budget forecasts.

In contrast, the Reserve Bank in last week's quarterly statement on monetary policy, when it warned of the need of higher interest rates, forecast underlying inflation being pressed against the top of the band from the end of this year through to mid-2013, and then predicts pressures building even further.

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