Surplus forecasts doubtful - economists

The federal government says it will meet its target for a budget surplus in 2012/13, after making new savings worth $11.5 billion over four years, but economists say Labor has not made large enough savings to ensure its forecasts will be met.

In its Mid-Year Economic and Fiscal Outlook (MYEFO) released today, the government projected a surplus of $1.5 billion for the year, which was less than its May forecast for a surplus of $3.5 billion.

Nomura Australia chief economist Stephen Roberts said the surpluses were too small when you considered the budget blowout of $14.5 billion in six months.

"From the budget in May, in six months we've gone from a prospective budget deficit of $22.6 billion, to $37.1 billion," Mr Roberts said.

"Anything could happen to the 2013/14 budget because the latest estimate the budget surplus for 2014 is only $1.9 billion.

"So it's going to be pretty much line ball, not even line ball.

"There's significant risks we could have a pretty sizable deficits persisting in 2012/13 and 2013/14."

Mr Roberts acknowledges it would be difficult for the government to make too many budget cuts at a time when they would be wanting to ensure economic growth.

"They are caught between the foot on the accelerator and the foot on the brake, with all these problems internationally, maybe the foot should be on the accelerator," he said.

"Then you're looking at the potential deterioration in the budget position and risks to the way overseas investors see Australia even though our budget position is pretty good, it's a very different world.

"So over time there is almost a necessity to improve the structural position of the budget almost regardless of the circumstances that are happening internationally."

CMC Markets' chief market strategist Michael McCarthy said the budget statement seemed to reveal dampened expectations for growth.

"The forecasts for growth seemed to be in line with market expectations," he said.

"They might even be on the conservative side, given what we saw the OECD (Organisation for Economic Cooperation and Development) say overnight, and their forecasts for four per cent growth.

"There's also a concern here that this has been a bit of a weak reaction - that the $11.5 billion cuts over the next four years don't leave room for manoeuvering and could be withdrawing stimulus at a time when fiscal stimulus is an important part of the overall economic equation."

Mr McCarthy observed a weak market response to the statement, with the Australian dollar falling slightly after the MYEFO data was released.

"The share market came off about 30 points, but has now rallied back, so it's overall quite muted," he said.

"The market has been dominated by those global concerns - if we weren't so focused on European and US growth prospects, the Australian share market and dollar would be a lot higher.

"This statement doesn't change the Australian scenario. We're still enjoying better than most emerged nations' growth, and we're still in a robust situation in terms of the government balance sheet and the household balance sheet."

Treasury also cut its forecast for Gross Domestic Product (GDP) growth from 4 per cent to 3.25 per cent in 2011/12 and Consumer Price Index inflation (CPI) from 2.75 to 2.25, increasing the prospect of further interest rate cuts next year.

"That pretty much puts a cap on the positivity with regards to the rate movements next year," Easy Forex senior dealer Francisco Solar said.

"In fact it starts tipping the balance now to more rate cuts rather than fewer."

JP Morgan chief economist Stephen Walters said it it would not have mattered it the budget remained in deficit.

"A more than plausible case can be made for the government to let the budget remain in deficit, as insulation against an even deeper global downturn and exaggerated weakness in the domestic economy," Mr Walters said.

"As far as government officials are concerned, though, the politics argue against this.

"On today's evidence, the government will be tightening fiscal policy materially as the economy weakens.

"Cutting spending now carries significant risks; the cuts could, for example, undermine already fragile consumer and business sentiment."