Surplus better than expected

The Federal Government is banking on a record budget surplus in 2008/09 after slashing government spending and planning for ongoing growth in taxation revenue as companies continue to benefit from the global commodities boom, despite share market volatility and high interest rates.

Treasurer Wayne Swan said the budget, which has been billed as an inflation fighting budget, would have a mild tightening effect on the economy.

"There is a mild tightening in this budget, for sure,'' Mr Swan said during the budget lockup.

"But what we've done is that we've put aside the reserves, if you like, to give us the flexibility to deal with international uncertainty and in the longer run, to make those investments for the future.''

The first budget of the new Labor government is estimating an underlying cash surplus of $21.7 billion for the year, beating the median financial market forecast for a surplus of $20 billion.

The surplus will equate to 1.8% of gross domestic product (GDP), which is better than the government's own projection of at least 1.5% of GDP and its best level in about 10years, assuming the economic outlook will remain positive.

The surplus will be built on $7 billion in government savings across its departments and takes into account more moderate real GDP growth of 2.75% over the year, down from an estimated 3.5% in 2007/08.

"Weaker global growth and the effects of monetary policy are slowing our economy,'' Mr Swan told parliament tonight.

"Eight interest rate rises in three years and the global slowdown are expected to see growth in our economy moderate.''

In a speech that mirrored some of the language used in last week's Reserve Bank of Australia (RBA) monetary policy statement, Mr Swan said Australia faced countervailing economic forces as it battled high inflation at home and economic turbulence overseas.

But he said inflationary pressures would ease in the year ahead as the budget spending cuts worked with the government's move to increase capacity in the economy.

"These are all things that demonstrate a degree of rigour which has not been evident in policy in the last four or five years,'' Mr Swan said.

Treasury has forecast the consumer price index (CPI) inflation at a year average of 3.5% in 2008/09, down from an estimated 4% in 2007/08. Tighter fiscal and monetary policies would gradually ease underlying inflation down from its recent 16 year high of 4.2%.

The government sees household consumption growth moderating to 2.75% next financial year.

The government announced a $55 billion Working Families Support Package, which for the most part encompasses promised tax cuts over four years and other measures flagged prior to tonight's budget, such as increases in the Medicare levy surcharge and child care tax rebate.

On the revenue side, it expects a total of $319.464 billion in 2008/09, up from an estimated $303.831 billion this year. Taxation revenue is expected to grow by a real 0.9% year on year to $299.2 billion.

"Individuals' incomes, including from unincorporated businesses and property, are expected to grow strongly,'' the papers said.

"Company profits are forecast to to be higher, reflecting further strong rises in commodity prices.''

Those gains may be partly offset by reduced capital gains due to share market falls and higher interest expenses for business.

Business investment is expected to grow by 8.5% in 2008/09, down from an estimated 9.5% this year.

The budget papers caution that, business is still facing higher labour and materials costs and that a further deterioration in global capital markets could impact funding rates.

Meanwhile, non-resident foreign investors will be paying less withholding tax on their investments, as the 30% non-final rate falling to 22.5% in 2008/09, then 15% in 2009/10 and to 7.5% in 2010/11.

Looking further ahead, the budget surplus is projected to progressively narrow over the following three years, to $19.7billion in 2009/10, $19 billion in 2010/11 and $18.9 billion in 2011/12.

AAP