AUSTRALIA could face further spending cuts and/or revenue rises this year and in 2013 after Treasurer Wayne Swan pledged to make more budget savings if weaker-than-expected economic growth imperils his promise of a budget surplus.
As the ratings agencies warned that the budget's economic forecasts are ambitious and might not be reached, Mr Swan told the National Press Club that Labor would cut further if the budget looked like failing to reach its target of $1.5 billion.
His decision, announced as a curt one-word answer "Yes" to questions on the issue, sets Australia at odds with the International Monetary Fund, which is advising governments in such situations to let their fiscal position take the hit rather than weaken the economy.
"Countries need to keep a steady hand on the wheel," IMF managing director Christine Lagarde said in Zurich on Monday. "If growth is worse than expected, they should stick to announced fiscal measures, rather than announced fiscal targets.
"In other words, they should not fight any fall in tax revenues or rise in spending caused solely because the economy weakens."
Ratings agencies gave the budget the thumbs-up, declaring it consistent with Australia retaining its AAA rating. But they issued caveats on the economic targets, implying Mr Swan's resolve may be put to the test.
Standard & Poor's credit analyst Kyran Curry said the forecast return to surplus "will provide flexibility to respond to large economic and financial shocks, and the forecast peak level of Australia's debt was "well below that of most peers".
"However, this strategy relies on an accommodative economic outlook that remains highly uncertain, and the support of coalition partners for the minority government's austerity measures," Mr Curry said.
Moodys vice-president Steven Hess said that while Australia's low debt gave it "considerable flexibility in the timing of a return to surplus", its economy was a heavy borrower from global capital markets and it was important to see "a substantial positive move in the government's fiscal position".
But he warned that "the fiscal correction of about 3 percentage points of GDP in 2012-13 will be a drag on economic growth", and raised doubts about "whether the targeted budget surplus is ultimately achieved".
Fitch Ratings put a similar view, calling the government's plans "positive", but adding they "could be challenging, particularly if the economic outlook weakens further."
