Savage cuts return Australia to surplus

Australian Treasurer Wayne Swan declared the "deficit years of the global recession" over Tuesday, unveiling a Aus$1.5 billion budget surplus funded by deep cuts to defence and foreign aid spending.

Swan vowed an ambitious Aus$33.6 billion in savings, slashing Aus$5.5 billion from military spending and trimming Australia's overseas aid by Aus$2.9 billion, aalong with a raft of other reforms to tax and welfare benefits.

The measures will only deliver a modest Aus$1.5 billion (US$1.52 billion) surplus for the 2012-13 fiscal year starting July 1, but the Labor government has been determined to return the budget to black in a bid to salvage its popularity.

"Tonight we make a forceful statement that ours is one of the world's strongest economies," Swan told lawmakers in his budget speech.

"The deficit years of the global recession are behind us. The surplus years are here."

The budget forecasts a surplus of Aus$7.5 billion by 2015-16, a dramatic reversal of the present Aus$44 billion deficit requiring some of the deepest cuts to government spending seen in Australia for decades.

Defence was the major target, with Aus$5.5 billion in spending cut over the next four years, including a delay in the acquisition of 12 F-35 Joint Strike Fighter aircraft, scrapping some artillery purchases and sacking 1,000 civilian staff.

The government vowed there would be "no adverse impact on operations in Afghanistan" or East Timor and the Solomon Islands, where Australian troops are stationed in a peacekeeping capacity.

Overseas aid was also sacrificed, with Aus$2.9 billion in savings through the scaling back of development targets which Foreign Minister Bob Carr said would see funding "grow at a slightly slower rate" than forecast.

Australia was the only advanced nation to dodge recession during the global downturn due to the resilience of its mining exports to Asia, and it again leads the major economies by becoming the first to record a budget excess.

Swan said the surplus was a key buffer against renewed turmoil in Europe, where French leader Nicolas Sarkozy and the Greek government were unseated at weekend elections, threatening eurozone austerity plans.

"In these uncertain times there's an absolute premium on clear and credible fiscal policy and that's why the government has charted this course," he told reporters, adding that the "conditions demand a surplus".

"Every area of government spending has, in one way or another, been reined in in this budget."

Swan said Europe continued to cast a pall over the global economy, but he expected the Asian region to remain prosperous and buoy Australia, with some Aus$450 billion in mining sector investment slated for coming years.

Australia is forecast to grow by 3.25 percent in 2012-13 and 3.0 percent in each of the three following years.

Unemployment, which is currently at 5.2 percent, was put at 5.5 percent in 2012-13 and 2013-14 before dropping off to 5.0 percent, with inflation of 3.25 percent flagged for 2012-13 and 2.5 percent for the following three years.

All the figures are unchanged from Canberra's last budget outlook, issued in November.

Economists said the spending cuts would hurt economic growth and may see lower interest rates, which are at 3.75 percent following a surprise 50 basis-point cut this month.

"It will take a huge chunk out of the economy, we estimate around a one percent detraction from the economy," said AMP chief economist Shane Oliver.

"That should be enough to justify further interest rate cuts for the Reserve Bank."

Swan, whose government is struggling in the polls, denied the return to surplus was a populist political move.

"We've come back to surplus because we think it's good fiscal policy," he said.

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