Swan swings axe to save surplus

squeezed under new budget measures designed to keep the Gillard government clinging to its commitment to a return to surplus in 2012-13.

The surplus is predicted to be wafer thin - just $1.5 billion - and will come after a massive blowout in this year's deficit from $22.6 billion to $37.1 billion, according to yesterday's mid-year budget update from Treasurer Wayne Swan.

In addition to the savings announced yesterday - worth a net $6.8 billion over four years - the government will have to bring forward some spending into this year, and defer some until after next year, to achieve a surplus in 2012-13.

The deterioration in the budget has been driven in part by the euro crisis, which has cost revenue $20 billion over four years compared with the May forecast and has prompted Treasury to downgrade expected growth to 3.25 per cent this financial year and next, a fall of 0.75 and 0.5 points respectively.

Treasury is significantly more pessimistic on the local economy than the OECD, which predicted this week that Australian growth would surge to 4 per cent in the 2012 calendar year.

Treasury's unemployment outlook has been revised up from 4.75 per cent in the budget to 5.5 per cent by the June quarter of next year.

The slowing economy has also triggered another slump in GST revenue that is set to punch a $670 million hole in the Victorian budget over the next four years, putting more pressure on Premier Ted Baillieu to deliver on his surplus promise.

Predicting a Europe recession, Mr Swan declared: ''We are showcasing to the world the strong economic fundamentals of the Australian economy.''

He highlighted yesterday's decision by Fitch Ratings to join the other two major ratings agencies in awarding Australia a AAA long-term credit rating.

By cutting spending, yesterday's package creates more scope for the Reserve Bank to cut interest rates if global conditions worsen. There has been speculation it could reduce rates again as early as next week.

Among the main savings measures announced yesterday:

?The $5400 baby bonus, introduced by the Howard government, will be cut to $5000 from September and indexation will be ''paused'' for three years from July 1. This will save $320 million over four years and mean $34 a fortnight less for families.

?The government is seeking a one-off 2.5 per cent public service ''efficiency dividend'', including travel and hospitality reductions, saving $1.5 billion.

?The dependent spouse tax offset will be restricted to those with a spouse born before July 1, 1952, saving $370 million.

?A crackdown on tax rorts, mainly by foreign workers and executives in Australia, is predicted to yield $682 million.

?Changes in superannuation rules, with a reduction in the matching rate and maximum payment of the voluntary co-contribution, are designed to save more than $1 billion.

?About $1 billion will come out of education, including cuts and delays to reward payments for universities, teachers and schools, and an end to the HECS concession for science and maths students.

?The start of a standard tax deduction for work-related expenses is deferred for a year.

The projected 2012-13 surplus is down $2 billion from the $3.5 billion predicted in May.

Mr Swan said Australia would return to surplus ahead of all major advanced economies, while government net debt had peaked ''dramatically lower'' than theirs. ''Strong public finances and strong economic fundamentals are the best protection that we can provide for working people,'' he said.

Opposition Leader Tony Abbott said the government was imperilling Australia's ability to respond to the global slowdown - making a bad situation worse by its new taxes and continuing waste. He said the baby bonus

cut showed Labor ''has never had much respect for the stay-at-home mums of Australia''.

Economist Saul Eslake, of the Grattan Institute, accused the government of ''accounting chicanery'' in juggling spending between years, and said it was ''remarkably insouciant'' about the deficit blowout.

The Australian Chamber of Commerce and Industry welcomed the projected surplus, as did the Business Council of Australia, which called it ''the right economic policy for the times''.

Greens leader Bob Brown said the push by the major parties ''to cling to a wafer-thin political surplus while advocating public sector job losses and cuts to services is contrary to reasonable, forward-thinking economic advice".

Independent MP Rob Oakeshott said he would fight the cuts to higher education funding.

The Community and Public Sector Union said it expected 3000 public sector jobs to be lost, but Finance Minister Penny Wong said ''our expectation'' was no need for forced redundancies.

The ACTU said the government must be prepared to delay its return to surplus and to stimulate the economy if key indicators turned worse than predicted.