The Organisation for Economic Co-operation and Development has given Treasurer Wayne Swan the green light to delay the budget's planned return to surplus this financial year if the economy deteriorates more than expected.
The Paris-based institution also said the Reserve Bank may need to make further cuts in official interest rates – already at record lows of 3 per cent – if the outlook worsens further.
OECD to weigh in on surplus
An influential report will argue for the Gillard government to be less rigid on its promised budget surplus.
In its latest review of Australia, published on Friday, the OECD endorsed the nation's economic policies, saying interest rate and budget settings were ‘‘appropriate’’ for the fragile global environment.
Australia was weathering the aftermath of the global financial crisis well, it said, and its public finances were in ‘‘much better shape’’ than those of most developed countries.
However, if the global economy were to weaken more than expected, it said the government should abandon its plan for a rapid return to a surplus of $1.1 billion in 2012-13.
Market economists also say Mr Swan should be prepared to ditch his pledge to deliver a surplus – which will require a budget tightening equal to 3 per cent of the economy in one year.
‘‘In case of a sharper-than-expected cyclical weakening, the central bank should loosen further and the fiscal automatic stabilisers should be allowed to work, even if this postpones the return to budgetary surplus,’’ it said.
A major global shock as severe as the 2008-09 global financial crisis would warrant a response similar to the Rudd government’s fiscal stimulus package, it said.
Mr Swan noted the OECD’s endorsement of the government’s budget strategy, which would place less pressure on interest rates and the dollar, assisting firms in the economy’s slow lanes.
‘‘The OECD finds that, unlike many developed economies, the Australian economy remains resilient, with successful macroeconomic management contributing to solid growth, low unemployment, contained inflation, and strong public finances,’’ Mr Swan said in a statement.
The comments come amid reports the Treasury has advised the government to abandon its return to surplus this year, after figures last week showed weaker-than-expected growth and a decline in real national income.
In the longer term, the OECD said Australia’s economy stood to benefit from the rapid industrialisation of Asia, but further economic reforms were needed to ensure we made the most of the opportunity.
While Australia’s budget was in far healthier shape than most developed countries, the OECD called on leaders to embark on a series of sweeping changes to shore up its long-term strength, including a mining tax that applied more broadly, a ‘‘stabilisation fund,’’ and cuts to spending on support for the car industry.
Enhancing productivity was also vital, it said, and this would be supported improvements in training programs and increased private investment in infrastructure.
Despite many firms struggling under the high dollar, it said Australia’s floating exchange rate had been a key reason the economy had coped with the third-sharpest shock to export prices in an OECD country since 1960.