Budget surplus gives RBA 'maximum flexibility' to cut rates but dwelling investment recovery a year off

The federal government remains on track to deliver a budget surplus this financial year, giving the Reserve Bank “maximum flexibility to cut interest rates” says Federal Treasurer Wayne Swan following the release of the 2012-13 Mid-Year Economic and Fiscal Outlook (MYEFO).

He also pointed out that mortgage holders are $4,500 a year better off due to cash rate cuts by the RBA while the current Labor government has been in power.

The cash rate was at 6.75% when Kevin Rudd was sworn in as prime minister in December 2007 and is now 350 basis points lower at 3.25%.

However, the MYEFO forecasts dwelling  investment  to be flat in 2012-13, before  growing 4% in 2013-14.

“Dwelling investment declined 3.3% in 2011-12 on the back of continued weakness in the detached housing market.

“Conditions across the sector are expected to improve gradually over the remainder of 2012, consistent with the solid growth in dwelling approvals and commencements seen in the June quarter.

“The recovery is expected to gather momentum into 2013-14, driven by a pickup in homebuyer demand, improved affordability following declines in house prices over the past two years and the assumption that interest rates will remain below average across the forecast period," says the MYEFO.

Announcing the release of the MYEFO, Swan emphasised the government’s efforts to return the budget to surplus “despite worsening global conditions cutting almost $22 billion from tax receipts”.

“Returning the budget to surplus also gives the Reserve Bank maximum flexibility to cut interest rates, as it has several times in the past year.

“Interest rate cuts since the government was elected in 2007 are saving a household with a $300,000 mortgage around $4,500 every year,” said Swan.

The government is forecasting real GDP growth at around trend of 3% in 2012-13 and 2013-14, a downgrade of 0.25 percentage point in 2012-13 compared with what was in the federal budget, but follows stronger than expected growth in 2011-12.

“While global headwinds, a high dollar and changing consumer behaviour are weighing on some sectors, the Australian economy is expected to outperform every major advanced economy this year and next, with growth underpinned by strong investment, strong growth in export volumes and solid growth in consumption.

“The unemployment rate is forecast to remain low at 5.5 per cent in 2012-13 and 2013-14, in stark contrast to the stubbornly high rates of unemployment seen across the developed world.

“Both headline and underlying inflation are expected to remain well contained over the forecast period, sitting within the RBA's target band,” says Swan.

Swan also pointed out Australia remains on track to return the budget to surplus “ahead of all major advanced economies”.

“The average net debt position of the major advanced economies (G7) is projected to peak at 95%t of GDP in 2016, almost 10 times higher than the peak in Australia's net debt of 10% of GDP in 2011-12.”