National economy at mercy of the markets, says IMF

THE Treasurer and the International Monetary Fund are at odds over whether the budget should return to surplus this financial year.

The fund has used its latest report on Australia to raise the prospect of abandoning the planned surplus, saying the authorities had ''scope to delay their planned return to surplus'' should the economic outlook deteriorate sharply.

The Treasurer, Wayne Swan, will tell a business breakfast in Sydney today he intends to return to surplus regardless, saying although the task ''is made harder by a fall in commodity prices'', a surplus is ''still our best defence against the current global economic volatility and sends a clear message that we are committed to responsible fiscal policy".

However the IMF believes Australia's reputation is not at risk, describing its public debt as "modest" and saying it has "monetary and fiscal space" to respond to shocks.

It has upgraded its forecast for Australian growth this year from 3 per cent to 3.25 per cent but warns "risks are tilted to the downside".

"For example, a hard landing in China would reduce demand for Australian mineral exports, worsen terms of trade, reduce household income, and could trigger a fall in house prices," it says.

The fund paints a picture of an economy increasingly at the mercy of international markets saying "the increasing share of the mining sector in the economy implies Australia will be exposed more to volatile commodity prices, not only upward but also downward, as in recent months".

While the floating dollar can help cushion the national economy it "offers little help" to regional economies and the industries that suffer the most at the hands of international markets.

The IMF says investment outside of Australia's resources sector is likely to remain weak for some time and the rest of the economy will soon face the challenge of absorbing mining industry workers made redundant as the boom comes off its peak.

Mr Swan will tell this morning's breakfast he is an optimist about China. He will say his talks there have convinced him much of its slowdown is deliberately engineered.

"We really just need to keep things in perspective," he will say. "China is now 40 per cent larger than in 2008 so its growth rate can be 20 per cent lower for it to make the same contribution to global growth."

"It's like Usain Bolt easing off a bit at the end of the 100m because he's 10m in front and has already smashed the world record."

The fund's Asian head of mission, Masahiko Takeda, told reporters yesterday Australia had the ability to respond to both a deeper decline in Asian growth and a worsening European situation. ''Australia has policy space to mobilise,'' he said, noting that for the moment Australian policies struck a good balance between cutting debt and supporting growth.

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