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Delivering on Surplus Promise Daunting Task for Australia

The Australian government has promised to return the nation’s budget to a surplus of A$1.5 billion ($1.53 billion) as early as the next financial year, but a ratings agency, an analyst, and the opposition party told CNBC on Wednesday that it may not be easy for it to keep its word.

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“The government has seen massive slippage in terms of fiscal consolidation over recent years. This is going to be the ultimate test,” Gavin Stacey, Australia and New Zealand Rates Strategist at Barclays Capital told CNBC Asia’s “Squawk Box".

He added that while returning the budget to surplus makes sense, trying to achieve that regardless of what the economic conditions are and to do it in one year is going to be difficult. “We have trouble with the budget strategy, in that it seems so unconditional,” Stacey said.

Treasurer Wayne Swan said on Tuesday that the Budget would finally be able to return to a surplus for the year to June 30, 2013 after four consecutive years of deficits.

However, Joe Hockey, Shadow Treasurer from the Liberal Party, said this surplus is dependent on Australia’s ability to raise enough revenues to offset a bigger-than-expected deficit in the current financial year ending June 30, which is expected at A$44.4 billion, more than the November forecast of A$37.1 billion.

“The government promised this time last year a deficit of A$23 billion," Hockey said. "It turns out to be A$44 billion and now they expect us to believe that they’re going to have a surplus. And when you look carefully, how are they going to go from A$44 billion deficit to A$1.5 billion surplus?"

The surplus is also dependent on the economy growing 3.25 percent over 2012-13. The Australian economy is largely driven by exports of resources such as iron ore, copper and aluminum, especially to China, which is showing signs of slowing down.

Data also showed that Australia’s manufacturing sector contracted in March and April, especially in basic metals, wood products and clothing pointing to weakening domestic demand.

“The biggest risks to the government’s ability to balance its Budget would be a slowdown in private consumption in Australia and a sharp decline in commodity prices,” said Art Woo, Director of Sovereigns at Fitch Ratings in Hong Kong.

National Australia Bank Senior Economist Spiro Papadopoulos said it is unlikely that Australia could achieve the GDP target. "Sharp fiscal tightening in the Australian budget will shave more than 1 percent from GDP growth in 2012-13," he said.

Penny Wong, Australia’s Minister of Finance and Deregulation, defended the Budget on Wednesday, saying the government would be able to deliver on its promise. The government has taken into account in the latest Budget the writedowns of A$150 billion over 5 years in tax revenues, Wong said.

“We've offset that revenue writedown to bring the budget back to surplus and build those surpluses over time,” Wong said on CNBC Asia’s “The Call”.

“And our economic forecasts are consistent with those of the Reserve Bank of Australia and broadly consistent with institutions like the IMF with one exception. We're actually more conservative in our forecasts around Europe, so the budget figures are predicated on a more conservative thinking about what is going to occur in terms of the European economies than the IMF,” she said.

Contact Asia Economy

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