By Nick Mann | 20 September 2012

Australia is in financially good enough shape to be able to delay its move to budgetary surplus and increase public spending if the economy deteriorates badly, the International Monetary Fund said today.

At the end of its annual review of Australia’s economy, the IMF said the country’s low public debt meant it could loosen its budgetary stance. In May, the country’s treasurer Bill Swan said strong growth and strict fiscal discipline had put it on track to record an Aus$1.5bn (£935m) budget surplus in 2012/13.

The IMF said Australia had the ‘monetary and fiscal policy space to respond to near-term shocks, with monetary policy serving as the first line of defence’. In the first instance, Australia’s central bank, the Reserve Bank of Australia, could lower interest rates and loosen monetary policy, while the government could also provide emergency funding to banks, as it did in the wake of the 2008.

It could also allow automatic stabilisers – state interventions such as the increase in unemployment benefit payments ­that kick in when the economic situation worsens – to take effect. ‘Australia’s modest public debt gives the authorities scope to delay their planned return to surplus and let the automatic stabilisers operate in the event of a sharp deterioration in the economic outlook,’ the IMF explained.

The IMF praised Australia’s fiscal consolidation path, which it said struck a balance between limiting both domestic and external debt increases and any impact spending cuts might have on growth.

Much of the move to budgetary surplus is expected to come from revenue rises catching up with the pace at which economic output is growing, which should help to reduce the impact of deficit reduction on demand in the economy.

‘Given these factors, we estimate the contractionary impact of this budget will be less than would be suggested by the headline deficit reduction of 3%,’ the IMF said.

Australia’s overall economic outlook remains ‘favourable’, with the fund forecasting growth of around 3.25% this year as natural-resource related investment reaches record levels.

The IMF warned, however, that Australia needed to focus on diversifying its economy away from a focus on the mining sector in order to seize the opportunities provided by the growth of nearby Asian economies.

‘Strong efforts, especially on the part of business leaders, to become Asia-conscious would be required to discover opportunities in the region,’ it said. ‘The government has a role to play in creating an environment conducive for Australian firms to cultivate their Asian markets.’