Paul Brennan, co-head of economic and market analysis, Citi Australia:

What we found surprising about this year’s budget is the extent of new spending initiatives, even if they are fully funded.

In our view this is a risky strategy given the government is so committed to its promise of a surplus in FY13.  For just as during the past year when revenue growth fell below expectations, so it well could again in FY13.  The absence of a larger buffer should revenue growth turn out lower could see the government being forced to come back later in the year with further policy measures to ensure the budget is balanced.

The budget does little to deliver productivity enhancing initiatives. It is silent on cutting government regulation to businesses, reforming inefficient and overlapping state and federal taxes to remove deadweight losses in the economy and thee are few expenditure measures to promote investment.

The original Henry Tax Review goal of cutting the corporate tax rate aggressively has been totally shelved, for example. The budget rhetoric is that the rapid return to surplus provides maximum flexibility for the RBA to lower interest rates further if needed.

In fact a contractionary budget at this time does not so much give more flexibility to cut rates, but rather potentially increases the need to cut rates, depending how large are the policy measures, given that the economy is growing below trend. But the RBA would already have factored the return to surplus in its thinking when cutting rates 50bp last week. And in the short term, the budget handouts to lower income families is actually could boost spending at the margin. Consequently, we see no immediate implications from the budget for monetary policy.

Craig James, chief economist, Commonwealth Securities:

This is a clever budget. This is very much a Labor budget. But it is by no means a horror budget. So how did the government manage to achieve the apparently unachievable — turning a budget deficit of $44 billion or 3% of GDP, into a small surplus? Something that hasn’t been achieved in 60 years. In large part it has been achieved by cancelling, revising or delaying proposed programs or initiatives.

Yes, there is a fair bit of clever accounting to achieve the outcome, but if all goes to plan, the desired outcome has been achieved. And achieved without causing major pain in the community. In fact low income earners will be getting dollars in the pocket. Most high income earners and big business get nothing. Still, they weren’t really expecting anything — in fact most were bracing for pain.

What is clear is that budgets continue to shift away from economic documents to political and accounting documents. The economics are only there because they provides the assumptions on which the budget is based. And this year the assumptions are very credible, in fact conservative.

The government is to be commended by doing some real cutting — policy measures actually improve the bottom line. But it is important to stress that not much has to go wrong in order to threaten the wafer-thin budget surplus. Overall it is a smart budget, but still one that leaves a lot of work for the future. There is only so much that you can delay, revise or push decisions into the future.

Shane Oliver, head of investment strategy and chief economist, AMP Capital Investors:

The 2012-13 federal budget is about one thing: returning the budget to surplus on schedule and doing it in a way that minimises the negative impact on the economy and doesn’t alienate the government’s key constituency of low to middle income voters. And this is what the government has done. The return to surplus is the correct thing to do as it will only further boost Australia’s economic credentials globally and start to put money aside for a rainy day should another round of stimulus be needed again. The contractionary impact on the economy will also help provide more scope for further rate cuts from the RBA, where we expect the cash rate to fall to around 3-3.25% later this year.

On the downside though, the budget also contains two key weaknesses. First, continuously hitting high income earners — the flood levy, means testing of private health rebate, the doubling of super contributions tax — and large corporates to fill budget holes or finance more welfare spending, which this budget does risks damaging incentive and long-term growth. Second, ongoing tinkering with superannuation risks damaging faith in it. The past five years have seen short-term savings (via bank deposits) surge at the expense of long-term savings (via superannuation). This could also potentially damage Australia’s long-term health.

But one thing is clear. Australia’s public finances are in good shape and the government is doing the right thing to make sure they stay that way.

Stephen Koukoulas, managing director, Market Economics:

The economic forecasts underpinning the return to budget surplus may yet be conservative.  If Treasury is understating the acceleration in GDP growth next year, the surplus in 2012-13 could significantly over-shoot the $1.5 billion projection.

The budget is predicated on GDP growth running at 3.25% in 2012-13 and with that, employment rising 1.25% with wages growth of 3.75%.

The so-called sensitivity analysis from Treasury suggest that if GDP growth overshoots just a little — with GDP at say 3.75%, employment growth at 1.5% and wages growth at 4%, the budget surplus would come in nearer $5 billion. So rather than wafer thin, the surplus would be Iced VoVo thick.

Treasury does not have a particularly upbeat view of the world economy, a conservatism that is currently well-placed.  But in a scenario where global conditions edge up in the US and China, net exports would be a little more positive and as confidence lifts, the GDP outlook would clearly improve.

Household consumption is forecast to rise by 3% in 2012-13, a moderate rate of growth that no doubt reflects a relatively cautious spending environment for consumers. There could be upside to this forecast as cash flows are freed up due to the interest rate cuts that have already been delivered and as some of the cash payments from the government goes to household. The end of the flood levy on June 30 will also deliver a boost to incomes for high income earners.

All up, the budget surplus could come in above the current $1.5 billion estimate — any upside in growth would deliver a further boost to the budget bottom line.

Saul Eslake, Merrill Lynch:

It bears emphasising that all of the projections of a surplus are for the “underlying” surplus. This is a measure that was introduced by former treasurer Peter Costello in his first budget in 1996, with a view to making clear the extent to which asset sales (in particular, sales of government-owned business enterprises) were contributing to improvements in the budget “bottom line”.

The “underlying” surplus differs from the so-called “headline” surplus by the amount of the earnings from the Future Fund, and what are classified in the Budget Papers as “net investments in financial assets for public policy purposes”. Under the Howard government, this latter item was usually negative — since it included sales of shares in the formerly government-owned telecommunications carrier Telstra. Under the current government, however, there have been no major asset sales: instead, this item records the government’s equity investments in the company building the National Broadcasting Network (NBN Co) and, from 2012-13 onwards, its financing of the Clean Energy Finance Corporation (out of part of the proceeds of the carbon tax). The former will amount to around $4.5 billion in 2012-13, and the latter $2 billion.

In total, this “wedge” between the “underlying” and “headline” results will amount to $13.3 billion in 2012-13, and $12 billion in 2013-14. As a result, notwithstanding the “underlying” balance returning to surplus in 2012-13, the “headline” balance will be in deficit by $8.7 billion in 2012-13, and by $6.8 billion in 2013-14; it will not register a surplus until 2015-16.

There is no economic difference between (for example) paying for the construction of the NBN through the Department of Communications, or by making capital grants to the states, and by subscribing equity to NBN Co, which then carries out the construction: yet there is a substantial difference in the way in which it is recorded in the Budget Papers. The government’s equity contributions also have to be financed — which they will be, according to the Budget Papers, through the issuance of $5.8 billion of “Aussie Infrastructure Bonds” in 2012-13.

Stephen Walters, JP Morgan:

The predicted change in the headline budget balance from a yawning deficit of more than $44 billion in the current fiscal year to a wafer-thin surplus in 2012-13, is worth more than 3% points of GDP. This task is not far removed from the huge fiscal challenges facing debt-laden countries in Europe. Indeed, it is the largest-ever consolidation in Australia over such a short time horizon. The fiscal drag, though — the negative impact on growth in the economy — probably is only about 0.7% of GDP; expenditure is frontloaded into this year, and the revenue into next. Also, some of the planned spending cuts are in portfolios where the multipliers are small.

Ultimately, fulfilling the government’s surplus promise, more political than economic, and one that government officials see as crucial in restoring their credibility as managers of the economy, will depend on how the economy performs. The budget plausibly assumes GDP growth close to trend in the year ahead, which will help support revenue collections, and limit spending on welfare. Crucial to the outcome of trend growth, though, is the underlying assumption that the independent RBA will deliver further material interest rate cuts, an outcome over which the government has no influence.

The economy failing to grow at trend, which is a growing risk given worsening offshore uncertainty, in particular, and the added risk that the “rivers of gold” flowing from the mining boom run dry, would mean the government failing to deliver its long-cherished surplus. This would become clear just in time for the next federal election, which must be held by November 2013.