Australian Prime Minister Julia Gillard yesterday defended her government's plan to return its budget to surplus next year, arguing that balancing the nation's books would give the central bank scope to cut interest rates.

The centre-left Labor Party Government is determined to become the world's first major advanced economy to deliver a budget surplus after the global financial crisis.

The Government has foreshadowed big spending cuts to achieve a narrow surplus in the fiscal year starting July 1. The budget blueprint will be unveiled to Parliament on May 2 - the same day the Reserve Bank of Australia holds its next monthly meeting to decide whether to shift the key cash interest rate from its current 4.25 per cent.

Many economists and business groups have argued that the Government should postpone a budget surplus until the economy is stronger.


Running a surplus can be a headwind for economic growth as the Government is taking more money out of the economy than it is putting in.

But it can also mean the central bank has more scope to stimulate growth with lower interest rates than would be the case if the Government was adding fuel to the economy by running a budget deficit.

Many economists and businesses thought the Reserve Bank should have chosen to stimulate the slowing economy by cutting interest rates at its last board meeting on April 3.

Gillard said she would tell a business forum in a speech last night that a surplus budget would factor in the Reserve Bank's thinking on interest rates.

"Putting the budget in surplus does give the Reserve Bank room to move if they choose to do so," Gillard told ABC radio.

Newspapers have described the speech, a text of which was given to some media outlets, as Gillard pressuring the central bank to reduce interest rates.

But Gillard said yesterday the Reserve Bank was "completely independent" of government. Government ministers as a rule do not comment on interest rate movements in respect for the central bank's independence.

Since Labor was elected to government in 2007, it has delivered record annual deficits by spending billions of dollars on stimulus packages.

With elections due late next year, a surplus budget would provide a boost to the government's credentials as economic managers.

But the task of balancing the books has become more difficult with slower than expected economic growth in the last quarter of 2011. The economy grew by 0.4 per cent in the three months through December and 2.3 per cent over the year.

Many economists expect the Reserve Bank will reduce the cash rate to 4 per cent at its next meeting.

- AP