Big surplus tipped in Costello Budget

CANBERRA - Treasurer Peter Costello will tonight present his 10th Budget against a background of troubling economic trends and a deepening rift with Prime Minister John Howard that threatens to distract the Government from a new policy programme.

Politically, the Budget already is being seen in the context of Costello's ambitions to succeed Howard, and Howard's refusal to consider handing over until he is ready to go.

Despite new polls showing Howard is clearly the preferred leader, and the Prime Minister's strength within the Liberal Party, Costello is rapidly being locked into a leadership challenge.

At the same time, Costello has been presented with the difficult choice of new taxation reform and long-term economic measures and the temptation to spend heavily with what is likely to be a much larger surplus than expected.

Although Costello has played down estimates, the forecaster Access Economics has predicted a surplus of A$13.4 billion ($14.2bn) this year - A$6.2 billion up on last December - with surpluses of about A$10 billion for the following three years.

But Access warned that this was a product of surging commodity prices, relying heavily on demand from China and other key markets, and that prices would fall as new iron ore and coal mines came on stream.

Analysts are predicting growth in gross domestic product to remain at 2 to 3 per cent for the next three years, with key indicators such as housing and retails sales slowing, and the trade deficit soaring.

Costello was still finalising details over the weekend, and meeting with the Cabinet yesterday, as leaks and speculation suggesting last-minute changes to what Howard had earlier said would be an "orthodox" Budget.

It is clear the Budget will be policy-driven, focusing on measures to stimulate productivity and employment, including a range of measures to shift welfare beneficiaries back into the workforce.

"[The] Budget focuses on giving tens of thousands more Australians opportunities to participate in the economic mainstream of Australian life," Costello told Channel Nine.

"Responsible measures today, opportunities for tomorrow - that's what this Budget's being focused on."

This will include the creation of the Future Fund, an investment vehicle for Budget surpluses and the proceeds of the sale of Telstra to help offset the costs of an ageing population, although new spending may bite into original plans.

It will include a range of measures already announced, including science and health initiatives and a reduction in the 12.5 per cent superannuation surcharge for high income earners.

But the centrepiece will be the carrot-and-stick drive to encourage more beneficiaries into jobs, with new rules to allow solo parents and disability pensioners to keep more of their benefits for longer during their transition back into the workforce.

The Budget will fund 80,000 new childcare places to help sole parents, who will need to seek work when their youngest child starts school, introduce tougher work tests and eligibility rules, and extend the hours required of long-term unemployed on work-for-the-dole schemes.

While Costello refused to comment on further tax measures, newspapers reported the Budget would deliver across-the-board tax cuts in addition to those promised for 2005-06 in last year's Budget.