The announcement by the federal government of a fiscal strategy that returns the Budget to surplus in 2012–13 is the right economic policy for the times.

This year’s Mid-Year Economic and Fiscal Outlook (MYEFO) has been delivered against a backdrop of dire economic challenges in the Euro area and considerable uncertainty in the global economy.

The unmistakable lesson from economic developments around the world is the fundamental importance of governments living within their means.

By delivering a surplus next year the government will send a strong signal to households, businesses and investors that Australia can keep its house in order.

A budget surplus will provide an important buffer to help ride out the inevitable volatility that lies ahead. It will give us the firepower to step in and stimulate the economy to keep Australia strong if the global situation deteriorates substantially.

Fiscal policy should not be used to fine tune the economy but should be reserved to prime economic growth when it is needed. In 2008–09 Australia’s strong fiscal position allowed it to respond boldly to the challenges of the global financial crisis.

The impact that good public policy has on building confidence in the economy, both domestically and internationally, should not be underestimated.

The simple fact is that foreign investor sentiment does have an impact on the cost at which Australia borrows to fund the investment it needs – investment that ultimately drives productivity and economic growth.

The benefits of this can be seen in the AAA credit rating – and therefore a relatively lower cost of capital – that Australia continues to enjoy.

While the council strongly supports the approach the government has taken, it is important that it continues to strike the right balance in finding future savings that don’t compromise Australia’s ability to maintain economic growth.

The government must also put a firmer foot on the pedal to drive reforms that will enhance the productive capacity of the economy.

We need to pull out all stops to encourage private investment including in key infrastructure, improve the competitiveness of the tax system, lower the red tape burden on business, and step up measures to increase the mobility of labour.

With the MYEFO, the government is on the right path with a fiscal strategy that aims to further strengthen Australia’s economic foundations.

However, if the situation in Europe and around the globe deteriorates rapidly, the government ought to have the capacity to be able to reconsider its position on the surplus.

This scenario would call for unprecedented bipartisanship in support of fiscal policy that allows the Australian economy to stay strong in the face of global turmoil.