By Business editor Peter Ryan
A top financial strategist has warned the government's pursuit of a budget surplus could spark a recession and ultimately jeopardise Australia's AAA credit rating.
Christian Carrillo, head of fixed income strategy at Societe Generale in Tokyo, has backed concerns from Australian business leaders that deep spending cuts to achieve a surplus could damage the economy.
Listen to my extended interview with Christian Carrillo.
Read the ABC News Online story here
"In the effort of achieving the budget surplus there is going to be so much money withdrawn from the economy that demand will weaken again and therefore the economy will potentially even dip over into a recession," Mr Carrillo told AM.
"This actually could be magnified if they slow down in demand and potentially in employment causes a downturn in the housing market even more than what we are already observing."
Mr Carrillo told AM that although global ratings agencies will initially applaud the budget cuts, the economic fallout could eventually prompt a review of Australia's prized AAA credit rating.
He pointed to savage austerity programs in Britain and recent warnings that its AAA rating could be downgraded because of the economic impact.
"If Wayne Swan went into a similar type of a strategy and the economy were to slow down significantly because of the pursuit of a surplus the ratings agencies will stab him in the back at the first sign that the economy is losing momentum," Mr Carrillo said.
"You can actually do something like an own goal in which because you tighten fiscal policy so much, you find that perhaps interest rates are biting a little bit, then you could actually cause a downturn in the economy that could in turn, in the future, risk your own sovereign rating."
Mr Carrillo said the Treasurer should heed calls from prominent business leaders that a budget surplus at all costs was a dangerous strategy.
"They are seeing the situation on the ground which is why we are concerned."
Mr Carrillo told AM that reduced demand in the economy resulting in a recession could also harm the already soft housing market.
"The housing market is wobbly at best. Let's just say that demand weakens so much that housing takes a turn for the worst and more seriously. You cannot just say okay, we will achieve the surplus no matter what," Mr Carrillo said.
"The housing market has been looking very poorly for a while in places like Western Australia which was supposed to be the main beneficiaries of the mining boom. Other states in Australia that are arguably in recession and that if you squeeze further from them, I think recession is a realistic possibility."