Local economists have described as "madness" the Government's attempt to eke out a razor-thin budget surplus in 2012-13.

Treasurer Wayne Swan released his Mid Year Economic and Fiscal Outlook (MYEFO) on Tuesday, forecasting a budget deficit of $37.1 billion this financial year, up from $22.6 billion predicted in May.

But emboldened by news that ratings agency Fitch has awarded Australia AAA status, Mr Swan says the budget is on track to return to surplus by $1.5 billion in 2012-13.

This will be achieved thanks to $11.5 billion in new savings delivered by cutting the public service and changing some payments like the baby bonus.

University of Newcastle economics professor Bill Mitchell says the Government's attempt to deliver a surplus is crazy.

"I think it demonstrates the incompetence of the Government," he said.

"We've got a situation where the world economy's slowing and probably major areas in the world are going to go back into recession.

"We've got the private sector in Australia spending very modestly, wanting to save, trying to bring down the debt they ran up before the crisis began.

"And under those circumstances, with employment flat for almost the whole year, you've got a government that's proposing they're going to cut spending further - that's just madness."

Sorry, this video has expired Wayne Swan explains this year's deficit blowout ( Chris Uhlmann )

Political imperative

JP Morgan chief economist Stephen Walters says he would not describe the push for a surplus as madness, but he does think it is unlikely to be achieved.

"The goalposts have moved a fair bit; in fact they've moved by $15 billion, so essentially what the Government's promising now is quite implausible, which is a $40 billion turnaround in their budget position in just 12 months," he said.

"But clearly the Government's got a political imperative here.

"They see it as very important for their fiscal credibility to deliver a surplus, but I would argue there's a very plausible case for letting the budget stay in deficit while we're getting this weakening in the global backdrop and while financial markets are in turmoil."

While economists generally were not keen about the surplus promise, the Government found one ally in Australian Chamber of Commerce and Industry director of economics Greg Evans.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Listen Duration: 4 minutes 3 seconds 4 m 3 s Australia now fully AAA, surplus or not ( Michael Janda ) Download 1.9 MB

"Returning to surplus in 2012-13 and beyond in the manner in which the Government has outlined today is appropriate and responsible," he said.

But despite all the fuss, the planned $1.5 billion surplus is little more than an accounting error in a total budget worth close to $400 billion.

More flexibility

The big international ratings agencies continue to seem untroubled by the size of the Government's deficit, with Fitch joining its bigger rivals in rating Australian government debt as AAA.

Fitch says low government debt, a flexible exchange rate and an open free-market economy combine to make Australia one of the safest countries to lend to.

The agency also agrees with economists who say the Government should be flexible in its surplus commitment.

Fitch's primary analyst for the report, Art Woo, says economic reforms over the past 30 years have been the key to Australia weathering recent financial shocks.

"A combination of economic reform, particularly through the 1980s and early '90s in terms of opening up trade and labour markets, helped create a more diversified economy," he said.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Listen Duration: 5 minutes 40 seconds 5 m Swan says surplus achievable following $15b budget blow-out ( Sabra Lane ) Download 2.6 MB

"Australia has shown the ability to weather a number of externally driven shocks and going forward we still think Australia has a high capacity to do so."

Mr Woo says it is this economic structure and Australia's consistent long-term economic and fiscal performance that are critical to the AAA rating, not whether the Government achieves its forecast surplus next financial year.

"The public debt level is low. We estimate it's around 26 per cent of GDP in comparison to the AAA pair rating group median that's closer to 5 per cent, so that demonstrates that Australia's government has actually remained fiscally prudent for a number of years," he said.

"They have a strategy in place which is to keep a lid on expenditure, and if per chance the revenues actually disappoint because global growth slows, exports slow and that feeds back into the economy, we wouldn't view that to be such a problem."

Australia has always held a AAA rating for debt issued in Australian dollars, but it now joins only 14 other countries that Fitch rates AAA on debt issued in foreign currencies.

It is harder to obtain a high rating on foreign currency debt because the Government cannot simply print more money to meet its repayments.