Wayne Swan’s third Budget was billed as a “no frills” affair and the Treasurer has delivered in spades with another small reduction in the deficit and offsets for a range of mainly health-related initiatives. The only excitement is the central selling point for the government — a much faster return to surplus than forecast, with a small surplus now forecast for 2012-13, three years ahead of previously forecast.

But the lag from taxation receipts from a recovering economy means there will still be a $40.8 billion deficit in 2010-11, before an expected $34 billion surge in revenue in 2011-12 hits the Budget bottom line and accelerates the Government’s return to surplus.

As expected, the government has pumped even more money into primary health care — $2.2 billion all up, in addition to the funding deal thrashed out with the states and territories at COAG. A new Renewable Energy Future Fund will also be established, partly funded by savings from the shelving of the CPRS, to pump more money into the renewables sector despite the slow rollout of previous big spending initiatives like the Solar Flagships program.

There’ll also be a simplified tax return system from 2012-13 and an array of small tax changes aimed at reducing compliance costs for small businesses and enhancing Australia’s credentials as a financial services centre. They include the establishment of a retail bond market and tax changes for foreign-owned banks to reduce their cost of capital and increase competition for local banks.

Otherwise, the sort of big-ticket spending items that traditionally form part of a pre-election budget are absent.  Instead, this is a budget designed to convince Australians Labor can be trusted to manage the recovery as well as it managed the GFC.

The Budget returns Australia to right where it was in 2008, before the GFC tore a hole in the government’s economic plans. Returns literally — the government will spend 25.1% of GDP this year, the same as 2008, after the stimulus surge in spending last year that took spending to over 26% of GDP.  And like in 2008, the government has disappointed on the savings front, finding only $1.4b in savings next year.  It has claimed $2.5b and $30b over Forward Estimates, but much of that is the RSPT and tobacco excise increase rather than genuine cuts in expenditure — although the Government has moved to end the disgracefully generous treatment of locally-produced ethanol and achieved some big savings on pharmaceuticals.

The economic forecast that will drive the rapid return to surplus is fuelled by a 14.5% terms of trade surge — 3.75% GDP growth next year, rising to 4% in 2011-12 before dropping back to 3% in out years; unemployment will drop to 4.75% in 2011-12 and inflation will remain steady at 2.5%.

The story of this Budget, and like the Australian economy as a whole, is pretty simple: it’s doing almost obscenely well compared to other western economies, and the GFC is increasingly looking like a momentary aberration from a long, resources-led period of high growth in a flexible, open economy. The government doesn’t have to work too hard to keep that growth going, but it is a huge challenge to manage it sustainably. The government’s tax package and this Budget are small steps toward that goal, though at least they’re in the right direction.