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Tuesday, November 25, 2008

They're preparing us for a deficit

THE Prime Minister has opened up the possibility of the budget going into the red - saying that if there is a budget deficit, the shortfall is likely to be met from government investment funds such as the $20 billion Building Australia Fund rather than by borrowing.

Under questioning at the conclusion of the APEC summit in Peru Mr Rudd repeatedly refused to rule out a deficit, saying only that the government expected to get by without having to borrow.

"What I am saying is, under current circumstances, we do not see the need to borrow for the purposes of Government spending and investment," he said.

When asked whether he was drawing a distinction between a budget deficit funded by borrowing, and one funded from the reserves of funds such including the Building Australia Fund and the $11 billion Education Investment Fund Mr Rudd said that the purpose of the funds was clear cut and that "each year as you draw down on the funds, of course it goes to the budget bottom line, that is clear."...

"We have known that and we have said that all the way through," Mr Rudd said. "What I am talking about is borrowing for the purposes of Government investment or spending and what I am saying to you loud and clear is that based on current circumstances, we do not see the need to borrow."

The distinction opens the way for this year's forecast deficit of $5.4 billion to turn into a deficit funded by some of the $30 billion the government salted away in infrastructure investment funds in the May budget.

The government would be able to argue that although the budget had fallen into deficit, it did not need to borrow in order to fund it.

The new line of argument came as APEC leaders spoke of a need further co-ordinated action in the new year to avert global recession.

"There was the beginning of an understanding of the added benefit that comes from co-ordinated action based on advice from the International Monetary Fund that if you act together it has a double stimulatory effect," Mr Rudd said.

The Prime Minister distanced himself from a forecast in the communique that the economic crisis could be over within 18 months.

"I think that statement was from the Peruvian President," he said. "We all know for a fact that the recovery from the global financial crisis and the global economic crisis is going to take a period of time."

Overnight the IMF warned that that it expected the crisis to continue into 2010. "This will dampen economic prospects via a number of potential channels, notably lower demand for Asia’s exports, tighter funding conditions, more volatile capital flows, depressed equity prices and confidence," it said it its Asia-Pacific Economic Outlook.

It forecast economic growth of just 0.8 per cent this year, and a mere 0.1 per cent next year in what it called "industrialised Asia," made up of Japan, Australia and New Zealand.

It expects Australia's growth rate to slide from 2.4 per cent this year to 1.8 per cent in 2009.

Merrill Lynch joined Goldman Sachs JB Were and JP Morgan Monday in forecasting an Australian recession beginning in the last half of 2008. All three expect the budget to fall into deficit.

Speaking at the National Press Club Opposition Leader Malcolm Turnbull declined to offer support for a deficit. "You’re wanting me to give Kevin Rudd a leave pass to have lazy economic management and run the budget into deficit?" he asked. "If that's the invitation, I decline it. Mr Rudd has inherited public finances which are the envy of the world. There is no reason why he should not be able to maintain a surplus."