MINISTER EXPECTS FEDERAL BUDGET DEFICIT,

C O N F I D E N T I A L SYDNEY 000013


E.O. 12958: DECL: 01/11/2019
TAGS: ECON EFIN AS
SUBJECT: MINISTER EXPECTS FEDERAL BUDGET DEFICIT,
REGULATORS PREDICT RECESSION

REF: A. 08 CANBERRA 1302

B. 08 CANBERRA 1266

Classified By: Pol/Econ Officer Casey Mace for reasons 1.4 (b) and (d)

Summary
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1. (C/NF) The Australian Government has accepted it is
heading towards its first federal budget deficit in eight
years, according to Federal Infrastructure Minister Anthony
Albanese, but remains committed to a muscular fiscal policy
to prevent a deep or protracted recession. In a private
lunch meeting in Sydney January 9 with the Charge and Consul
General, Albanese said that the government is already
planning to further stimulate the national economy with a
second infrastructure package that will be larger than the
AUD 4.7 billion dollar package announced in December 2008
(ref. A). Two of Australia's key financial sector regulators
told the Charge in separate meetings that Australia will not
be able to avoid a recession in 2009, but that its economic
consequences would be more predictable than the financial
sector events of 2008. The Chairman of the Australian
Securities and Investments Commission hopes the new SEC
Chairwoman can visit Australia in early 2009 to finalize a
mutual recognition agreement with the United States for
financial market operators. The Charge's meetings with
Albanese and regulators confirmed that a recessionary outlook
is growing more pervasive in the GOA's economic circles.
While most economists argue that a deficit is justified to
stimulate the economy in the face of a looming recession,
Prime Minister Rudd's Labor government will face political
heat for breaking the eight-year streak of budget surpluses.
End Summary.

Infrastructure Round Two: Bigger Projects and More Dollars
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2. (C/NF) Privately confirming what many economic
commentators have predicted, Infrastructure Minister Albanese
told the Charge January 9 that the federal budget was headed
towards a deficit. The combination of shrinking revenue
caused by slowing economic growth and increased government
spending to stimulate the economy has eaten much of the
government's budget surplus. Nonetheless, Albanese said the
GOA is committed to further spending packages to shore up the
economy even at the cost of a larger deficit. Albanese
confirmed that the government is planning to announce a
second, larger infrastructure package in the coming year. He
explained that much of the first AUD 4.7 billion
infrastructure package announced on December 12 (ref. A) was
for projects to rail, road, and research facilities that were
already in the pipeline. The government is planning to
finance large new projects, like a major expansion to
Sydney's metro transit system, in a second wave of
infrastructure spending. Albanese said the federal
government is hoping to attract private sector participation
in financing the next set of infrastructure projects, but is
prepared to bank roll the entire cost if necessary.

An Australian Recession
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3. (C/NF) Ross Jones, the deputy chairman of the Australian
Prudential Regulatory Authority (APRA),told us in a separate
meeting that Australia will enter a recession this year.
Jones said that the "worse is yet to come, but events will be
more predictable" than the crisis that seized Wall Street and
sank Lehman Brothers. He explained that even the more
predictable recession facing Australia will inevitably lead
to the collapse of some of Australia's larger companies, and
a couple of Australian banks will have exposure. As the
national regulator for banks, insurance, and pension funds,
APRA keeps a close eye on the health of the financial sector.
Jones pointed out that Australia's four major banks remain
healthy and successfully completed capital raisings in
December. Citing Commonwealth Bank's acquisition of Bank
West, Jones noted that the crisis has created opportunities
for the big banks to acquire smaller banks in Australia. He
expects this trend to continue, citing the potential that
Queensland-based Suncorp will be acquired by one of
Australia's major banks in the coming year. These
acquisitions, together with the withdrawal of foreign banks
from the market, will lead to greater concentration in the
banking sector. The chairman of the Australian Securities
and Investments Commission (ASIC),Tony D'Aloisio, provided a
similar recessionary outlook in a separate meeting.
D'Aloisio said that Australia is heading for a recession, but
he expects it to be short and shallow.

Still Hungry for a Mutual Recognition Agreement
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4. (SBU) D'Aloisio said that the GOA was still committed to
executing a mutual recognition agreement for financial market
operators with the United States. A framework arrangement
unveiled at a joint press conference with SEC Chairman
Christopher Cox in August 2008 represented the first phase of
the agreement. The SEC and ASIC agreed to defer completion
of the second phase, authorizing specific stock exchanges and
broker-dealers to operate in the counterpart market without
needing to comply with additional regulations, until after
the new U.S. administration assumes office. D'Aloisio said
that he has written the incoming SEC Chairwoman to urge her
to make the mutual recognition agreement a priority, and
hopes she will be able to visit Australia in early 2009 to
complete the agreement. D'Aloisio pointed out that the
United States is Australia's largest investor and remains a
critical source of capital for the Australian economy. As a
result, a mutual recognition agreement that reduces
regulatory barriers to investment remains a top ASIC priority.

A Principle-Based Approach to Executive Compensation
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5. (SBU) Ross Jones confirmed that his regulatory agency,
APRA, had already been working on a new policy of principles
for executive compensation before the financial crisis set in
last year. One key aspect of the policy is to link executive
remuneration to longer-term performance indicators in order
to temper high-risk behavior. Jones said that because the
GOA is participating in the G-20 working group on executive
compensation, it has decided not to announce any
Australia-specific policy measures until after the G-20
concludes its work on the issue (Ref. B).

Comment: Deficit-Spending Will Demand Political Courage
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6. (C/NF) Over the last several election cycles, the Liberal
Party relentlessly--and until the last election
successfully--portrayed itself as the more responsible
economic manager, in part because it paid off Australia's
national debt in 2001 and consistently delivered federal
budget surpluses. No matter how compelling the case for
economic stimulus, reversing the trend of budget surpluses
and dropping into deficit will expose the Labor government to
intense criticism from the opposition Liberal Party. Indeed,
opposition leader Malcolm Turnbull jumped all over Prime
Minister Rudd when he foreshadowed the possibility of deficit
spending during a November parliamentary debate. A budget
deficit will spark fierce political controversy, but it is
unlikely in the short-term to dent Rudd's popularity among a
populace that is more concerned about jobs and pensions that
are tied up in a sinking sharemarket.


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