KEY POINTS:
The Australian federal Government will have to deliver a budget deficit this year and proceed with big-spending infrastructure programmes as the threat of a recession looms, economists say.
The latest call to delve into the red for the first time since 2001 comes as the International Monetary Fund
(IMF) forecasts an even bleaker outlook for the Australian economy than Treasury had anticipated.
The Rudd Government has already raided half of this financial year's projected budget surplus to boost the sagging economy with handouts to pensioners, parents and first-home buyers.
Economists are expecting more of the surplus to be raided to pay for infrastructure projects.
Citigroup managing director of economics Stephen Halmarick said the Government would have to deliver budget deficits for the next two financial years to shield Australia against unfavourable economic conditions.
"We do not, however, see this as a negative," he said. "Indeed, allowing the budget to move into deficit at a time of significant global recession and near-recession conditions in Australia would be sensible economic policy."
Treasurer Wayne Swan handed down a A$21.7 billion ($25 billion) budget surplus for 2008/09 in the May budget, and projected a A$19.6 billion surplus for the following financial year.
But Treasury's Mid-Year Economic and Fiscal Outlook this week revised down its projected budget surplus for this financial year to A$5.4 billion.
This followed last month's A$10.4 billion emergency stimulus package.
The mid-year economic outlook also downgraded growth forecasts for 2008/09 to 2 per cent, from 2.75 as forecast in the May budget.
On Friday, the IMF forecast an even weaker 1.8 per cent growth pace for the year to the end of June 2009.
"The Government's economic forecasts still look too optimistic to us," Mr Halmarick said. "As a result, we would expect to see either the 2008/09 and/or the 2009/10 budgets move into a deficit position."
With budget deficits likely, Mr Halmarick said the Rudd Government would have to scale back investment in its health, education and infrastructure funds or issue more Commonwealth Government bonds to finance the programmes.
The sovereign wealth funds were set up in the May budget and were to be financed with A$40 billion from future budget surpluses.
HSBC chief economist John Edwards said infrastructure spending programmes would proceed as the economy slowed.
"The Rudd Government was after all elected on a platform of extensive renovation of Australia's physical infrastructure, and improvements in health and education," he said.
Dr Edwards said easing inflationary pressures would also give the Government a reason to spend on infrastructure. "It could not implement the programme in the May budget because of the inflation constraint.
"With that constraint now removed, in peril of a recession that may make it a one-term Government, and with the entire economic community endorsing fiscal deficits as appropriate in the new circumstances, Labor is hardly likely to hang back on supporting worthwhile projects."
The Howard Government handed down a A$983 million budget deficit for 2001/02 as the US economy struggled with a recession.
- AAP