P 122345Z JAN 09
FM AMCONSUL SYDNEY
TO SECSTATE WASHDC PRIORITY 8765
INFO AMEMBASSY CANBERRA PRIORITY 
AMCONSUL MELBOURNE PRIORITY 
AMCONSUL PERTH PRIORITY

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 
------- 
 
¶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 
--------------------------------------------- ------------- 
 
¶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 
----------------------- 
 
¶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 
--------------------------------------------- -- 
 
¶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 
--------------------------------------------- ------- 
 
¶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 
--------------------------------------------- ---------- 
 
¶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. 
 
 
FERGIN