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THE Rudd Government may need to raise $45 billion to stimulate the economy and help state governments finance new infrastructure programs.

The states’ funding has been hit by the federal Government’s policy to guarantee bank deposits, which has prompted investors to dump state government bonds and buy guaranteed bank debt.

The federal Government has this year issued $15.3 billion worth of bonds, a major source of income for the Government, but economists at Citigroup predict this will triple in a push to finance the projected budget deficit and public sector spending. “In the seven months since the budget, the whole world has changed,” Citi economist Stephen Halmarick said.

The investment bank forecasts the Government will borrow $10 billion for the potential deficit in the next year and $15 billion for its Building Australia, health and education funds.

Mr Halmarick said the Government’s original plan was to finance the funds from the 2009-10 budget surplus, but the money would not necessarily be invested in the same year.  “That surplus doesn’t exist any more,” he said. “Some of the money could be raised in future years as projects come on line, but it was going to be funded out of the surplus.”  The Government plans for the board of the Future Fund to manage and invest the money held in the three funds. On top of the national spending, a further $15 billion could be borrowed to help fund the states’ infrastructure agenda.

The economists estimate the Government will need to fund an extra $5 billion worth of debt that is due to mature in the next financial year.  Citi chief economist Paul Brennan said there would be demand in financial markets among investors to buy national government debt as long as inflation remained low during the economic slowdown. He said it was positive for the economy for the Government to be spending, particularly on infrastructure, as most major economies faced recession.

The International Monetary Fund has warned that next year will be one of the toughest of recent times for the global economy. “It looks like we’re going to shift from surplus to deficit, and that deficit could be really large,” Mr Brennan said.  “The Government could feel they have to stimulate things a bit more, given you have the IMF calling for a co-ordinated fiscal stimulus.”  Economists have started to question how the state governments will pay for their infrastructure plans, after their bonds were dumped by investors choosing to buy guaranteed bank debt.

But Mr Brennan said the federal Government could borrow cash and lend it to the states in a bid to maintain public sector spending on infrastructure.

*source The Australian

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