|Patrick Walters and Brad Norington | October 18, 2008
BUDGET pressures could force the Rudd Government to slash plans to order 100 F-35 joint strike fighters next year and postpone the acquisition of a fourth air warfare destroyer.
A long-term funding gap of up to $15billion in the defence budget, together with the impact of the global financial crisis, is expected to lead to an order for only three squadrons, or 75 F-35s, mid-next year.
The $16billion F-35 purchase would be Australia's biggest defence purchase, with the RAAF planning to buy four squadrons, or 100 aircraft, to replace the F/A-18 Hornets and F-111 strike bombers from 2014.
Kevin Rudd's long-term plan to expand the navy - including a new, larger submarine fleet - could also be threatened by the looming economic crunch.
Fallout from the global financial crisis continued yesterday as Australian stock prices slumped another 1 per cent, defying a 4.6 per cent rally on Wall Street overnight.
The collapse of credit markets over recent weeks has triggered wild stock market gyrations and the collapse of 25 overseas banks.
The Prime Minister released a five-point plan yesterday for tighter regulation of lending practices by financial institutions, promising to push for its global adoption through the G20 group of nations.
The plan, outlined at a meeting of business executives in Sydney, includes requiring banks to squirrel away profits from boom times to use during economic downturns and penalising financial institutions that reward with big pay packets executives who use high-risk investment practices.
On Tuesday, Mr Rudd moved to meet the spread of the turmoil into the real economy by raiding his $22billion budget surplus to fund a $10.4billion pump-priming package to sustain Australian economic activity.
It included one-off bonuses for millions of pensioners, carers and low-income families, to be paid in December, as well as first-home buyer grants worth as much as $21,000 to prevent a collapse of the housing sector.
In a positive development for mortgage holders, the ANZ Bank broke ranks with its rivals by cutting home loan rates by 0.25 of a percentage point.
All the major banks failed to pass on the Reserve Bank's full one-percentage-point rate cut this month, instead reducing home loan rates by 0.8 of a percentage point, citing continued pressure on their own funding costs. But the Government's decision to join other countries in guaranteeing bank debt in an effort to shore up the global financial system has helped to reduce funding costs.
ANZ announced its variable mortgage rate would be cut to 8.32per cent. The Commonwealth Bank rate stands at 8.53per cent, with NAB and Westpac on 8.56per cent and St George on 8.57per cent.
In Sydney yesterday, Mr Rudd told a business summit called to discuss the crisis that he remained determined to take whatever action was necessary to underpin economic growth.
"Together we are going to come through this, and we are going to come through this thing in good shape," he said.
Under the Rudd plan, financial institutions would be licensed to operate on the condition they fully disclosed their exposures, on and off balance sheets. The condition would apply to banks, insurance companies, hedge funds and clearing houses.
Mr Rudd said he wanted banks and other institutions to use times of economic prosperity to build up capital as a buffer for bad times. He also wanted regulatory authorities to set high capital requirements for firms with executive salary packages that "rewarded short-term returns for excessive risk-taking".
Mr Rudd said accounting rules used to evaluate risk should be set to take a more medium-term perspective. And he wanted the International Monetary Fund to be given a strengthened mandate to provide prudential advice, especially for early warnings on vulnerabilities in the system.
"I will be corresponding with other G20 countries around the world over the coming 24 hours in support of these points," he said at a briefing of members of the Australian Industry Group.
And in an interview with The Weekend Australian, Wayne Swan has described the collapse of world credit and finance markets as "a freight train" that could mow down nations, even those with strong economic fundamentals.
But the international financial turmoil has left the $22 billion Australian defence budget facing its most difficult financial pressures in nearly 20 years. The adverse economic trends promise to test the Government's commitment to increase annual defence spending by 3 per cent each year in real terms to 2018.
Defence Minister Joel Fitzgibbon months ago acknowledged a funding shortfall of up to $11billion in the defence budget over the decade to 2018 covering personnel and new equipment operating costs, including the army's planned extra battalion. Defence Department internal accounting is now showing the funding shortfall, which includes a