The Abbott Government will drive the Budget deficit towards $40 billion by diverting almost $9 billion into the Reserve Bank as Treasurer Joe Hockey signals growing concerns about the international economy.
Mr Hockey, fresh from revealing plans to lift the Commonwealth's debt ceiling to $500 billion, said yesterday he would boost the Reserve's special reserve fund by $8.8 billion with borrowed money.
The increase in borrowings will wipe away the Government's pre-election plan to improve this year's Budget by $700 million.
The fund has been run down over the past nine years by governments of both political persuasions taking big dividends.
Former treasurer Wayne Swan took a $5.2 billion dividend out of the record $8.8 billion profit the Reserve made in 2009-10.
Pressed by governor Glenn Stevens to stop taking dividends until the fund, used to offset currency changes and other contingencies, contained almost $11 billion, Mr Swan took $500 million to boost the May Budget.
Mr Hockey said he had decided to top up the bank's reserve fund as quickly as possible.
He said he had doubts about how the US Congress would deal with the next round of talks concerning the American debt ceiling early next year and that there were serious clouds over the European banking system.
"We need all the ammunition in the guns for what's before us," Mr Hockey said. "Our institutions must be at their absolute strongest to deal with the challenges ahead."
Mr Hockey said Mr Swan had ignored the Reserve's concerns about its funding buffer.
The Treasurer admitted the money would have to be borrowed, saying the Budget deficit was now well on its way to $40 billion.
But shadow treasurer Chris Bowen said neither he nor Mr Swan had ever had a request from the Reserve for such a big grant.
He said Mr Hockey had to release all advice from the Reserve and Treasury about moving such a large amount of money from the Federal Government to the bank.
"To create the perception that the Reserve Bank urgently needs $8.8 billion could in fact undermine confidence in the Australian economy," Mr Bowen said.
Prime Minister Tony Abbott yesterday played down suggestions the Government's Commission of Audit could end up recommending tax rises.