By James Grubel
CANBERRA, May 11 (Reuters) - Australia's Prime Minister Kevin Rudd on Monday sought to reassure debt-wary voters that soaring national deficits will be temporary as a key independent senator threatened to block parts of his second budget.
Rudd's leftist Labor government is expected to use the budget on Tuesday to curb payments to middle-income families, while giving more money to elderly pensioners, although media reports said single mothers on welfare may miss out on the handouts.
But lawmaker Nick Xenophon, whose vote the government may need to pass laws through a difficult upper house Senate, said any move to increase pension payments for the elderly would also need to boost welfare payments to sole-parent families.
"My position is very clear -- you can't have a society of haves and have-nots. You can't have one class of pensioners getting an increase and another class not getting an increase," Xenophon told reporters.
If the major conservative opposition votes against the budget measures, Rudd will need support from Xenophon, one other independent, and five Greens to pass his budget laws through a Senate providing headaches for Rudd on a raft of issues.
Australian voters, conditioned by a decade of surpluses, generally punish governments which run up large debts or mismanage the economy, and Rudd will want the budget to secure his economic credentials in case he opts for an early election.
The next election is due in late 2010, but Rudd may have the option of calling a vote earlier if the Senate blocks his laws to fight climate change or lift taxes on alcoholic soft drinks, sweet drinks with alcohol in them that are targeted at young people.
MODERNISE LABOR
The Australian Financial Review newspaper said Treasurer Wayne Swan and Rudd had framed the budget with an election eye.
"This is the budget where Kevin Rudd and Wayne Swan set up the strategic plays for the 2010 election campaign, refashioning Labor as the party of equity and economic responsibility and using the power of incumbency to seek to shatter perceptions of the (conservative) coalition as responsible economic managers," political editor Laura Tingle wrote on Monday.
The government has said the budget will target middle-class welfare payments, such as rebates for the cost of private health insurance, to pay for spending and promised tax cuts.
Rudd will also commit to fund paid maternity leave from 2011, and is expected to outline new stimulus measures to help Australia through a looming recession, including details of up to A$25 billion ($19 billion) in new infrastructure projects.
But economists expect the budget will unveil a record deficit for the 2009/10 financial year, with no return to surplus for six years. A Reuters poll of 16 economists found a median forecasts for a A$60 billion deficit in 2009/10.
Private forecasters Access Economics on Monday said it expected a record underlying cash deficit of A$59 billion for 2009/10, worth about five percent of gross domestic product.
Rudd told reporters all countries were running deficits to ensure ongoing stimulus to ward off the global downturn.
"There is a global recession. Every government around the world is engaged in temporary borrowings for temporary deficits in order to plug the gap which has been left by a private sector in retreat, and to do so temporarily," Rudd said on Monday. ($1=A$1.32) (Editing by Jan Dahinten)