Investors upbeat as deficit encourages talk of rate cuts

The market rallied strongly towards the end of the week as the US sharemarket hit another record high, and as the Bank of England and the European Central Bank kept their interest rates at record lows.

Meanwhile, the Rudd government unveiled a larger than expected budget deficit on Friday, prompting economists to predict further rate cuts.

For the week, the benchmark S&P/ASX200 index rose 74.8 points, or 1.5 per cent, to finish at 5116.8 points, while the broader All Ordinaries index rose 74.9 points, or 1.5 per cent, to finish at 5098.7 points.

The ASX200 has now closed higher for two weeks in a row, while the All Ordinaries index has closed higher for six weeks in a row.

The government said on Friday that the budget deficit had jumped in the past two months from the $18billion forecast in the May budget to $30.1billion this financial year, as it struggles to deal with a surprise revenue write-down of $33billion over the next four years.

The unemployment rate is expected to rise to more 6 per cent this year, making it higher than at any time during the financial crisis.

But the Rudd government says it has identified $17.4billion worth of budget cuts, describing them as "responsible savings".

According to economists, the budget deficit could have been worse without those cuts.

"What the government has chosen to do is a limited amount of extra taxes and a limited amount of spending cuts ... the outcome would have been worse if no changes were made," St George senior economist Hans Kunnen said.

"There is no easy way out. Assets were sold by previous governments to pay down debt. That option is no longer available. Improved economic growth would help. [And] further large-scale stimulatory spending does not appear to be on the political agenda."

The revised deficit came in the same week as the global chief economist of Citigroup Willem Buiter made a rare visit to Australia and he had some very positive things to say about Australia's economy.

"Australia's position is not without issues, but [its] problems are luxury problems compared to those in the rest of the advanced economy universe," Professor Buiter said.

"This is a very unusual place to be in, to see a headline suggesting that the governor of the central bank is encouraging the cabinet to be less restrictive in fiscal policy is something that I had given up hope of ever seeing," he said.

For the week, Amcor rose 24¢ to $10.79 after the global packaging company said it would split its Australasia & Packaging Distribution business from other operations.

Crown jumped 56¢ to $13.26, after it shook up senior management in a move that resulted in its Perth resort boss promoted at the expense of his Melbourne counterpart.

Rio Tinto rose $2.07 to $59.31, after the miner agreed to sell its majority stake in a NSW copper and gold mine to a Chinese company.

Whitehaven Coal slipped 17¢ to $1.96, as falling coal prices dampened the effect of a strong increase in the company's production.

Woolworths slipped 4¢ to $33.57, after the retailer's sales grew 4.3 per cent to more than $59 billion last financial year.

AGL Energy rose 1¢ to $14.75 on news that the largest solar power project in the southern hemisphere would be built in NSW, with funding from the state and federal governments and the energy company.