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Wednesday, October 15, 2008

Why $10 billion? Because it’s a bucket-load of money

and we’re facing a bucket-load of trouble

Unlike the US and much of Europe, we are not actually in that much trouble yet. Our well-run financial system and extraordinarily high export prices have bought us time.

The best forecasts suggest that almost all of the developed world is facing recession. In six of the world’s biggest economies economic growth has slowed to an annual rate of 0.5% or less. In another three it is negative or zero. The recession will be more like the deep one of the early 1980s than the shallower one at the start of the 1990s.

Kevin Rudd’s advisors have told him Australia has time to avoid that vortex. If it acts straight away.

We mightn’t be able to avoid a severe slowdown but we just be able to avoid recession. The difference is important. Australia’s last recession pushed the unemployment total up to one million. It took the best part of two decades to get it back down below half a million.

The $10.4 billion price tag works out to around 1% of GDP. That’s normally considered big enough to have an impact. In the US this May President Bush sent out cheques worth 1% of GDP with a face value of $US600 per individual, $US1200 per couple and $US300 for every child. It stopped the US from sliding into recession at the time...

Australia’s Keating government came up with a stimulus package half that size in the early 1990’s. But One Nation, as it was called, was too late. The Australian economy was already on the mend. As a result much of it ended up never being delivered.

By contrast Kevin Rudd’s package is timely and will be delivered quickly.

Not all of the cheques going into the hands of pensioners, seniors, carers and parents in December will be spent. But pensioners spend more than the rest of us - around 80 per cent of windfall cheques rather than 70%. They are an efficient way of getting money into shops.

Some of the extra billions that will be spent in shops (and on houses as a result of the boost to First Home Owner Grants) will be spent again. The Australians who work in the shops, make the goods and services that are sold there and work constructing and furnishing houses will themselves spend some of their extra income.

All up, pumping the best part of 1% of GDP into the economy in December should boost GDP by around 1% (when competing effects cancel out). It might give us an annual growth rate this financial year of 2.0% instead of 0.5% to 1.0% or 1.5% instead of 0.5%.

By early next year the boost will have faded, but hopefully by then the full effect of the September and October interest rate cuts will be felt and any danger will have passed.

If not, Kevin Rudd will do more. He said yesterday he would do whatever is needed to keep Australia from a recession. He means it.