Friday, February 20, 2009

$8.7 billion? Let's pay down our cards

The mystery of what happened to the government's $8.7 billion in December stimulus payments is becoming clearer.

Australians spent at least $3 billion of them making extra payments on their credit cards.

Credit card repayments reached an all-time high in December, topping $21 billion - some $3 billion more than is typical.

At the same time Australians took their credit cards shopping more than ever before, pulling them out an extraordinary 145 million times during the month - 12 million more than in the previous December.

The Reserve Bank figures provide evidence for both sides in the stimulus payments debate...

Supporters can argue that the payments had us spending big in December, putting a record $20 billion on plastic. Opponents can argue that we used a big chunk of the payments to pay the plastic off.

Nomura Australia chief economist Stephen Roberts said it wasn't surprising that Australians used the handouts to pay down credit card balances.

"Clearly nobody has any incentive to pay 20 per cent interest. With rising unemployment, paying exorbitantly high real interest rates makes no sense," he said.

The $8.7 billion in December bonus payments will be followed from April by the $10.5 in payments approved by the Senate this month.

Available to Australians earning up to $100,000 a year and worth up $900 each, most will be made automatically through the Tax Office. Some Australians will be entitled to more than one payment.

New car sales continued to climb in January after surging as the bonus payments hit wallets in December. But sales of non-passenger vehicles such as utilities, vans, trucks and buses slid 7.5 per cent.

"This looks like businesses cutting investment plans, particularly in the resources sector, said Commonwealth Securities economist Savanth Sebastian.

Australia-wide, vehicle sales are down 17 per cent over the year.

Sales in Victoria are down a more modest 11 per cent, and jumped 2 per cent in January, twice the national average.


Nicholas Gruen said...

If they've been used to pay down credit card debt, that's very different to being used to pay down home loan debt. One is a debt that's repaid, the other is a line of credit. If they have credit card debts on which they're paying interest, they're the type for whom an available balance is irresistible for future spending. It may take a few months, but they'll spend the money. If they repay their card each month, then chances are the money has been saved.

Joshua Gans said...

I have a question: does this really represent saving? I wonder if instead as home mortgage rates declined, people just transferred debt from credit cards to their mortgages.

Scott said...

Whether people put the extra cash on their credit card or played the pokies a couple of things are pretty certain about the December handout and the upcoming 'stimulus' package;

1. We will get a short term jump in retail sales thus possibly avoiding a 'technical' recession for another 1/4 or two.
2. It will not make much of a difference to rising unemployment let alone create any 'new' jobs

Basically just don't think the underlying problems are being addressed. A bit like giving a bloke in a bad relationship a couple of viagra pills every few months - sure there will be a bit of short term activity but not really addressing the real problem.

Alan Kerlin said...

Yeah what Nicholas said. Spending via a credit card is the same as spending via cash - it's how we do shopping now.
So this lone stat can't be said to be an indictment on the idea of the stimulus.
What is an indictment on it though is the short-term nature of it. The government should be focussing far more on its earlier infrastructure promises, which now sadly look more and more like getting watered down. Inspiration should come from Barak Obama's speeches on building proven new age jobs in green energy and more - like the house insulation initiative X 10.

Anonymous said...

The time-frame of the impact of the cash bonuses seems very uncertain to me. People may spend the money before the cash payments are given out - especially if they are buying on credit - in anticipation of recieving the payment. Other purchases require research and dependencies and therefore could take a few months to be completed.

The real risk for the government is that without timely action the depth of the recession will be much deeper. The housing bubble has left Australia in a highly risky position. It took us a decade to create this house of cards and it will take a decade to carefully take it down and build something sustainable.

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