Thursday, February 12, 2009

IT'S FAILED! The Senate has just rejected the stimulus package

Rudd has just told the House he will reintroduce the bill (moving down the road to a double dissolution).

No stories on it yet, but here's one on the way it was developing.

Malcolm Turnbull no longer has the best of both worlds. He opposed the package, and it got rejected.

But it's not quite a disaster. Someone will cobble something together.

Here's The Age:

Xenophon threatens to derail stimulus package

Leo Shanahan, Katharine Murphy

Independent Senator Nick Xenophon has threatened to derail the Government's $42 billion economic stimulus package unless he given more money for the Murray-Darling Basin.

Despite the Senate earlier voting in favour of amendments to the package that will see special payments to families and individuals reduced from $950 to $900, Senator Xenophon said he would not support the final package in its current form.

"I didn't come here to make friends, I came here to make a difference," he said.

"This Government seems to think that the economy only happens on the eastern seaboard at that is wrong," Senator Xenophon said.

He told the Senate the economic stimulus package could not ignore the parlous condition of the Murrary-Darling Basin. He asked the Government bring forward amendments worth billions in spending for the Murray, including infrastructure and buy-back of water entitlements.

The ANZ's Katie Dean emails:

The Australian senate has blocked the passing of the Government's $42bn economic stimulus package. The Senate vote was a tie at 34-34, which means it was defeated. With the Greens and Family First voting to a slightly amended package, it was the no vote of Independent Senator Nick Xenophon that blocked the package from passing.

The Government is attempting to reintroduce legislation for the economic stimulus package this afternoon to the House of Representatives. Once passed by the Labor majority in this House, the Government is attempting to get the Senate to reconsider the package in its current form for a vote on Friday. The coalition reportedly opposes putting it back to the Senate tomorrow and there are reports that the Senate may not be able to debate the plan again until February 23.

The first part of the package, the one-off payments to taxpayers, is not due to commence until April. So the government has some time up its sleeve to get the package passed.

But as we have seen in the US, lingering uncertainty is not good for confidence or for markets. It could also see markets shift towards expecting bigger and quicker interest rate cuts from the RBA, with monetary policy expected to pick up the burden in supporting growth from the stalled expansionary fiscal policy.

If it is not passed in its current form, then the package will most likely be amended before it is submitted again.

Senator Xenophon rejected the bill because "A credible stimulus package cannot ignore the Murray Darling". The Senator has reportedly asked the Government to bring forward amendments worth billions in spending for the Murray, including infrastructure and buy-back of water entitlements.

It is unclear how negotiations will proceed if the package is not passed tomorrow. If the Government agrees to address Senator Xenophon's demands, two outcomes look possible:

1. The government could include the Murray Darling spending in place of its planned infrastructure spending on construction in schools and public housing. This might be better for the economy in the long-run, by raising future productivity and sustainability for example, but in the short-term the immediate impact to jobs and growth would be smaller than the package in its present form. This could put more pressure on monetary policy to counter the slowdown in the economy.

2. The government could add some Murray Darling spending to the package. Overall, this would probably be mildly positive for the economy, but I'm not sure markets would like it. The retention of the original stimulus plan means the short-term impact to the economy is in tact, and indeed higher spending means the overall impact on the economy would be greater. Nevertheless, this could potentially add billions to the Government's deficit and could also constrain the ability of the Government to deliver further stimulus measures in either the May Budget or over H2 2009 as the economy continues to slow.

The Government, earlier in the day, had already agreed to reduce the special one-off payment for middle-income familiies and individuals from $950 to $900 at a cost of around $422mn.