The Rudd Government will pour an extra $42 billion into the economy in its latest bid to ease the impact of the slowing economy.
With the $10.4 billion spent in December and still being paid out in first home buyers’ grants for new and used housing, the latest package means over $52 billion will be in the system by the end of 2011 and running into 2012.
(And this doesn’t include the revamp coming in the May budget to retirement incomes policy for pensioners).
It takes the share of gross domestic product of the two packages to around 5% in a full year, a bit less over the next 17 to 18 months. But when added to the billions freed up by the Reserve Bank’s 4% of rate cuts, there’s a huge stimulus in the system already.
That’s a little less than the 5.8% President Obama is preparing to spend (6.8% if 2008’s tax rebates are included).
Germany is spending around 50 billion euros, or close to $A 100 billion. That’s just under 3%.
But with the 4% of rate cuts since September from the Reserve Bank the economy is certainly well primed.
The extra spending was contained in yesterday’s mini-budget from Prime Minister Kevin Rudd and Treasurer Wayne Swan, as the Government battles to adjust its policies and forecasts fast enough to cope with the rapidly deteriorating global economy.
The Federal Government also halved its 2008-09 growth forecast for the economy to 1% from a November forecast of 2%.
It sees growth slowing to 0.75% in 2009-10 when we are at most risk of a recession.
That’s when most forecasters see a dip into the red occurring. The Reserve Bank will release updated forecasts of its own on Friday in its first Monetary Policy Statement of the year.
But Federal Treasury reckons we will be able to ride above negative growth on a financial year basis because of the solid contribution from the farm sector (has anyone told them about the impact the big dry is having on summer crops in South Australia, NSW and Victoria, or the impact it could have winter grain crops if the autumn isn’t wetter than normal?)
Today’s spending package includes $28.8 billion for infrastructure, schools and housing, as well as $12.7 billion cash payments for low and mid-income earners to be paid in March, 2009.
The additional spending means years of budget deficits around the country because the states will feel the bind of lower distributions from Canberra from the GST (down an estimated $10 billion)..
Mr Rudd said the Government now predicts its deficit for the year to June 30 will total $22.5 billion alone.
That shortfall compares with projections of a surplus of $5.4 billion as recently as November (after the $10.4 billion payout in December was announced) and a massive $21.7 billion surplus when it announced its budget last May.
The National Australia Bank last week estimated the 2010-11 deficit at $40 billion; Treasury reckons it will be around $35.5 billion.
Monday Mr Rudd said the global financial crisis would leave a $115 billion hole in the government’s expected revenues over the next four years.
Businesses taxes are set to shrink by $76 billion alone as profits wither.
The first stage of the package is an immediate injection of $11 billion into the economy, to start rolling out in March, with handouts to taxpayers on less than $100,000, single-income families and a bonus for families with school age children.
The handout repeats the approach of the Government’s December cash injection, but this time targeting low and middle-income earners, who’ll receive more than $8 billion.
There’ll also be a half-billion dollars for students to meet education costs and to encourage unemployed people back into training.
The second stage is a jobs package starting in 2009-10 o($15.7 billion, and another $9.8 billion in the 2010 year.
The main part of this is a rather large $14 billion infrastructure program for Australian schools to upgrade libraries, halls, laboratories and enable general maintenance.
There will also be 20,000 new homes funded via a $6 billion defence and mostly public housing package, a $3 billion insulation program and a temporary investment tax break for small businesses.
The Government reckons all this will support 90,000 jobs from the package between now and 2011.
And all this spending and the deficit will mean the return of the bond market, with upwards of $ billion bonds to be issued over the next few years.
Here’s what Federal Treasury said:
The Australian Government general government sector net debt for 2008-09 is estimated to be -$16.2 billion (1.3 per cent of GDP). Net debt is expected to increase across the forward estimates to 5.2 per cent of GDP in 2011 12.
The Government will finance the projected budget deficits by issuing Commonwealth Government Securities (CGS). For this purpose the Government will seek to amend the Commonwealth Inscribed Stock Act 1911.
The overwhelming majority of the increase in net debt is due to the collapse in tax receipts resulting from the deteriorating global economic outlook and the unwinding of the commodities boom.
A secondary impact is the increase in payments typically associated with a slowing economy.
A third component is the Government’s temporary stimulus measures put in place to support growth and jobs.
As the economy recovers and grows above trend, the Government will take action to return the budget to surplus. These surpluses will be drawn upon to retire debt as rapidly as economic circumstances permit.
Australian Government net debt remains very low by international standards. The average net debt for OECD countries in 2010 is estimat
