Australians shudder at where wonder economy has gone

Other News Materials 16 February 2009 05:58 (UTC +04:00)

Lots of Australians are disobeying Prime Minister Kevin Rudd and keeping rather than spending the money he gives them to boost demand in the economy, dpa reported.

Their behaviour is a rational response to warnings given about a nasty end to 17 consecutive years of economic growth.

"The truth is we are going through the worst financial crisis in our lifetime," Rudd told them when announcing spending of 10.4 billion Australian dollars (6.7 billion US dollars) in October on one-off payments to low-income families, first-time house buyers and pensioners.

Finance Minister Lindsay Tanner bemoans the lack of confidence that prompts people to pay off credit card debt rather than rush to the shops and spend.

But when he warned that "if everybody retreats into their shells, that will make the situation much worse," he stoked the very fears that he sought to allay.

The second stimulus package, worth 42 billion Australian dollars, is through Parliament and the cheques will soon be mailed out. Again, many will chose to save rather than spend. And again, it will be a rational response.

Many will want to get ready for tax increases they see as inevitable. Within the space of 12 months, the government accounts are to move from a surplus of 22 billion Australian dollars to a projected deficit of 22 billion Australian dollars - a debt that has to be paid off either through reduced public services or tax increases.

Liberal leader Malcolm Turnbull, who with his party voted against the latest stimulus package, says people are right to worry about government spending.

"I think their package is too big, I think it's twice as big as we ought to be spending at this moment," he said. "This is a panic move. It's too much money, too much debt, at this time."

Turnbull reckons joining a global recession is not inevitable and talks up Australia's strengths.

The economy is still growing, unemployment is below 5 per cent and the financial services sector is strong. The rate of mortgage foreclosures is minuscule and more than 90 per cent of house owners are paying off their borrowings faster than they need to.

The economy is not the wonder it once was but it's better placed to weather the global downturn than most.

The fear among some is that the massive size of the stimulus packages - about 5 per cent of gross domestic product and likely to put the budget in deficit by 200 billion Australian dollars over the next four years - will itself sap confidence.

"When a package is announced that is disproportionate to the known indicators," says Canberra University economist Milind Sathye, "consumers and businesses may conclude that they don't have the complete picture of the economy, which the government has, and this uncertainty may inhibit the investment and consumption that the package is meant to stimulate."

In contrast, senior International Monetary Fund (IMF) official Ray Brooks lauds the Rudd government for acting early and not being frightened of incurring debt.

"What has been done so far by the authorities has been a very timely policy response that helps cushion the blow," he said. "There will be a budget deficit and that will be appropriate."

Brooks, head of the IMF's Asia Pacific department, said that the fiscal measures were working in tandem with the monetary policies set by the independent Reserve Bank of Australia central bank.

Interest rates were cut by 1 per cent to 3.25 per cent in January - the fifth cut in as many months.

A criticism of Rudd's largesse is that it comes without consideration for other shifts in the economy. Lower petrol prices, the lower cost of servicing debts that comes with interest rate cuts and lower inflation, mean it is very hard to predict trends.

For example, analysts who expected a big fall in employment in January were surprised when jobs were created. And retailers, who had predicted a wipe-out at Christmas, were buoyed by an 8-per-cent increase in sales.

"I think there have been too many recessions predicted that never actually happened," said Carl Emmerson, deputy director of London's Institute for Fiscal Studies. "I think it's probably better to wait until you're sure you are in recession, and that recession requires more action than what you can deliver through cuts in interest rates alone."

The most extreme criticism of pump-priming the economy by supplementing private demand with government money comes from University of New South Wales economics lecturer Neal Stoughton.

He said tax cuts would have been better than hand-outs but that governments everywhere had a poor record of getting value when they spent taxpayer's money.

"If the choice is between doing nothing and doing what they've done, I would probably pick nothing," he said.