Firepower in reserve
The combined efforts of the government and the RBA should help weaken the effects of the looming recession. But, rest assured, if these measures aren't enough, there's still some big weapons left in their armouries.
The Rudd government and the Reserve Bank are doing their best to fight back against the irresistible tide of economic woe flooding into the country from abroad. They can't turn it back, but their coordinated efforts today might at least soften the impact.
Kevin Rudd's contribution was a $42 billion mixture of near-term consumption-boosting measures – which will be criticised for its profligacy – and nation-building measures – which will be criticised because of the sector targeted.
But the Reserve Bank won't be criticised for cutting the official rate by another one percentage point, taking the cumulative reduction in rates this cycle to 400 basis points in five months. However, there may be some disappointment that the reduction wasn't slightly larger.
Their combined efforts represent a concerted attempt to, if not arrest, then slow the destructive spiralling of confidence within the community and, if not avert, then at least weaken the looming recession.
The effectiveness of the measures will only be known – in a vague sense – with hindsight. Both the government and the central bank are handicapped in responding to the deterioration in the economy by the reality that it takes time for the impact of policy decisions to flow through.
It is the need for urgency to respond to the accelerating downturn that has dictated the one-third stimulus/two-thirds investment structure of the government's latest package.
As Rudd indicated, if the package had been completely devoted to longer term nation-building we'd be deep in recession before the first real dollars started to flow. Indeed, the first six months of this calendar year could well be the crunch point for the economy.
While the initial $10.4 billion stimulus last year has been derided as a waste of money and fiscal capacity, it did put a wobbly floor under retail spending this Christmas.
The latest deluge of cash is again going to be dispersed to a very targeted band of low-income earners who have little capacity to save it. The bulk of it – $11 billion – will be injected into the economy in the first half of this year, with only $1.7 billion slipping into the 2009-10 financial year.
The government is hoping that will tide the economy through until the big surge in spending on schools, public and defence housing, and the $2.7 billion funding for the installation of insulation in homes. Only $1.8 billion of those funds will be deployed before July, with $15.7 billion next financial year and $9.8 billion in 2010-11.
Both programs fade away almost completely by 2011-12 – they are designed to support the economy through the worst of the fallout from the global crisis and recession and then wind down abruptly to enable the government to regain some level of control over a fiscal position that has gone from heavy surplus to large deficit almost overnight.
That isn't to say that there won't be more, or that the package is all that the government is doing to stimulate activity and protect jobs, though those tasks are looking harder following the unpleasant news in the updated forecasts today of an unemployment rate that will soar from 4.3 per cent last year to 7 per cent in 2009-10, implying the loss of about 300,000 jobs.
But there is a major longer term infrastructure spending program being planned in the background and Rudd also said the government would be prepared to spend more, increasing the size of the deficit in the process, if economic circumstances required it.
Similarly, while there had been calls for the RBA to cut rates by as much as 150 basis points, with official rates at 3.25 per cent – their lowest point in almost half a century – the bank has kept some firepower up its sleeve.
Even with the implosion in its tax base revealed on Monday, both the government and the bank have more residual room within which to manoeuvre than most of their developed world counterparts.
On the numbers presented today, the budget deficits of $22.5 billion this year, $35.5 billion in 2009-10 and a projected 34.3 billion in 2010-11 would peak at about 2.8 per cent of GDP in 2009-10. The government said the average deficit for advanced economies in 2009, as calculated by the IMF, is 7 per cent. The US Federal Reserve Board rates are almost at zero and the Bank of England's at 1.5 per cent.
Both the government and the bank may need to call on those reserves.
Even with the impact of today's package, which Treasury has estimated will add 50 basis points to GDP growth this financial year and between 75 and 100 basis points in 2009-10, the outlook is for negligible growth this financial year and next. At best. And that's probably an optimistic assessment.
Kevin Rudd's contribution was a $42 billion mixture of near-term consumption-boosting measures – which will be criticised for its profligacy – and nation-building measures – which will be criticised because of the sector targeted.
But the Reserve Bank won't be criticised for cutting the official rate by another one percentage point, taking the cumulative reduction in rates this cycle to 400 basis points in five months. However, there may be some disappointment that the reduction wasn't slightly larger.
Their combined efforts represent a concerted attempt to, if not arrest, then slow the destructive spiralling of confidence within the community and, if not avert, then at least weaken the looming recession.
The effectiveness of the measures will only be known – in a vague sense – with hindsight. Both the government and the central bank are handicapped in responding to the deterioration in the economy by the reality that it takes time for the impact of policy decisions to flow through.
It is the need for urgency to respond to the accelerating downturn that has dictated the one-third stimulus/two-thirds investment structure of the government's latest package.
As Rudd indicated, if the package had been completely devoted to longer term nation-building we'd be deep in recession before the first real dollars started to flow. Indeed, the first six months of this calendar year could well be the crunch point for the economy.
While the initial $10.4 billion stimulus last year has been derided as a waste of money and fiscal capacity, it did put a wobbly floor under retail spending this Christmas.
The latest deluge of cash is again going to be dispersed to a very targeted band of low-income earners who have little capacity to save it. The bulk of it – $11 billion – will be injected into the economy in the first half of this year, with only $1.7 billion slipping into the 2009-10 financial year.
The government is hoping that will tide the economy through until the big surge in spending on schools, public and defence housing, and the $2.7 billion funding for the installation of insulation in homes. Only $1.8 billion of those funds will be deployed before July, with $15.7 billion next financial year and $9.8 billion in 2010-11.
Both programs fade away almost completely by 2011-12 – they are designed to support the economy through the worst of the fallout from the global crisis and recession and then wind down abruptly to enable the government to regain some level of control over a fiscal position that has gone from heavy surplus to large deficit almost overnight.
That isn't to say that there won't be more, or that the package is all that the government is doing to stimulate activity and protect jobs, though those tasks are looking harder following the unpleasant news in the updated forecasts today of an unemployment rate that will soar from 4.3 per cent last year to 7 per cent in 2009-10, implying the loss of about 300,000 jobs.
But there is a major longer term infrastructure spending program being planned in the background and Rudd also said the government would be prepared to spend more, increasing the size of the deficit in the process, if economic circumstances required it.
Similarly, while there had been calls for the RBA to cut rates by as much as 150 basis points, with official rates at 3.25 per cent – their lowest point in almost half a century – the bank has kept some firepower up its sleeve.
Even with the implosion in its tax base revealed on Monday, both the government and the bank have more residual room within which to manoeuvre than most of their developed world counterparts.
On the numbers presented today, the budget deficits of $22.5 billion this year, $35.5 billion in 2009-10 and a projected 34.3 billion in 2010-11 would peak at about 2.8 per cent of GDP in 2009-10. The government said the average deficit for advanced economies in 2009, as calculated by the IMF, is 7 per cent. The US Federal Reserve Board rates are almost at zero and the Bank of England's at 1.5 per cent.
Both the government and the bank may need to call on those reserves.
Even with the impact of today's package, which Treasury has estimated will add 50 basis points to GDP growth this financial year and between 75 and 100 basis points in 2009-10, the outlook is for negligible growth this financial year and next. At best. And that's probably an optimistic assessment.
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