Rudd’s package for the people: Bartholomeusz

Kevin Rudd’s $10.4 billion “economic security strategy” is a shot of adrenaline directly into the arteries of a faltering economy.

Kevin Rudd’s $10.4 billion “economic security strategy” is a shot of adrenaline directly into the arteries of a faltering economy.

The nature of the package – largely one-off and quite sizeable payments to pensioners and low to middle-income households in the lead-up to Christmas – means that it is almost certain the cash will be spent and circulated through the economy rather than hoarded. The cash goes directly to households, and therefore is unlikely to be captured within the liquidity traps that have developed within a fearful banking system.

The doubling of the first-home buyers’ grant should help stimulate, or at least support, the housing sector and building industry, but the bringing forward of the Government’s planned infrastructure program will take longer to have a meaningful impact.

Rudd and his Treasurer Wayne Swan made no bones about it. The package is not part of some considered long-term fiscal strategy. It is a response to a crisis, an attempt to soften the blows the Australian economy will experience from the fallout from the global financial crisis and the developing and accelerating global economic slowdown. Rudd described it as providing a “buffer” for the economy and households.

The urgency of the Government’s actions is telling. It could have waited until the mid-year economic and fiscal outlook statement in late November/early December to move.

The fact that it has unveiled the measures hard on the heels of the rate cut and the weekend’s range of measures to shore up the domestic banking system signals the levels of concern within Government over its ability to protect the Australian economy.

At about 1% of GDP, the stimulus is quite sizeable, particularly coming so soon after last week’s 100 basis point reduction in official interest rates which resulted in an 80 basis point fall in mortgage rates. The steep fall in the Australian dollar also provides a sizeable boost to the domestic economy.

Rudd made it clear today that he will do “whatever it takes” to protect the Australian economy. While there would still be a “comfortable” budget surplus even after today’s package, Swan reminded journalists that the Government’s pledge was to maintain a surplus “over the course of the cycle” – which implies the Government would be prepared to move into deficit if that is what it takes to avoid a recession.

Swan was right when he said the circumstances dictated decisive action, here and abroad. The credit crisis is biting savagely into real economies around the globe. The emerging economies, including China, are slowing. Commodity prices have tumbled. The outlook for global growth is grim. Australia cannot be immune to such widespread trauma.

To do nothing, or to wait for its impact to be more evident here, would be to invite a recession.

In the circumstances it is better to do too much too early, than too little too late. Not that there appears to be much of a risk that the package will result in an over-heated economy.

Most economists are expecting further official rate cuts before the end of the year, with some predicting another 100 basis point cut before Christmas. After the weekend measures to support the banking system, it is probable that the banks would pass on any rate reduction in full.

The Government itself will have the option of doing more when it delivers its mid-year outlook and another, larger and more considered opportunity when framing next year’s May budget statement.

The relative conservatism of both monetary and fiscal policy in recent years means that the Reserve Bank and Rudd Government have an ability – they have more flexibility than almost any other developed economy – to respond decisively and attempt to re-inflate a deflating economy.

Rudd is right to say that he will use that capacity to do whatever it takes to protect Australians from the economic storms developing offshore.

This article first appeared in Business Spectator