The Australian Federal Government has announced a $42 billion stimulus package just shortly before the Reserve Bank of Australia provided another welcomed boost to the economy by cutting official interest rates by 100 points (1 per cent) to 3.25 per cent.
Here are the basic points of the two events.
THE STIMULUS PACKAGE
- $14.7 billion for schools – $200,000 each
- $12.7 billion for cash bonuses of up to $950
- $6.6 billion for 20,000 new homes
- $3.9 billion to insulate 2.7m homes
- $2.7 billion small business tax break
- $890 million for road repairs and infrastructure
- Rebates for solar hot water
- Tax breaks for small businesses
THE INTEREST RATE CUT
- It is the fifth consecutive rate cut since September 2008
- In the space of five months the official cash rate has fallen from 7% to 3.25%
- 3.25% is the lowest rate in 40 years
- $10.4 billion stimulus package announced by the government in October consisted of cash payments, aimed at helping the elderly, poorer families and first-home buyers.
- $8 billion to fund residential mortgage backed securities in September/October, 2008 as global lines of credit dried up
- $6.2 billion in car industry assistance to help protect jobs and develop environmentally-friendly vehicles.
- In September 2009 the government also announced it would guarantee public bank deposits and wholesale funding to banks.
The government claims that 90,000 jobs will be created by the package over the next two years, whilst still recognising that the unemployment rate is predicted to jump to seven per cent by 2010. Furthermore, the budget will be $22.5 billion in deficit for this financial year – a $44 billion turnaround from the $21.7 billion surplus predicted in the May 2008 budget.
Nevertheless, we believe that the Federal Government is behaving in a measured and responsible manner. There is a fine line between spending to stimulate and spending like the end of the world is nigh (take note President Obama!).
The International Monetary Fund (IMF) predicted recently that the Australian economy would contract by 0.2 per cent in 2009, and at the very best stall to a position of zero growth.
Thus, by bringing forward infrastructure spending, encouraging consumption and employment, and ensuring much of the injection will be spent domestically, the Federal Government is not simply sitting on their hands waiting for a recession or deflation to occur
Together with the efforts of the Reserve Bank, the powers that be are certainly seeking to insulate and cushion Australia from the dire global rumblings. Whilst it’s unlikely they’ll be able to stave off what is probably inevitable, I’d still probably rather be sitting in Australia than anywhere else when the storm truly erupts.