There will be another stimulus package from the Rudd Government, and soon.

Yesterday’s awful growth figures from China mean that, even if the December spend-a-thon produced a significant lift in demand, the Government will be deeply worried about the resources sector, which to date has ensured WA and Queensland continue to enjoy very low unemployment. Those of us who were trying to stay optimistic looked to China to stay buoyant. Now, that doesn’t seem likely; worse, low growth in China increases the chances of social unrest there.

The case against another package is that the Reserve Bank’s rate cuts are still working their way through the economy, and the fall in fuel prices has provided further cash to consumers. There’s also the Budget in May. But the Government’s focus is on stopping unemployment from rising, knowing how hard it is to get it down again. Rudd, Gillard and Swan aren’t going to wait until July — when the first impacts of Budget measures will be felt — to do something.

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But options for the package all come loaded with cons as well as pros:

Cash handout — has already been tried, and those who miss out again are apt to complain. This time it could be directed at the swelling numbers of unemployed, but you get the sense the Government would prefer to talk about reskilling the unemployed, not giving them money. The plasmas’n’pokies aspect is also likely to attract more criticism second time around.

Tax cuts — will earn the Opposition’s support (albeit the sort of support that consists of incessant sniping), but are only available to wage and salary earners and likely to be banked or put on the mortgage.

Infrastructure — hundreds of millions of dollars of projects have already been brought forward and local councils got a handout for ready-to-go projects last year. It’s unlikely to provide much of an immediate boost and you wonder about the quality of projects Governments rush to build when they want to ward off recessions.

Extending the First Home Owners Boost due to end in June. The sector has been pushing for an extension until December, particularly of the new homes segment. Unlikely to provide an immediate stimulus, but addresses the ongoing shortage of housing stock across the country. And the Government has focussed very heavily on housing in its first twelve months.

Company tax cuts would provide a direct means of assisting business, with flow-on effects for employment. The Government is desperate to prevent job shedding; cuts to State payroll taxes might have more direct benefit, but that’s beyond the immediate reach of the Commonwealth.

Green investment Green is the fashionable stimulus colour, particular in the United States. Energy efficiency retro-fitting of households and businesses would provide ongoing cost and carbon savings, could be linked directly to expenditure and distract from criticism of the Government’s weak ETS

So here’s a prediction: the Government will most likely opt for a partial bring-forward of the 2010 tax cuts and an early introduction of the July tax cuts, a new energy efficiency rebate for households and accelerated green depreciation for businesses, and an extension of the First Home Owners Boost. Total back-of-the-envelope cost: ~$1.1b for tax cuts for the rest of this year and $600m for a green stimulus; another $4.5b for tax cuts in 2009-10, $2b for energy efficiency and maybe $1.2b for the extension of the First Home Owners Boost.

That sort of package will have the benefit of preventing the Opposition from complaining about the fall into deficit, allow the Government to display its increasingly tattered environmental credentials and keep the housing sector humming.

Still, as the economic news gets worse each day, you wonder if even with the biggest imaginable package the Government isn’t taking a knife to a gunfight.


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Peter Fray
Peter Fray
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