The Government’s second attempt at breathing life into the Australian economy is a two-stage employment and demand stimulus package that will cost $41.5b. Coupled with the massive negative impact of the global recession on tax receipts, the package will send the Budget into a new deficit record of $22.5b this year and over $35b in 2009-10.

The first stage of the package is an immediate injection of $11b into the economy, to start rolling out in March, with handouts to taxpayers on less than $100,000, single-income families and a bonus for families with school-age children. The handout repeats the approach of the Government’s December cash injection, but this time targeting low and middle-income earners, who’ll receive more than $8b. Depending on their circumstances and number of children, some families might reap several thousand dollars in Government cheques in coming months. There’ll also be a half-billion dollar bonus for students to meet education costs and to encourage unemployed people back into training.

The second stage is a jobs package rolling out in 2009-10 ($15.7b) and 2010-11 ($9.8b). The headline component is a massive $14b infrastructure program for Australian schools to upgrade libraries, halls, laboratories and enable general maintenance. There will also be 20,000 new homes funded via a $6b housing package, the $3b insulation program already leaked overnight, and a temporary investment tax break for small businesses.

The Government is counting on generating 90,000 jobs from the package between now 2011. Treasury remains convinced Australia will avoid a recession on an annualised basis, predicting growth of 1% this year and 0.75% in 2009-10, with unemployment only rising to 7% by June 2010. Part of the reason is the strong rural performance, with farm product tipped to grow 11% this year and 5% next.

As usual, however, the lack of quarterly forecasting means the figures allow the possibility of a recession during part of the year.

It was only in November that Treasury forecast a $5.4b surplus. Since then, tax has fallen and expenditures have risen by nearly $10b and Government decisions, including this year’s components of the new package and other new funding such as COAG, have added a further $18b to the deficit. There’s a far bigger turnaround next year when the budget moves from $3.9b surplus — always a fairly notional figure — to a $35.5b deficit.

Given the optimistic domestic growth and employment scenarios used by Treasury, that figure could turn out to be far higher. Unemployment of 8% or 9% would generate “parameter variations” in the billions.

Treasury has hewed to a more mainstream line on international growth — 1.75% contraction in the US and Europe next year, 2.5% contraction in Japan, and only 6.5% in China. This will lead to a collapse in Australia’s terms of trade of nearly 13% next year, with the current account deficit rising to 5.5% of GDP.

As bad as all this sounds, Australia will be doing well to achieve these numbers.

Peter Fray

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