A bold move from Rudd

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A bold move from Rudd

By Malcolm Maiden

On the weekend the G7 nations issued a statement that was long on intent and short on detail, promising to do what it took to restore confidence in the world's financial system without saying what it thought would be necessary.

Events since then have shown that much more was discussed by the G7 behind closed doors in Washington than the bland statement revealed.

The worldwide intervention since then - to guarantee retail bank deposits, offer guarantees for interbank lending, moves to buy protective shareholdings in distressed banks including RBS and HBOS-Lloyds in Britain and offer unlimited short-term liquidity to the system - has been absolutely stunning in scope and speed.

If this does not restore confidence, nothing will: everything but the kitchen sink has been thrown at the crisis - and here, the kitchen sink is now also being lobbed, in the form of accelerated government spending on the economy itself.

Australia ushered in the massive global response when the Reserve Bank announced a surprise one percentage point cut in the cash rate from 7% to 6% a week ago, and the Rudd government was a relatively early mover on Sunday when it guaranteed bank deposits and offered to stand behind bank term funding operations.

It has stayed ahead of the curve with today's announcement of a $10.4 billion fiscal package.

The spending aims at supporting household demand and adding as much as one percentage point to economic growth that was previously expected to slip to 2% or less next year, as commodity prices fall and world growth slows.

The fiscal package will begin feeding in immediately and be totally in the economy by year end, and includes $4.8 billion in bonus payments to pensioners, an extra $3.9 billion for low and middle income families, a doubling of the first home buyers' grant to $14,000, and accelerated spending on education, health, transport and communications.

Expect northern hemisphere nations to follow suit if the huge financial market stabilisation efforts gain traction - as the global market rally yesterday and today indicates, the slowing of Australia's sharemarket rally this afternoon notwithstanding.

If the markets do regain their feet, thoughts will turn more squarely to the next stage of the battle, and that almost certainly involves more Australian-style fiscal stimulus, to revive economic growth concussed by the financial crisis.

The fiscal package absorbs close to half the government's expected $21.7 billion budget surplus in 2008-2009, but the threat to growth is clear enough now to justify it.

It does mean, however, that the Reserve Bank will be more cautious about cutting interest rates deeply from this point.

The markets were predicting quick cuts totalling another one percentage point last week, when the crisis was raging.

But the world has received a huge financial infusion since then, and it will boost inflation as well as growth. The Reserve is still likely to cut rates again soon, but it is unlikely to go more than a half a percentage point lower without pausing to do a stock-take.

The Age

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