Economists praise stimulus package
The Federal Government's $42 billion stimulus package will boost consumer spending and create construction jobs in these difficult economic times, economists say.
The second stimulus program to kickstart the economy includes a $28.8 billion package for schools, housing and roads, and a $12.7 billion handout to low- and middle-income earners.
Commonwealth Bank of Australia senior economist Michael Workman said the cheques to households would boost consumption in the short term.
"In the short term, the outlays to families will keep consumption patterns higher than they would be otherwise,'' he said.
The government said Tuesday the unemployment rate was expected to surge to 7.0% in 2009/10, from the present 4.5%.
"It's gloomy but it's quite realistic ... 7% is quite feasible,'' Mr Workman said. "The shift from the low 4s to 7%, that's almost 3 percentage points and that's in line with what happened in the 1990s recession.
"That will be driven by big falls in full-time jobs.''
Mr Workman said construction and mining sector workers, hit by the economic downturn, would benefit from the infrastructure programs.
"A lot of the construction-related work ... people working in these areas, will be able to shift to these infrastructure projects,'' he said. "There could've been more spent on infrastructure, that way you prevent that leakage to imports.
"The higher the infrastructure spending, the better off we'll all be: it lifts productivity in the economy and increases the general higher standard of living in the economy.''
As capital markets were more reluctant to lend, federal and state governments would be better placed to borrow to build infrastructure, Mr Workman said.
"The governments have the capacity to borrow because capital markets aren't working properly,'' he said. "Capital raising that used to occur can't, but federal and state governments can borrow.''
The federal budget is expected to sink into a $22.5 billion deficit in the 2008/09 financial year, a massive deterioration from the $5.4 billion surplus projected in the Mid-Year Economic and Fiscal Outlook, and deepening into deficits of over $30 billion in the following two years.
The budget deficit as a proportion of gross domestic product (GDP) will be 1.9%, the highest level since 1995/96 when Australia's budget deficit constituted 2.1% of GDP.
Gross domestic product (GDP) is now expected to grow by just 1.0% in 2008/09 and by only 0.75% the following year, compared with forecasts of 2.0% for 2008/09 and 2.25% for 2009/10 made in November.
"It's relatively better than most of the OECD (Organisation for Economic Co-operation and Development) group,'' Mr Workman said. "There's still a growth differential of 2 percentage points.''
Nab Capital senior markets economist David de Garis said the latest economic and fiscal package announced on Tuesday by the federal government was in line with his bank's forecast.
"We expected a budget deficit of $40 billion next year, so some of that has been brought forward this year,'' Mr de Garis said. "There is even more front-loading of spending, which I would not argue with that at all.''
"But the question was whether it was enough,'' Mr de Garis said. "Could they have done more?
"Obviously, there is still some concern in the government about deficits.
"While they are not avoiding deficits, the Labor Party is very conscious of that.''
Mr de Garis said the federal government's growth forecast of 0.75% for 2009/10 was small considering the stimulus in the economy.
"They don't expect this boost to have a hugh impact on the economy,'' he said.
The federal government has stepped in again to relieve the Reserve Bank of Australia (RBA) of some of the stimulatory burden to the domestic economy, Mr de Garis said.
"At the margin, it does take a little bit of pressure off the Reserve Bank to do a super sized rate cut today,'' Mr de Garis said. "We have been thinking a 75 basis points cut but would not be surprised if it was 100 basis points at all.''
The central bank will announce its decision on the cash rate, currently 4.25%, at 2.30pm.
UBS senior economist Matthew Johnson said the government's downward revisions to the nation's GDP growth and unemployment rate were difficult to judge.
"These things are pretty hard to assess until we get an idea of how effective the givebacks will be in terms of stimulating consumption,'' Mr Johnson said.
Mr Johnson said the $42 billion package "won't be the thing that gets growth going again, it just transfers money from savers to consumers via the government''.
"If the economy is ready to pick back up at that point, it will pick back up again, and if it's not then it will just fall over again,'' Mr Johnson said.
"You don't create wealth by taking money off people who buy bonds and giving it to people who don't have any money.''