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Category Archives: stimulus packages

Cosima Marriner and Peter Martin
May 22, 2009

THE chairman of Australia’s largest company, BHP Billiton, has contradicted assurances by the Rudd Government, Treasury and Reserve Bank that an economic recovery is imminent, warning instead it will be “protracted and complex”.

Speaking at his old high school in Brisbane yesterday, Don Argus said he was “pessimistic” about prospects for recovery in the short term.

His comments follow spirited defences by Treasury Secretary Ken Henry and Reserve Bank governor Glenn Stevens of growth forecasts in last week’s federal budget. The economy is projected to grow above 4.5 per cent from the middle of 2011, a forecast economists have questioned and Opposition Leader Malcolm Turnbull has labelled “completely unbelievable”.

“(Dr Henry and Mr Stevens) have got the levers of the economy,” Mr Argus said. “I’ve got a balance sheet, I’ve got revenue statements, I deal with customers, I’m a contributor to the Australian economy … I’m just calling it from where I see it.”

Mr Stevens tipped on Tuesday that “a recovery will get under way towards the end of the year”. But Mr Argus warned it would be a “pretty tough” 2009 and 2010. “We can hope for recovery. We should also have contingency plans for scenarios where world capital markets continue to provide surprises on the downside.”

He said that while some people would call his comments pessimism, “I prefer to call it caution that 50 years in corporate life engenders … The current outlook is very uncertain.

“It’s very much reliant on the Government, corporate and regulatory response to the global financial crisis. It will be a difficult transition period. Governments and corporates have to pay off debt and rebuild their balance sheets.”

He predicted that Australians who had so far been shielded from the impact of the crisis would start to be affected, as the Government was forced to pay back debt incurred with its stimulus packages. “They can’t do that without budget cuts and increasing taxation.”

Mr Argus based his analysis on an International Monetary Fund report, his own analysis of the 1987 crash, and business conditions BHP is experiencing. “The IMF report makes it easy to conclude that the road to economic recovery will be slow, hence my cautious response to the recent political rhetoric.”

He said the recovery would be under way when financial institutions had access to good liquidity and had dealt with distressed assets, and weak institutions had been recapitalised.

His comments came as it was revealed Australians paid off $19.7 billion of credit card debt in March — the second-biggest amount on record — as $900 and $950 cheques directed at single-income families, carers and parents of children at school went out. The record for card repayments was in December, when stimulus cheques of between $1000 and $2000 went out.

There was also a spending surge in March, with credit cards getting their second-biggest work-out on record, again exceeded only in December. “We’re both spending and saving at the same time,” CommSec economist Savanth Sebastian said.

The next stimulus payments began hitting bank accounts in April, suggesting spending and saving will continue to climb.

Some of the extra spending appears to have gone on cars, passenger vehicle sales up a seasonally adjusted 1.8 per cent in April after months of decline.

The rebound is consistent with a Westpac-Melbourne Institute survey this week showing a rise in consumer sentiment.

Other figures showed that average full-time earnings climbed 5.6 per cent to more than $61,000 in the year to February. But the rate of increase is slowing as fewer hours and less overtime are worked.

“Workers in the public sector are enjoying better conditions than private sector workers,” said Commonwealth Bank economist James McIntyre.

“Public sector households are getting the benefits of significant interest rate cuts, stimulus payments, petrol price falls and tax cuts without the job security concerns.”

Meanwhile, new figures yesterday showed investment in minerals and energy projects hit a record high in April, defying budget forecasts.

http://business.theage.com.au/business/bhp-at-odds-on-recovery-20090521-bh6e.html

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Kenneth Davidson
May 18, 2009

Turnbull is wrong, it is not the size of the deficit that matters, but how it is used.

THE political debate about the budget is bizarre. The fiscal strategy is not rocket science. As the budget papers say, the task of budgetary policy is “supporting the economy and jobs now while investing in infrastructure for the future”.

The prime short-term objective of budgetary policy (reinforced by monetary policy) is to balance the economy. In other words whether the budget should be in balance, surplus or deficit depends on the rest of the economy. There is no particular virtue in a surplus budget unless the surplus is designed to offset a potential inflationary gap between expenditure plans and economic capacity.

Today there is a deflationary gap which can be measured by rising unemployment. As the world is experiencing the biggest recession since the 1930s, it isn’t surprising that Australia is running the biggest deficit since the end of World War II. It is also at least arguable that the reason the world is unlikely to experience another Great Depression is because of the willingness of the industrial nations to “pump prime” demand to offset the crisis in consumer and business confidence.

Because the budget accounts for about a third of gross domestic product and sets expenditure and revenue-raising priorities, it is also the major direct government influence on income distribution and the allocation of resources. This in turn influences the growth in living standards.

Yet all the Opposition can do is bleat about the size of the budget deficit. In a truly pathetic budget reply in Parliament last week, the Leader of the Opposition, Malcolm Turnbull, said: “Australians are now paying the price for Labor’s reckless spending” and he contrasted this with the record under the Howard government when “… the Coalition, together with the Australian people, (took) 10 years to pay off $96 billion of Keating Labor debt”.

The Howard government paid off the debt by a slash and burn policy on higher education, public schooling, training and hospitals, as well as the privatisation of Telstra, airports and virtually all government office buildings.

Arguably, the net sale of the overwhelming majority of these assets generated no net benefit to the nation.

The Howard government undermined support for CSIRO and independent university research. The bureau of manufacturing industry was abolished, meaning the future of manufacturing was left to the tender mercies of the Treasury and the Productivity Commission.

This contributed to the destruction of manufacturing know-how and capacity and the blow-out in foreign debt from about $150 billion in 1996 to about $600 billion now.

And, despite the erosion in services that added to household expenses, there was no tax relief. The tax burden rose from 22 per cent of GDP under Labor to a peak of 25 per cent between 2004 and 2006. The diminution of public services, which led to higher private costs in health and education and the rise in the tax burden, was a major factor in the rise in household debt to a record 160 per cent during the Howard era. It is household debt and foreign debt that is the real burden on Australians.

Government debt raised domestically is largely owed to ourselves. If it is borrowed from the Reserve Bank, the interest charged becomes part of the profit of the RBA, which is owed to the Government.

The money borrowed from the public is a burden on us as taxpayers but it is an asset to us as superannuants and as depositors in financial institutions.

Part of the debt will be borrowed offshore. But these borrowings will be largely associated with the necessity to finance the foreign debt burden that grew out of the Howard government policies that undermined Australia’s balance of payments in the first place.

If the budget reply by Turnbull can be taken at face value, he would impose a smaller deficit on the economy than the Government.

This is the path to the Great Depression Mark 11. The budget is already deflationary. The impact of the budget on the economy is measured by the change in the surplus or deficit, not its size.

The net injection into the income-expenditure flow this financial year is equal to 4.4 per cent of GDP (from 1.7 per cent in 2007-08 to -2.7 per cent in 2008-09).

In 2009-10, the net injection from the budget into the income-expenditure flow will be halved to 2.2 per cent of GDP according to the budget papers (from -2.7 per cent in 2008-09 to -4.9 per cent in 2009-2010).

In 2010-11 the forward estimate suggests the budget deficit will contract from 4.9 per cent of GDP to 4.7 per cent, resulting in a cut in the contribution to the income expenditure flow of 0.2 per cent.

Just because the stock of debt will be increasing over the two years, it doesn’t mean fiscal policy is contributing to an expansion in consumer demand and job creation.

One of the oldest confusions in economics is between stocks and flows and there always seem to be plenty of politicians happy to exploit this, rather than educate themselves and the public. This is reinforced by financiers whose prestige and profits would be diminished by a more active fiscal policy underpinned by financial reregulation.

By maintaining the fiction that responsible fiscal management demands balanced or surplus budgets, the opportunity for profit from “innovative financial products” that got the world into the present financial mess is maximised.

Whatever. Both sides of this political debate are reluctant to embrace deficits of the scale necessary to support employment, even though there is little risk that this would promote inflation.

While the cynicism on both sides of this debate is palpable, I don’t think either party is aware that the greatest danger to the prospect of an above trend 4 per cent growth rate after 2011-12 is not the level of debt— which is forecast to be a piddling 13.6 per cent of GDP with an interest burden of 0.6 per cent of GDP — but questionable infrastructure projects such as the $4.3 billion express rail project from West Werribee to Southern Cross Station.

It is not the size of the deficit that matters in terms of the burden on future generations, but how it is used. Households and corporations use debt to enhance their long-term wealth. The same principles apply to government debt. Providing the debt yields a higher rate of return than the cost of borrowing, there is no burden on the future.

Conversely, where governments sell productive assets for a price that yields a lower return to the taxpayer than if the assets and the dividends were kept in public ownership, then the nation is impoverished.

kdavidson@theage.com.au
http://business.theage.com.au/business/cut-deficit-and-bring-on-depression-20090517-b7e6.html?page=-1

Michelle Grattan and Tim Colebatch
May 12, 2009

The second Rudd Government budget will predict a huge $58 billion deficit.

TONIGHT’S second Rudd Government budget will predict a huge $58 billion deficit in the new financial year — a record 4.9 per cent of GDP, higher than in any post-war recession.

It will also estimate almost a million people will be unemployed, with the unemployment rate rising from 5.4 per cent to 8.5 per cent.

Costello: Swan ‘desperate’
Peter Costello accuses Wayne Swan of desperation over the looming budget deficit but fails to answer whether he would run a deficit himself.

The budget will cut into so-called middle-class welfare, and slice spending in other areas, but the collapse of revenue and the cost of the earlier stimulus packages will bring a string of red numbers.

The deficit is an $80 billion turnaround since the forecasts in last year’s budget.

The leak of the figure last night prompted the Opposition to declare that “the Australian Labor Party has lost control of the nation’s finances”.

The Government will today seek to rush through a bill to allow it to keep $365 million in revenue collected from its defeated alcopop tax. It has also signalled that it will try again to get the tax hike through the Senate.

Its fate will depend on a change of heart by Family First senator Steve Fielding, who voted against it last time. There is agreement to validate the $365 million already collected.

Treasury now forecasts that the economy’s collapse will lift unemployment to record levels. While the unemployment rate is expected to peak at 8.5 per cent, well below its 10.9 per cent peak in the last recession, the total numbers out of work would rise even above the 933,000 unemployed in December 1992.

Prime Minister Kevin Rudd, preparing to justify the unprecedented deficit, said Treasury advice to be published in the budget was that if the Government had not brought in its earlier stimulus measures, unemployment would have reached 10 per cent.

The budget would “support the jobs of today by investing in the infrastructure we need for tomorrow”, Mr Rudd said yesterday.

Treasury’s advice was “the final nail in the coffin for those who argue that governments should do nothing to support jobs during a global recession”.

“We are in the worst recession, the worst global recession since the Great Depression,” Mr Rudd said.

Meanwhile former NSW Labor treasurer Michael Costa launched a sharp attack on the Government, saying he had always taken the view “the Prime Minister and his Treasurer don’t know what they are doing”. The stimulus had been a “disaster”, Mr Costa said.

“The issue comes down to how many jobs did you actually save for that level of spending and the cost-benefit of the stimulus becomes an issue.”

A pension rise of about $30 a week, a go-ahead for major infrastructure programs and the promised parental leave scheme will be among the budget’s good news, but many people will be hit in the hip pocket by losing their private health insurance rebate and superannuation concessions.

Shadow treasurer Joe Hockey said the Rudd Government was “a reckless spender”. “Every man, every woman and every child will have a burden of $2600 just for next year’s budget.”

But he refused to say what would be an appropriate level of debt. Mr Hockey said it was “inconceivable that we could have such a deterioration of unemployment in such a short time. We left the Labor Party with unemployment levels at 4 per cent, with a $22 billion surplus, with no debt.”

Mr Rudd said every government worldwide was “engaged in temporary borrowing”.

The Government has the added problem of a hostile Senate, which puts at risk some of its savings measures.

The Opposition is reserving its positions on measures such as the means test on the private health insurance rebate, which has been criticised by Senator Fielding and independent senator Nick Xenophon.

Opposition Leader Malcolm Turnbull said this was “unquestionably a broken election promise. “There was no election promise that was made more repeatedly or more emphatically by Mr Rudd than that there would be no change to the private health insurance rebate.”

Attempting to apply heat to the Coalition, Treasurer Wayne Swan said: “The Opposition on the one hand can’t be out there saying they’ll support a pension increase, then knock back the savings that make that pension increase sustainable for the long term. They can’t have it both ways.”

Mr Swan said the budget was complex. “We have to stimulate the economy now to support employment. We have to make room for vital investments and also for pensions.

“But also, we’ve got to make those longer-term savings that bring the budget back to sustainability over time given the new global circumstances.”

Business confidence has picked up — the NAB confidence index held on to most of its gains in April to come in at a near six-month high of minus 14 points, well above the minus 32 points recorded in January.

With BRENDAN NICHOLSON, SARAH-JANE COLLINS and PETER MARTIN

http://www.theage.com.au/national/get-ready-for-58bn-deficit-and-million-jobless-20090511-b0mb.html?page=-1

By Ian McPhedran
Herald Sun
May 02, 2009 12:01am

A MASSIVE shift in global power away from the US has influenced the Federal Government to increase defence spending to a record $300 billion over a decade.

In the biggest military equipment upgrade in the nation’s history, the Defence White Paper details a $100 billion shopping list that includes new submarines, warships, fighter jets, cruise missiles, helicopters, spy planes, drones and cyber-warfare equipment.

The build-up is intended to defend Australia from potential threats, ranging from nuclear conflict to failed states and water wars, the Herald Sun reports.

The document, entitled Force 2030, will be launched by Defence Minister Joel Fitzgibbon in Sydney today.

The White Paper focuses on the massive shift in global power away from the US to countries such as China, India and Russia.

It tackles the new ball game by creating a bigger, stronger and more advanced military force.

The document argues that the primary role of the military is to defend Australia from attack.

“The main role of the ADF should continue to be an ability to engage in conventional combat against other armed forces,” the paper says.

As expected, the focus of the 20-year plan will be the navy and on securing Australia’s maritime approaches.

To this end, the Government will buy 12 “future submarines”, to be built in South Australia, eight advanced frigates and 20 2000-tonne offshore combat vessels.

The document doesn’t specify whether any warships will be built at Melbourne’s BAE Systems dockyard in Williamstown, where the navy’s Landing Helicopter Dock project is due to start next year.

The submarines will be quieter than the Collins Class boats, able to travel much farther and remain underwater for longer, and carry secure, real-time communications and uninhabited underwater vehicles.

The submarine plan will hinge on the navy chief’s ability to better manage his underwater workforce and attract new submariners.

In addition to the two 25,000-tonne amphibious ships and three destroyers already on order, it will give the navy a 15,000-tonne sealift vessel to carry supplies and troops, as well as six seagoing landing craft capable of carrying armoured vehicles.

The navy will also get 24 helicopters and access, with the army, to a further 46 multi-role helicopters.

Besides the $45 billion earmarked for the navy, the RAAF will spend more than $35 billion to replace ageing jet fighters and spy planes, acquire a fleet of large, high-altitude, unmanned aircraft and maritime patrol planes, and 10 medium-lift, fixed-wing aircraft.

The army will receive about $20 billion worth of extra troops and support equipment, including seven Chinook heavy-lift helicopters, advanced communications and intelligence-gathering equipment, helicopters and hand-launched missiles.

The document concludes that war between states, including major powers, remains a risk.

It also provides for better pay, conditions and housing for the Australian Defence Force’s 55,000 uniformed personnel.

http://www.news.com.au/story/0,27574,25417217-5012587,00.html?referrer=email&source=eDM_newspulse

By Malcolm Farr
The Daily Telegraph
April 25, 2009 12:01am

Robin Hood … Treasurer Wayne Swan is expected to slug high earners in the upcoming

THE nation’s big earners, on $150,000 a year or more, will be hit to pay for pension reform.

Earners taking in more than twice the average wage could lose so-called middle-class welfare as the Federal Government prunes “programs that may not be essential”.

Prime Minister Kevin Rudd said a pledge for long-term pension reform would begin this Budget, with an increase in the single aged payment. He said this would require “additional support from those who are better off”.

The Daily Telegraph has reported that senior ministers are looking at possible cuts in private health insurance subsidies for the well off and elimination of some of their superannuation concessions.

Mr Rudd defended the Government’s growing debt as it funds measures to blunt the impact of recession while also seeing its own revenue shrink.

“Either you completely slash and burn everything government does and throw tens of thousands of extra people on to the unemployment queues and cut funding for hospitals and schools, or you engage in temporary borrowing,” he said.

Mr Rudd again said the increase in the first home owners scheme would end as scheduled on May 30, with subsidies reverting to their original levels.

Finance Minister Lindsay Tanner said the issue was still under consideration in final preparations of the May 12 Budget.

“That issue, along with a number of others, is something we’re still actively considering,” he said.

The Daily Telegraph reported yesterday that the Budget would renew the improved scheme, which doubled the usual payment for buyers of their first home from existing stock to $14,000, and tripled it to $21,000 for first home buyers of new houses.

Around 36,000 people nationally have taken up the higher grants since they began four months ago.

A renewed scheme could emphasise new home construction, an area Mr Rudd said was important.

“This boost has helped keep our housing construction figures up when the rest of the world has been falling,” he said.

http://www.news.com.au/story/0,27574,25383598-5012587,00.html?referrer=email&source=eDM_newspulse

Patrick Walters
The Australian
April 25, 2009 12:01am

Military boost … Australia faces a challenging and uncertain security outlook in Asia over the next two decades

KEVIN Rudd is set to announce Australia’s biggest military build-up since World War II, led by a multi-billion-dollar investment in maritime defence, including 100 new F-35 fighters, a doubling of the submarine fleet, and powerful new surface warships.

The new defence white paper will outline plans for a fundamental shake-up of Australia’s defence organisation to ensure that the nation can meet what the Prime Minister sees as a far more challenging and uncertain security outlook in Asia over the next two decades.

China’s steadily growing military might and the prospect of sharper strategic competition among Asia’s great powers are driving the maritime build-up, which will see new-generation submarines and warships equipped with cruise missiles, and a big new investment in anti-submarine warfare and electronic warfare platforms, including new naval helicopters.

The white paper will consider the emerging non-traditional threats to Australia, including cyber security, climate change and its associated risk of large uncontrolled people movements, The Australian reports.

Senior government sources say Mr Rudd has insisted that defence spending remain largely insulated from the Government’s budget difficulties, but the Defence Department will still have to find at least $15 billion of internal savings over the next decade to help pay for the $100 billion-plus long-term equipment plan.

Mr Rudd said yesterday the delivery of the white paper was proving “acutely challenging as we work to defend ourselves from the global economic storm”.

“It is the most difficult environment to frame the Australian budget in modern economic history. It is also the most difficult environment to frame our long-term defence planning in modern economic history as well,” he told the Australia-Israel Chamber of Commerce.

“Nevertheless the Government will not resile even in the difficult times from the requirement for long-term coherence of our defence planning for the long-term security of our nation. This is core business for government.

“That is why we have forged ahead in our preparation of the defence white paper because national security needs do not disappear because of the global recession. If anything, those needs become more acute.”

Funding pressures will mean the navy will not get a fourth air warfare destroyer, and the delivery of the first batch of the RAAF’s F-35 joint strike fighters will slip by at least one year to 2014-15.

The huge cost of paying for the next-generation defence force, due to be detailed in the white paper and the forthcoming 10-year defence capability plan, will have little impact on the defence budget over the the next four years.

Apart from the air warfare destroyers and the F-35 fighters, most of the planned defence purchases will not have to be paid for until well into the next decade and beyond.

Mr Rudd and Defence Minister Joel Fitzgibbon are expected to release the long-awaited white paper as early as next week, with the more detailed 10-year defence capability plan due to published by mid-year.

The naval build-up will be led by a planned 12-strong submarine fleet expected to replace the Collins-class boats from 2025.

It will enable the RAN to deploy up to seven boats to protect Australia’s northern approaches, including key maritime straits running through the Indonesian archipelago, at times of high threat.

The white paper will outline the requirement for a new class of eight 7000-tonne warships equipped with ballistic missile defence systems similar to the three air warfare destroyers already on order that will eventually replace the Anzac frigates.

A new class of 1500-tonne corvette-size patrol boats able to take a helicopter is slated to replace the Armidale-class vessels from the mid-2020s.