Sydney - Last month Prime Minister Kevin Rudd was telling
the elderly that raising their pensions by 30 Australian dollars (21
US dollars) a week would increase inflation and goad the Reserve Bank
of Australia (RBA) into raising interest rates yet again.
This week he promised to have 2,100 Australian dollars in the bank
accounts of retired couples before Christmas and is urging them to
spend it fast.
Last month Rudd was railing against people going deep into debt to
buy houses they couldn't afford. This week has him offering grants of
up to 21,000 Australian dollars for people taking on mortgages.
All told, Rudd is pumping 10.4 billion Australian dollars into the
economy, spending half of the 21-billion-Australian-dollar government
surplus to try and avert a recession.
He has not ruled out Canberra spending beyond its means and
recording the first budget deficit since 2001.
Some people can hardly believe their luck. Raini Singh and Rasan
Gujral didn't think they could afford to build a new house before
their wedding in January. Thanks to the tripling of the tax-free and
non-income-tested First Home Owners Grant to 21,000 Australian
dollars, not only are they building but they will be borrowing even
more to build in a better Sydney suburb.
'The truth is we are going through the worst financial crisis in
our lifetime,' Rudd, 50, said when announcing a package twice as
large as most analysts expected. 'If you're to learn anything from
economic history, it's this: at a time when economies need stimulus
support, don't leave it too late.'
Some analysts fear he will spook the RBA into postponing a
50-basis-point interest rate cut they had penciled in for next
month's board meeting. Inflation is running higher than the RBA's
target of 4 per cent and last month the movement downward was a full
1 per cent.
Treasurer Wayne Swan notes fiscal policy is now in step with
monetary policy. With the economy slowing rapidly, 'the threat of
inflation is now abating,' the finance minister said.
Growth in gross domestic product, which was running at 4 per cent
in 2007, is expected to clock in at 1.25 per cent next year.
Stephen Walters, an economist with JP Morgan, lauded the spending
programme, arguing that a dampening in the terms of trade because of
crashing commodity prices would bring a deficit anyway.
'This is fiscal policy doing some more of the heavy lifting than
monetary policy - as it should be at this time (of the economic
cycle),' he said.
In contrast, economist Michael McNamara, of RP Data Valuations,
has denounced the package. He homed in on the increase in the First
Home Owners Grant, saying it was just throwing good money after bad.
'These sorts of demand measures are often immediately translated
just into higher house prices as first home buyers use those grants
simply to outbid each other for more expensive houses,' McNamara said.
The government says tripling the grant could see builders start
15,000 new houses over the next 12 months.
Barnaby Joyce, who ran an accounting firm before entering
Parliament for the opposition National Party of Australia, is deeply
critical of the nature of the pump-priming.
'If it was targeted expenditure that both stimulates and provides
an asset for our nation, I'd say I'm on board with that,' said Joyce.
'But we're dipping into the surplus and turning it into Christmas
presents. This is going to be a stimulant more to the Chinese economy
than the Australian economy.'
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