A very odd recession

I have been off-line because of a house move, making it difficult to both write and post.

I find this a very odd recession, both globally and in Australia. Australia may well avoid a “technical” recession, but for all practical purposes at least parts of the country feel as though they are in recession.

Why then do I say odd? Well, the economy is all over the place, with a now somewhat incredible gap between domestic and international economic performance.

At a time of global real-estate declines, the Australian Government’s first home buyer grant in combination with reduced interest rates have triggered something of a mini-real estate boom in at least at the lower end of marketplace. In real estate mad Sydney, real estate investment is again a topic of interminable conversation.

One side effect of this is that rents appear to have risen at the lower end of the market place.

The best data on both rents and sales in NSW is provided by Housing NSW’s Rent and Sales Reports. The latest sale reports are for the June quarter 2008, the latest rent reports the September Quarter.

The sales reports show year on year real estate price declines in most localities. This in combination with lower volume of sales led to a marked drop in State Government revenues from stamp duty. By contrast, rents generally increased.

Since then, house lending has started to move up, with a seasonally adjusted increased for housing finance for owner occupation of 7.1% in December over November. This was associated with a major jump in December for the seasonally adjusted value of dwelling commitments.

The next NSW rent and sales reports may not show this increase because of lag effects – the sales data will be for the September quarter – but should still be interesting.

I had major reservations about the extension of the first home buyers grant on existing properties, a view I still hold. However, one practical economic effect has been the creation of another buffer for financial institutions and for ordinary wage and salary earners owning their own homes.

Australian bank bad debts have increased. However, this has been focused on the commercial side, not housing. This makes it much easier for Australia’s banks to absorb losses without adverse balance sheet effects.
Still on the odd side, only a little while ago Australia’s major banks were seen as global minnows, too small to compete effectively. I find it hard to come to grips with the fact that they now have market capitalisations greater than many major international banks including Citigroup.

Clearly bank shareholders are concerned about the statements from the various major banks that their profits are under pressure and that they may need to reduce dividends. However, there is a major difference between worrying about dividend reduction as compared with worries about sheer survival.

Like US consumers, Australians have clearly been trying to save more and have reduced spend on particular items. Reflecting this, the January figures for motor vehicle sales showed a further small decline in both trend (-0.8%) and seasonally adjusted (-1.1%) terms, continuing a downward trend that began at the start of 2008. December on December sales show a decline of 16.9% in seasonally adjusted terms.

In addition to ordinary shifts in consumer demand, motor vehicle sales have also been pulled down by lower fleet sales. Still, both the December reduction and the year on year numbers are still relatively mild by global standards.

All very interesting.

Crowding out and the Rudd stimulus package - still more economics 101

This post continues the discussion I began in More economics 101 - the economics of Malcolm Turnbull. Since then I have added The Rudd Stimulus Package - Andrew Laming's view to provide a Liberal Party view. This post focuses on the crowding out issue.

As with all these posts, I am trying to think my way through the issues. Feel free to disagree.

Economists use the term crowding out to describe the way in which one set of actions - an increase in Government spend, for example - can reduce other activities, thus crowding them out.

It may seem strange to talk about crowding out at a time the Australian economy has spare capacity. Yet it is an issue to my mind because of the way the package is being funded.

If the Government had funded expansion in the old-fashioned way by issuing Treasury bills thus expanding the money supply, then the increased spend would flow through into increased economic activity. The position is far less clear-cut when the extra spend is funded by increased borrowings from the market.

Increased Government spend pumps one dollar into the economy. The immediate effect is the same regardless of how that dollar is financed.

The Government then borrows one dollar from the market to fund its dollar spend. That dollar is no longer available to do other things. If there is a lot of liquidity around sitting idle as there is just at present, the effect may be small. However, these are very big borrowings.

One potential effect is an increase in market interest rates. Should this happen, then extra funds may be attracted to Australia, leading to appreciation of the currency. In turn, this would encourage imports, discourage exports, placing downward pressure on economic activity.

This is the type of effect that led Harry Clarke to write Pointless fiscal expansions that swamp us with debt but don't reduce unemployment, a post brought on-line in the wee hours of this morning.

However, there is another problem as well.

We presently have a thoroughly constipated financial system with banks still reluctant to lend to business. There is a lot of liquidity around, so Government borrowings may not of themselves shift real interest rates a great deal. Nevertheless, they could well further reduce the availability of loan finance for business.

Still keeping it in simple terms that I can understand, cash has to go somewhere. At present, there is a very high weighting in the market for risk, so available cash flows to the safest investments, reducing cash for perceived riskier investments, and that includes loans to business.

Government borrowings of the type Mr Rudd proposes increases the supply of high quality financial assets, potentially further reducing (crowding out) the cash available for loans to business.

In theory, this might lead to increased interest rates on business loans, widening the interest rate spread until funds are attracted. However, we already have credit rationing. So long as risk assessments remain as they are now, interest rates are unlikely to shift much in the short term.

We can already see some of these types of effects in the housing market place. For a number of reasons, housing is still seen in Australia as a relatively safe longer term investment.

This perception is not clear cut. There is downward pressure on property prices in the more expensive segments of the market place. However, at the lower end house prices have moved up, in part because of Government incentives. This is reflected in the statistics, with loan approvals for housing now increasing.

Banks are lending for housing because they still see it as a relatively safe investment offering a higher yield. Barring unexpected changes, they will continue to do so. So we have credit rationing for business, while housing lending expands.

The Rudd Stimulus Package - Andrew Laming's view

My post More economics 101 - the economics of Malcolm Turnbull drew a thoughtful response from Andrew Laming, the Liberal member for Bowman. I have been remiss in not bringing this up before onto the main blog - it gets lost in the comment section.

The latest Rudd stimulus package has passed. However, Andrew's arguments are still relevant to the longer term.

Andrew wrote:

Dear Jim,
Just a note on your excellent analysis.

This is not a debate between a small Coalition and a large Government stimulus package. It is not about supporting a larger intervention if you are bearish about Australia and smaller if you are optimistic.

This debate is about whether $42 billion spend AS PROPOSED is appropriate in quality and quantity.

Once committed, the $42 billion becomes opportunity cost. That's why Mr Turnbulls's proposed scrutiny of the package in the Senate is so vital.

This debate is not about whether the world will recover from the recession. Of course it will. The real argument is whether the stimuli, as proposed represent cost-effective recession aversion.

Highest level analysis asks - how and when is each stimulus dollar of GDP deployed to pre-empt economic threats and have maximum impact maintaining jobs, and in turn, Australia's GDP growth.

Judge the package not on the social infrastructure it delivers or that people are "paying down home loans and that is no bad thing." This is akin to treating a skin cancer patient with a weight loss program.

We all want nation-building, but in a recession, a specific set of measures are prescribed to maintain economic activity (reduce the length and depth of recession), and to position the economy to achieve the most sustainable growth recovery (so that we are better placed than our competitor economies when we all enter the post-recession phase.

Readers will know of those elements: PREVENTION: high-multiplier expenditure, targeting the most vulnerable domestic sectors to job losses, and ADAPTION: where losses occur, reducing frictional unemployment through rapid retraining and redeployment into economic infrastructure - which reduces costs to business, builds confidence and prevents further job losses.

Finally, with the current fiscal fixation, don’t underestimate the ultimate power of monetary policy. Australia's comparatively higher interest rates allow significant room for stimulus which is not available to other economies, which will restore confidence and entrepreneurialism without sending Australia into generational debt.

As an aside...
Your excellent graph was part of my analysis of ABS retail sales for December. It is irrelevant that December was $700 million more than November. To understand the stimulus, four factors enter the calculations;
1. Temporal factors. Treasury now says they only expected 10% of the stimulus to enter the economy in December (they didnt say that back in December). Most (they hope will turn up in Q1 and Q2 this year).
2.Annual cycles: because every year, Australians spend remarkably close to 11.1% of their annual retail spend in December (as they did in 08, despite stimulus),
3. Year by year comparison: the degree to which December 08 increased from the 4 Decembers before it, relative to the annual growths in each of those years.
4. Monthly trends (your graph), because even with all the pessimism post-Lehmans, it shows that retail sales held up July-November. Too many people grasp at November's slip and infer trends. Remember the stimulus came before we even had the ABS November 08 figures.

My case is that Dec 2008 WAS ALWAYS GOING TO BE SOLID. That position is supported by all four points above, together with the confidence of falling interest rates, particularly cheap fuel and the Christmas effect (where people spend irrationally at Christmas (even at tough times), then compensate, with a rational slump in the first three months of the following year(see Xmas 2007).
It is difficult to argue that the December stimulus saved/supported/created any jobs, because department stores and the household sector (big winners from the stimulus), can and did further discount to maintain sales volumes and retain staff.

In the end, massive discounting plus the stimulus - achieved sales volumes of $300 - 850 million above expectation.

I argue that such a result neither justifies the stimulus, nor assisted much in averting what lies ahead for Australia in 2009.

Andrew Laming
ps: It was the tax cuts announced in May 2007 which "introduced a structural element into the deficit." Bringing those cuts forward is merely a one-off tax expenditure.

End Observation

In posting Andrew's comment in this way, I am treating it as a guest post. For that reason, I am not going to comment on it at this point, but leave it stand as a contribution to discussion.

I left my own post hanging on the issue of crowding out. I will discuss this further in my next post.

February 2008 - so far so good for the Australian economy

I am conscious that I still have to finish More economics 101 - the economics of Malcolm Turnbull. I will do so. However, I wanted to make a comment on the latest economic statistics.

As I write, the Rudd Government's economic stimulus package has been voted down in the Senate through the vote of independent Senator Nick Xenophon. He wanted more Murray Darling water for South Australia and the Government would not budge sufficiently. And a bloody good thing too, although this goes to some of my own biases. I will deal with this later in a separate post.

The latest ABS data that has been released supports my view about the performance of the Australian economy.

On 10 February, the ABS released data on the Value of Principal Agricultural Commodities Produced, Australia, Preliminary, 2007-2008. This suggested the value of agricultural production was up 24% on the previous year.

Yes, this is 2007-2008. Further, the previous year was badly affected by drought. Yet this better performance does feed into our trade stats.

The following day, 11 February, the ABS released housing finance figures for December 2008.

In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions increased 5.9%. Owner occupied housing commitments increased 7.1%, while investment housing commitments increased 2.9%.

This is not a bad result and shows the effect of the Rudd Government stimulus measures.

If you look at the attached ABS graph, you can see the sharp decline from December 2007 and then the recovery.

The Rudd Government measures are not all good. Home prices at the lower end of the market have started to move up, as have rents.

This is what happened before with this type of measure. Lower income renters were disadvantaged as a consequence.

Now turning to the unemployment numbers released to day.

Employment in January increased by 1,200 to 10,742,100. Full-time employment increased by 33,700 to 7,670,700 and part-time employment decreased by 32,600 to 3,071,400.

The drop in part time employment did not come as a surprise. The rise in full time employment did.

The participation rate, the proportion of the working age population wanting to work, increased. This increased the unemployment rate by 0.3 percentage points to 4.8%.

The attached graph from ABS shows how unemployment has risen. You can see the steady increase since the start of 2008.

Coming on top of the retail sales statistics, none of these statistics show an economy entering serious recession. However, the numbers are lagged and a little misleading.

I have no doubt that the economy is in downturn. My point has always been that the economic fundamentals are pretty good.

I support some variant of the Rudd stimulus package because I see it as important in getting us through to the second half of 2009. By then, some of the longer term measures will be starting to feed through.

As someone who has been watching the economic entrails for quite a long while, I am struck by the apparent disconnect between Australia and apparent global trends.

Victorian Fires

I really haven't felt like posting because of the Victorian fires. I find it hard to focus.

The fires have revealed the best in Australians, as well as some of our weaknesses. While I write a lot on this blog about economics, I also focus on management and public administration. There is so much in the Victorian fires that bears upon this.

Some of the stories out of Victoria are absolutely inspirational. Later on this or my personal blog I will write about this.

More economics 101 - the economics of Malcolm Turnbull

This post looks at the differing economic approaches of the Rudd Government and the opposition. I am not especially interested in the differing rhetoric of the two sides, just trying to understand the variations in the economics.

Mr Turnbull's web site carries his various statements. Again, I am not concerned with the detail, but with key concepts.

The Two Sides

Using the language of war, the Rudd Government has argued that the Australian Government must act now to protect Australia against global economic catastrophe. Having protected the banking system, measures are required now to provide short term stimulus while longer term investment measures start to come into effect. 

Mr Turnbull agrees that the economic outlook is grim.

Using another set of rhetoric, he suggests that the Rudd Government is behaving like the early Whitlam Government. After a long period in opposition, the Whitlam Government rushed through a series of measures, an over-spend that was to prove unsustainable.

According to Mr Turnbull, the stimulus packages have been ineffective and will leave Australia burdened with debt. There has been too much haste. Beyond the debt, spending now at the sale proposed must reduce the Government's capacity to respond to later developments.

The opposition proposes instead a much reduced stimulus package under which:

• the tax cuts to come into effect from 1 July should be brought forward, backdated to 1 January.
• The Commonwealth should pay a portion of the Superannuation Guarantee Levy on behalf of small employers (those with 20 or fewer staff) for the next two years.  This measure would directly improve the cash position of small firms, directly reduce the costs of employment, and so directly contribute to preserving jobs.
• there would be smaller, targeted infrastructure spend with $3 billion committed to school upgrades by reinstating the Coalition's very successful Investing in our Schools Programme.

Two rather different approaches.

My Own Views

While my focus in this post is on the underlying economics, I should make my own views clear so that you understand where I am coming from.

There is some truth in Mr Turnbull's comparison with the Whitlam Government. It has seemed to me that that Mr Rudd is in a rush for other reasons. I have suggested that we should take a deep breath - less haste, more speed. I have also pointed to what I see as specific weaknesses in Mr Rudd's initiatives, weaknesses linked in part to current administrative and public policy systems that create delivery problems.

The international downturn has been faster and wider than I expected. The impact on domestic confidence has also been greater than expected, given the underlying strength of the Australian economy. For that reason, I have been inclined to support the Rudd measures.

I do not share Mr Turnbull's stated concerns about the deficit so long as we do not create a structural deficit. I am also less worried about Government debt.

Overall, my view has been that the downturn provides an opportunity to do new things, to catch up on past neglects, thus laying the basis not just for future growth, but also for long term improvements in our social and physical infrastructure. Part of my argument for less haste, more speed it to ensure that we get the best results.

Finally, I have argued that the various stimulus measures taken round the world will pull the world out of recession. As that happens, the Australian economy will boom again. However, I have also expressed the concern that the global stimulatory measures will overshoot, creating problems in the opposite direction to those we face as present.

The Economics - tax cuts vs government spending

Mr Turnbull's views and those expressed  by his colleagues such as Julie Bishop link to a global economic debate.

In economics, the term consumption function is used to describe the relationship between income and consumption.

As developed by Keynes, it includes two elements, a base or autonomous consumption that occurs independent of shifts in income, together with a  second or induced element that shifts with income. As income increases, some is spent, some saved. The term marginal propensity to consume is used to describe the amount spent out of every extra dollar in income.

The marginal propensity to consume links to another concept, the multiplier.

In spending a dollar, you give someone else that dollar. Part of that dollar is spent, part saved. The part spent is then further part spent and part saved. And so on in ever diminishing amounts.

Some of this money is spent on imports and hence lost to the process. The size of the multiplier - the final spend for every initial dollar of spend - depends on the marginal propensity to consume together with the marginal propensity to import.

The Rudd Government's first big stimulus package deliberately targeted some of those most likely to spend. The size of the effect depended on how much they did spend, then the subsequent multiplier effect.

For reasons I outlined in The Australian economic stimulus package - distributional and timing issues, there was always going to be some leakage. However, Mr Turnbull goes further than this.

Drawing on overseas work dating back to US economist Milton Friedman, he suggests that the marginal propensity to consume is determined not by immediate variations in income, but by expected permanent income.

This is quite important. The permanent income hypothesis suggests that a one-off stimulus of the Rudd type will simply be saved or used to pay off debt.

Further, to the degree that expectations about future income and the value of household assets (people have been spending all their immediate income because they expect the value of their assets to rise) are affected by by the downturn, the incentive to save will be increased.

So the argument now runs, there is no point in one-off stimulus packages. We are better off lowering taxes, since this affects permanent income.

We can now break our argument into two parts.

On the first, the multiplier, Mr Turnbull argues that the stimulus package failed because December retail sales were only $700 million more in seasonally adjusted terms than the month before. This led him to ask "What happened to the other $8.9 billion of the cash splash?"

The Liberal member for Bowman, Andrew Laming, went further. He suggested that a closer look at the figures suggested that was not much improvement on the previous December: "Around $300 million extra turned up in retail sales and that's tiny - around 5 per cent of the stimulus package actually ending up in the retail sector".

I don't think that one can make this type of categorical statement.

To begin with, the impact on spend is likely to have been spread, beginning in November and then extending through December into the new year.

The Australian Bureau of Statistics was forced to abandon its trend estimates for December because the size of the retail bounce distorted trend estimates.

If we look at the previous trend estimated (graph) you will see that November showed a decline, resuming a downward trend. We cannot say what the December number would have been in the absence of the stimulus package. This is the real benchmark

Beyond this, we can (I think) say two things.

The first is that there was a very clear and large bounce. A 3.8% increase in seasonally adjusted terms is no small thing at a time of global downturn. The second is that if people did save or reduce debt, then that is not necessarily a bad thing at personal level in current circumstances.

The flow on multiplier effects are unclear and will certainly be lower than the traditional theory suggests. The only thing that we can say with a degree of certainty is that imports of consumer goods did not increase. This suggest that stocks were cleared, again no bad thing.

The second issue is the relative merits of a tax cut versus direct payments. At this point, Mr Turnbull is only suggesting that the tax cuts should have been brought forward. However, internationally the permanent income hypothesis is being used to support arguments for tax cuts as a stimulatory measure.

Bringing the tax cuts forward would, I think, have had very little short term impact on consumption because the actual cash impact would have been relatively small in the current financial year.

More broadly, I have a real problem about the use of permanent tax cuts as a fiscal stimulatory device because they then build a structural element into the deficit.

Government borrowing and the crowding out effect

In that lost world of the past, the Government would have funded a deficit by issuing securities to the Reserve Bank, thus expanding the money supply. Then, as economic conditions improved, the Government would have used the extra tax revenues to pay the Bank back.

Current orthodoxy does not allow this. Instead, the Rudd Government proposes to issue Government bonds to the market to fund the spend. This, Mr Turnbull, suggests will create a burden for the future.

At one level, this is true just as it would have been in the traditional approach. However, there are two quite separate issues involved.

First, the cost has to be set against the extra national income generated during the downturn. If the Government spends one borrowed dollar and gets a five dollar increase in national income, then it is in front because the extra tax revenues cover the cost.

Conversely, if the Government spends one dollar and gets, say, just one dollar back, then it is behind.

Secondly, returns from capital investment are spread over time. There is absolutely nothing wrong with borrowing longer term where this is linked to a longer term return.

The best world would be one where stimulation measures generate a profit in their own right from increased economic activity, leaving the long term income stream from capital investment as pure cream.

Despite the Government's rhetoric, it is not clear to me that that current stimulus packages will in fact generate both the immediate stimulus and the longer term return.

There is also an immediate problem in possible crowding out.

Note to reader: I am out of time. I will continue this post a little later.

Are all the Australian economic forecasts wrong?

In a post on my personal blog, Confusions over current economic forecasts, I explained why I found some of the current economic discussion so personally confusing. A key reason was the growing divergence between my own judgements and various forecasts and rhetoric.

In this post I want to look at just one variable, Australia's trade performance. Concerns here were a feature of both the recent Access Economics report and the Australian Government's own forecasts.

But is the position as bad as everybody says? Let's test this with some rough back-of-envelope calculations. I am doing these as I write, so that I am not sure just what my end point will be.

The latest Government projections forecasts a current account deficit for 08-09 of 41/2% of GDP. Exports are projected to go down sharply, imports to decline at a slower rate.

Australia's GDP is a bit over a trillion dollars, so this equates to a current account deficit of around $47 billion. All figures are in Australian dollars.

In the six months to end December, Australia had a trade surplus of $4.8 billion dollars. So to get to a 08-09 $47 billion trade deficit, we "need" a deficit in the second half of the year around $52 billion. This equates to a monthly deficit of $8.7 billion.

In the six months to end December, Australia's exports totaled $111.5 billion. To "achieve" the 08-09 projections, and assuming that imports remain constant, exports need to fall by $52 billion or by 47%.

I just don't believe this.

Look, I may be wrong. If so, please show me where my error is. I may just have committed a maths stupidity. I have done so before.

Until I am shown to be wrong, I just don't believe the forecasts.

Update

The thing that I had forgotten in writing this post was, of course, financial payments. I will deal with that in a moment. First to answer a question from SA.

SA, both the Access Economics forecast and some Government commentary has placed great weight upon our deteriorating trade position. To quote one example:

This is not just a recession. It will be the sharpest deceleration Australia's economy has ever seen," said a director at Access Economics, Chris Richardson....

The current account deficit is predicted to rise, from $65 billion this financial year to $100 billion next year, as exports fall faster than imports. With the international spotlight back on debt, Mr Richardson said a large current account deficit could leave Australia exposed, should other countries prove unwilling to continue lending us the money needed to finance the deficit.

Our trade stats improved at just the right time, so I found the gloom about the current account odd. This post was a very rough back-of-envelope calculation to test this:

1. The latest Government forecast suggested a deficit on the current account for 08-09 of 41/2% of GDP. This roughly equated to a deficit of over $47 billion.
2. To the end of December our balance of trade in goods and services was credit $4.8 billion. Given this, a deficit on the current account of over $47 billion seemed to imply a deficit on the balance of trade for the December half year of around $52 billion. Projected deficit (47 billion) = December half surplus (4.8 billion) -June half deficit (52 billion).
3. In turn, this seemed to imply a fall in exports of around 47%.

In running this calculation, I was ignoring net current financial flows - interest paid and received, dividends paid and received, royalties paid and received - that are added to the balance of trade to get the balance on current account. These are affected as well by current events.

Australia has borrowed quite heavily to fund past trade gaps. These borrowings have been largely private sector through the banking system and are generally denominated in overseas currencies, and especially the US dollar.

Two issues arise.

The first is one of risk. What happens if, as Chris Richardson suggests, other countries stop lending to us? This was the reason why the initial sub-prime crisis affected Australia - domestic liquidity was affected because bank overseas borrowings were affected.

Barring catastrophe, I think that we can already put this one aside because of the impact of the bank guarantee. Our banks are borrowing internationally.

The second issue is the impact of the depreciation of the Australian currency. This increases the Australian dollar value of interest payments, thus adversely affecting the balance on current account. The final effect here depends upon the combination of future movements in the value of the currency with movements in interest rates.

Again, all this shows the importance of shifts in our trading position and the importance of our move into surplus at just the right time.

According to the latest RBA statement, a far better document than the official Government forecasts, the improved trade position moved the current account deficit from over 6% of GDP to 3.2% in the September quarter to around 2.5% in the December quarter. So the Government forecast of a deficit of 41/2% still implies a substantial shift. The Bank figure is 31/2%; this seems more reasonable. 

The economics of the Rudd Government's $A42 billion stimulus package

The announcements yesterday on the Australian Government's latest stimulus package were very thin on detail, although today's Australian press provided more information. In addition, the Commonwealth Government has released a new economic statement that I had not seen. This provides supporting information.

The announcements deal with something of a rag bag of measures. Accepting this, I think that it is possible to say something useful if we stand back from the detail.

Australia's Economic Position

The global economic downturn has been deeper than expected and has, I think, affected Australia more then expected.

Part of the reasons for the impact on Australia are real. Exports are down, while Australian firms with operations overseas are also being hit. It is also clear that the Australian economy had already turned down, so international turn has added to existing domestic economic decline.

Part of the reasons for the impact on Australia are psychological. People's behaviour has changed, creating real economic effects. Here my complaint about the Access Economic Report and some of the Government's own commentary is that it adds unnecessarily to the fear, creating its own behavioural effects.

The initial stimulus elements and especially the pre-Christmas cash payments clearly had a stimulatory effect.

The Australian Bureau of Statistics estimated released today suggest that seasonally adjusted December retail sales jumped no less than 3.8% as compared to November, the largest seasonally adjusted increase since August 2000. So big was the increase that the ABS has had to abandon its trend estimates for the present.

However, some elements of the various measures and especially the big COAG development package have, I think, taken longer to implement than the Government might have expected. The Australian Government tried to front-end proposed spend, but so far this has not been very effective.

There are particular reasons for this linked to the mode of operation of our current systems. The practical effect is that it will be the 09-10 year before spend really starts, probably 10-11 before it hits full stride.

This opened a gap between immediate stimulus and longer term measures. This package is designed in part to fill that gap. However, despite the PM's views expressed on TV last night, I think some of the measures are going to take longer to implement than he expects and for the same reasons as earlier measures. Some of our administrative systems and processes are simply overloaded.

For that reason, and independent of international developments, I would expect at least one and possibly two further economic stimulatory packages to bridge the gap.

Discussion of individual measure follows, broken into groups by their likely impact in time. The small business tax measures are discussed separately because their impact is uncertain.

The Measures: immediate stimulation - three months

The immediate stimulus measures are five one off cash bonuses. The announcement describes them as:

• Tax Bonus for Working Australians of up to $950 paid to every eligible Australian worker earning $100,000 or less. This will support up to 8.7 million individuals at an estimated cost of $8.2 billion. Payments will be made from April.
• $950 Single Income Family Bonus to support 1.5 million families with one main income earner. This will cost $A1.4 billion and will be paid automatically in the fortnight commencing 11 April to recipients of the Family Tax Benefit part B.
• $950 Farmers' Hardship Bonus paid to around 21,500 drought affected farmers and farm dependent small business owners receiving exceptional circumstances related income support. This payment will be made in March and cost $20.4 million. So this is a fairly minor element in the whole package.
• $950 per child Back to School Bonus to support $2.8 million children from low- and middle-income families. This will cost the Government's $2.6 billion and will provide a one-off bonus of $950 per school age child (age 4 to 18) to families who are eligible for Family Tax Benefit Part A as at 3 February 2009. No date is provided for this payment.
• $950 Training and Learning Bonus paid to students and people outside of the workforce returning to study to help with the costs of education and training. This will cost $511 million, with part of the payments made in March.

In all, these items represent around $12.7 billion in direct cash payments in the June Quarter.

Without being too precise about it, Australian retail sales are around $78 billion per quarter, so the payments are around 16% of retail sales during the same period.

The Measures: medium term stimulation - three months on

The next group of measures will take a little longer before they

start to come into full effect. They include:

• up to $200,000 to every Australian school for maintenance and renewal of school building to be paid on a sliding scale at a cost of $1.3 billion over two years. While this one will take a while to sort administrative arrangements through, schools already generally know their most urgent maintenance details.
• urgent maintenance to upgrade around 2,500 vacant social homes. Housing Departments know their maintenance needs. $400 million is allocated for this over 08-09 and 09-10. I am unclear as to the extent of overlap between this and already announced COAG housing measures that agencies are working on. I would expect the majority of spend to take place in 09-10.
• installing ceiling insulation in 2.7 million Australian homes. This is projected to cost $2.7 billion over three years. Again, there will be some administrative delays. More importantly, I simply don't know how long it will take existing suppliers to gear up. One installer interviewed on radio commented that this would take time.
• Increased funding for local community infrastructure and local road projects at a cost of $890 million. This extends over several years. it is included because part of it represents acceleration of existing pr0jects.

The Measures: longer term stimulation - six months out

Most of the measures fall in this group.

Dealing with education first:

• Funding of $12.4 billion over three years for the construction of assembly halls, 21^st Century libraries, indoor sports centres, performing arts centres and similar major improvements for all Australian primary schools, including combined schools and special schools.
• Funding of $1.0 billion in 2009-10 the construction of science and language laboratories in secondary schools. Funding will be allocated to up to 500 schools on the basis of assessed need for new or upgraded facilities.
• The Government will also bring forward $110 million of funding for the Trade Training Centres in Schools Program, from 2010-11 to 2009-10.

Turning now to housing. The Commonwealth will provide

• Up to $6.0 billion to fund the construction of approximately 20,000 new public and community housing dwellings, to be largely completed by December 2010.
• $252 million to fund the construction of new Defence Homes.

Business tax measures

I will leave these aside for the present because I have not not had time to analyse them properly.

Discussion

The following chart sets out Treasury estimates of the economic stimulus effect. I just don't believe them for reasons set out after the chart.

The white component represents the effect of this latest package. At least part of 08-09 spend will flow over to 09-10 for reasons outlined above.

It is hard to see how the COAG components of the 1st half 2009 can be achieved in real terms, although they may be achieved in budgetary terms by pre-payments to the states.

The Commonwealth and states are still involved in implementation planning. As best i can work out, first contracts are unlikely to be let before April.

This post has focused on the detail of the package. I will return to some broader issues in my next posts.