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.