Let stimulus funds roll on, says Treasury
By Philip Coorey Chief Political Correspondent | smh.com.au | 31 August
A premature withdrawal of the unspent billions in economic stimulus would risk stalling the economy and causing a sharp increase in unemployment, says Treasury advice to the Government.
The advice, prepared a week ago, says the $42 billion stimulus package may prove "more effective than first thought" and it makes the first official acknowledgement that unemployment is unlikely to hit the 8.5 per cent figure forecast in the federal budget in May.
But it says that even when the package is phased out as scheduled, there will be a mild negative effect on growth from October onwards. To put the brakes on now would have a much harsher impact.
The Government will use the advice this week to combat calls by the Opposition and others to pare back the spending or risk an earlier-than-expected interest rate rise.
These calls will grow if, as expected, the national accounts figures on Wednesday show that the economy recorded positive growth for the June quarter, further confirming that Australia has avoided a technical recession.
But the Treasury advice says: "It would be wrong to conclude that the success of the stimulus to date is an argument for winding back the stimulus still in the pipeline." The measures are temporary so the spending "already involves a staged withdrawal".
"Withdrawing the stimulus more quickly would risk stalling the economy and causing a steeper rise in the unemployment rate," it says. The resurgent economy has led to predictions that interest rates will rise more quickly than expected.
The National Australia Bank warned on the weekend of two rate increases by Christmas. The official cash rate is at a decades-low 3 per cent because the Reserve Bank has cut it by 4 percentage points over 11 months to help fend off recession.
The Treasurer, Wayne Swan, said yesterday the economy would probably have fallen into recession had it not been for the stimulus package.
"But what has escaped the attention of those who have called for us to withdraw our support for the economy now is that the stimulus has been carefully designed to steadily withdraw from the economy as the private sector recovers," he said.
The Treasury advice estimates the stimulus added about 1 percentage point to gross domestic product in the December and March quarters and predicts it to add 2 percentage points in the June and September quarters.
But the impact on growth of the almost $12 billion in cash payments will peak in the June quarter and the impact of the infrastructure spending – which constituted about 70 per cent of the package – will peak in this quarter.
After that, the infrastructure spending will still generate activity and jobs but its impact on growth will be negated by the cash payments no longer having an effect. "Even with the infrastructure spending in place, the reduction in the overall size of the stimulus will detract from growth from the December quarter 2009 onwards," the advice says.
It says without any infrastructure spending, growth would be 1 percentage point lower by Christmas. "This would remove support from the economy before a sustained recovery in private-sector activity had time to take hold," it says.
The advice says strong recent economic data might be a combination of the stimulus package working better than expected as well as stimulatory action by other nations, especially China. The budget forecast the economy to fall into recession and unemployment to peak at 8.5 per cent.
The Government will revise its unemployment forecast at the end of the year and Treasury all but confirmed it would be lower, as long as the stimulus was not wound back.
"But with the unemployment rate still expected to rise, any argument for a lower level of stimulus is an argument for a higher level of unemployment," it says.
CASH SPLASH
* Stimulus boosted growth by 1 percentage point over the December and March quarters.
* Forecast to boost growth by 2 percentage points over the June and September quarters.
* If only cash payments made and no infrastructure spending, growth would be 1 percentage point less in six months to Christmas.
* Positive growth impact of package will stop in October but jobs and activity will still be generated. Source: Treasury, domestic economy division
HOME HOUSING
Families will be uprooted as bulldozers clear the way for 10,000 new homes costing $3 billion in NSW, using the federal stimulus money and state funding. This investment in public housing will avoid building huge estates that become ghettos. The idea is to spread the housing across Sydney. But almost none of it will be built in the expensive eastern suburbs or on the north shore. It will be concentrated in the south and west. At Blackett, 20 medium-density flats will replace a few old cottages. "House prices will tumble," says resident Frank Mooney.
First published by Smh.com.au on August 31 2009
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