KEVIN Rudd has declared Labor will spend more public money if its $10.4 billion economic pump-priming package announced yesterday fails to insulate Australia against the global financial meltdown.
But economists expect the package, including one-off cash handouts for pensioners, low-income families and first-home buyers, will fuel a six-month spending spree that will sustain economic activity and allow Australia to maintain economic growth.
The Prime Minister delivered a sombre message to the nation last night about the Government's latest response to the financial crisis. It came shortly before the US unveiled plans to spend $US250billion ($360 billion) on shares in its nine biggest banks, following the example set by the British Government.
The Rudd measures are designed to counter weeks of international stock market turmoil and overseas bank collapses now cascading into the real economy, threatening economic growth andjobs.
Warning that history showed the best way to respond to market gyrations was to "act decisively, act responsibly and act early", Mr Rudd laid out his plans to inject into the economy one-off payments worth 1 per cent of the national GDP. But he also said the situation was so grave more action might be required.
"As Prime Minister, it is my jobto level with the Australian people," he said during the televised address last night.
"I don't intend to gild the lily. There will be tough times ahead.
"But the Government remains determined to take whatever action is necessary in the future to steer the economy through this global financial crisis."
Markets had earlier responded enthusiastically to reports of the latest US plans, with the Australian Stock Exchange gaining 3.7per cent yesterday. It has now recovered 9.5 per cent of the ground lost last week, when it plunged almost 16 per cent.
The gains in Australia yesterday were smaller than those in New York, where there was an 11per cent jump, or in Japan, where the share index leapt 14 per cent. The London stock market was up 6 per cent in early trading, and Wall Street early today opened 4 per cent up.
British Prime Minister Gordon Brown, who has led the world in the reconstruction effort, said Mr Rudd's spending plans were an example to other world leaders.
Having flagged the moves on Monday, Australian investors did not react to the Government's budget stimulus, with the market steadily losing ground after having shot ahead by 6 per cent in the opening minutes of trade.
Mr Rudd will fund the stimulus package from the Government's 2008-09 budget surplus, predicted in May to reach $22 billion.
It will send billions of dollars into the economy, including $4.8billion via one-off payments to pensioners to tide them over before permanent increases occur next July. Those increases are still being finalised.
Single pensioners will receive $1400 and couples $2100 from December 8, with the payments covering all pension categories and also extending to self-funded retirees who hold commonwealth senior health cards.
Carers will receive $1000 for each person in their care, also from December 8.
And two million families eligible to receive Family Tax Benefit (A) pensions will receive $1000 for each eligible child in their care at a cost of $3.9 billion.
The Government will buttress housing sector activity, doubling the first-home buyer grant to $14,000 and tripling it to $21,000 on newly constructed homes until June 30 next year. The housing measure will cost $1.5 billion.
The Government will also proceed with earlier announced plans to bring forward infrastructure spending to early next year and will spend a further $187 million creating 56,000 more training places in 2008-09.
As news of the package spread to consumers yesterday, Sydney mother of two Jenny McNamara welcomed the largesse and was already planning how to spend her $1000-per-child lump sum payment. "I'll spend it on everyday needs - things like clothes, food and maybe some presents," said Ms McNamara, 31. With her husband Andrew earning $52,000 as a courier driver, and monthly mortgage payments of $1300, the couple rely on annual Centrelink family benefit payments of $6000 to make ends meet.
"Andrew's pay covers everything from mortgage, petrol, rates to food on the table. What we have just gets us through," Ms McNamara said.
As the Opposition pledged its support for the stimulus package, Wayne Swan, who returned to Australia yesterday after weekend talks with international leaders in Washington, said the world had changed fundamentally in recent weeks.
"We are in the midst of the worst financial crisis ever to confront the modern market economy," Mr Swan said.
"The sooner that governments act to protect their people the better."
Mr Swan said Australia was in better economic shape than the rest of the world but could not escape being affected by global events, with the International Monetary Fund predicting zero growth in advanced economies and negative growth in emerging nations.
Economists told The Australian yesterday the package would sustain economic growth over the December and March quarters and was cleverly targeted at low-income earners, who would spend the bonuses quickly.
"We will get a bounce in consumer spending towards the end of this year and early in 2009, and that is when consumer spending would have been under greatest pressure," Macquarie Bank senior economist Brian Redican said.
The mid-year budget update to be published next month is expected to include treasury modelling showing the effect of the stimulus. However Treasury has been influenced by US research showing a boost to budget spending of 1 per cent of GDP produces a similar lift in economic growth.
The US launched a $US150billion budget stimulus package in May, equivalent to 1 per cent of its economy, and Australian treasury officials believe this contributed to the positive growth achieved by the US this year, despite it being the epicentre of the global financial crisis.
Treasury expects the boost to the economy from the spending package will be much greater than from the Reserve Bank's 1 per cent interest rate cut.
A study by Treasury's chief economist David Gruen estimated that a 1 per cent interest rate cut would lift GDP by 0.3 per cent in the first year and a similar amount in the second.
Although nearly all the money being handed out is expected to be spent by the end of next June, the Government is expected to increase pensions by at least as much as the lump sum payments, which are equivalent to $36 a week for a single pensioner and $52 a week for a married couple.
Treasury is finalising estimates for its mid-year budget update. Although several private forecasters believe the budget will skate close to a deficit both this year and next, the Government is confident that it will remain in the black.
Although capital gains revenue has plummeted, the Government's revenue this year has been boosted by the record iron ore and coal contracts and by the devaluation of the dollar, which together may have boosted the estimated surplus this year by as much as $5 billion before accounting for the new spending package.
ANZ senior economist Mark Rodrigues said the deterioration in the economic outlook had cut the likely budget surplus this year from the $21.9 billion forecast at budget time to no more than $7.3billion now.
"The budget will be very close to balance in 2008-09, with the potential for a movement into deficit," he said.
Morgan Stanley chief economist Gerard Minack said the budget would fall into deficit this year, with a likelihood it would be seriously in deficit in 2009-10 by as much as 2 per cent of GDP.
