Straight to content

Positive early results from the stimulus

Back to front page

The combined program of the various Commonwealth Government economic stimulatory measures that have been announced in recent months represents the most significant fiscal policy initiative embarked upon by any Australian Government since the Second World War. Whilst there has been some inevitable conjecture over both the broad direction of the policy, and some of the imperfections in the detail, policymakers had few real alternatives available that would produce the desired almost immediate impact on the economy.

Why the money is being spent
By injecting spending into the economy, the Government is aiming to reduce both the length and the severity of the economic downturn. The Government’s spending program contains both short-term and long-term elements, with much of the shorter term strategies involving cash “hand-outs” to those most likely to spend ie those on low incomes or families on low to moderate incomes.

By keeping spending in the economy at a reasonable level, the Government is hoping avoid the economy entering a “vicious circle”, whereby low spending leads to higher unemployment which then leads to further falls in spending and, in turn, further increases in the unemployment rate.

In total, the Government anticipates that its fiscal initiatives will create an addition to Gross Domestic Product (economic output) of 0.5% this financial year and up to 1% in 2009/10.

The results so far
Although still early days with much of the Government’s stimulus program still to be implemented, there have been some noticeable impacts on economic data as a result of the Government’s spending to date.

The most significant effect of the fiscal policy initiative has been the jump in the level of retail sales. Despite the financial crisis causing consumer confidence to decline significantly in the second half of 2008, retail sales jumped by a significant 3.8% in December. This followed the payment of the first cash bonus. Further, retail sales rose by an additional 0.2% in the month of January, highlighting that consumers held over some of the bonus paid in December for future spending. Retail sales were some 6.3% higher in January than in June last year.

The high level of retail trade is no doubt contributing to a maintenance of employment in the retail sector, which employs more than 20% of all Australians in the workforce. Although the unemployment rate has been on the rise (increasing from 3.9% to 5.2% over the past year), there is yet to be any significant decline in the number of workers employed. Over the past 12 months, there has been a 0.7% rise in the number of workers employed, with this level remaining steady over the past 3 months.

Hence although the economy contracted in the December quarter, it could be argued that without the stimulus to retail spending, we would be experiencing a sharper downturn, with the retail sector not being in a position to hold up its level of employment.

The cash bonus payments were always going to be a short-term measure designed to avoid any rapid or immediate sharp decline in activity across the economy. Whether there will be any lasting avoidance of serious downturn will be just as dependant upon the success of some of the longer term infrastructure spending initiatives, which are yet to be implemented.

Has the Government gone too far?
The great danger in the Government’s fiscal stimulus package is that it only has a temporary impact on the economy, leaving the Government with limited financial resources to provide repeat measures over the medium term.

The proposed spending, and the impact of general economic weakness, will move the Commonwealth Government’s budget position from an underlying cash surplus of $19.7 billion in 2007/08 to expected deficits of $22.5 billion this year and $35.5 billion next financial year. However, as shown on the chart above, as a percentage of total economic output, the forecast deficits are less significant than those recorded in the previous 2 economic downturns.

It should also be noted that the Australian Government is spending significantly less in relative terms than other Governments around the globe, particularly the Governments of China and United States. Also of relevance is that fact that the Australian Government has embarked on this program from a position of zero debt. So whilst the fiscal stimulus has put a dent in the Government’s finances, the cupboard is not completely bare if more is required in the future.

Published by Hillross Financial Services Limited ABN 77 003 323 055. We are part of the AMP Group of companies. No remuneration or other financial benefits are paid to us or our related companies or associates for providing this publication. Any advice in this publication does not take account of your personal circumstances. Before relying on it to make a decision, you should consider how it applies to your overall circumstances or speak to a financial planner. Before deciding whether to buy or continue to hold any financial product including those referred to in this publication, you should obtain and consider the Product Disclosure Statement for the product, which is available from your financial planner. Although this information was obtained from sources considered to be reliable, we do not guarantee it is accurate or complete. Past performance is not an indication of future performance.

Back to front page