ANALYSIS: Rudd's fiscal exercise foxes some Australians

By Sid Astbury Oct 15, 2008, 6:40 GMT

   Sydney - Last month Prime Minister Kevin Rudd was telling the elderly that raising their pensions by 30 Australian dollars (21 US dollars) a week would increase inflation and goad the Reserve Bank of Australia (RBA) into raising interest rates yet again.

   This week he promised to have 2,100 Australian dollars in the bank accounts of retired couples before Christmas and is urging them to spend it fast.

   Last month Rudd was railing against people going deep into debt to buy houses they couldn't afford. This week has him offering grants of up to 21,000 Australian dollars for people taking on mortgages.

   All told, Rudd is pumping 10.4 billion Australian dollars into the economy, spending half of the 21-billion-Australian-dollar government surplus to try and avert a recession.

   He has not ruled out Canberra spending beyond its means and recording the first budget deficit since 2001.

   Some people can hardly believe their luck. Raini Singh and Rasan Gujral didn't think they could afford to build a new house before their wedding in January. Thanks to the tripling of the tax-free and non-income-tested First Home Owners Grant to 21,000 Australian dollars, not only are they building but they will be borrowing even more to build in a better Sydney suburb.

   'The truth is we are going through the worst financial crisis in our lifetime,' Rudd, 50, said when announcing a package twice as large as most analysts expected. 'If you're to learn anything from economic history, it's this: at a time when economies need stimulus support, don't leave it too late.'

   Some analysts fear he will spook the RBA into postponing a 50-basis-point interest rate cut they had penciled in for next month's board meeting. Inflation is running higher than the RBA's target of 4 per cent and last month the movement downward was a full 1 per cent.

   Treasurer Wayne Swan notes fiscal policy is now in step with monetary policy. With the economy slowing rapidly, 'the threat of inflation is now abating,' the finance minister said.

   Growth in gross domestic product, which was running at 4 per cent in 2007, is expected to clock in at 1.25 per cent next year.

   Stephen Walters, an economist with JP Morgan, lauded the spending programme, arguing that a dampening in the terms of trade because of crashing commodity prices would bring a deficit anyway.

   'This is fiscal policy doing some more of the heavy lifting than monetary policy - as it should be at this time (of the economic cycle),' he said.

   In contrast, economist Michael McNamara, of RP Data Valuations, has denounced the package. He homed in on the increase in the First Home Owners Grant, saying it was just throwing good money after bad.

   'These sorts of demand measures are often immediately translated just into higher house prices as first home buyers use those grants simply to outbid each other for more expensive houses,' McNamara said.

   The government says tripling the grant could see builders start 15,000 new houses over the next 12 months.

   Barnaby Joyce, who ran an accounting firm before entering Parliament for the opposition National Party of Australia, is deeply critical of the nature of the pump-priming.

   'If it was targeted expenditure that both stimulates and provides an asset for our nation, I'd say I'm on board with that,' said Joyce. 'But we're dipping into the surplus and turning it into Christmas presents. This is going to be a stimulant more to the Chinese economy than the Australian economy.'