AUSTRALIA ROLLS OUT FURTHER STIMULUS

UNCLAS SECTION 01 OF 03 CANBERRA 001302

SENSITIVE
SIPDIS

DEPARTMENT FOR EAP/ANP
NSC FOR LOI
TREASURY FOR WINSHIP

E.O. 12958: N/A
TAGS: ECON EFIN AS
SUBJECT: AUSTRALIA ROLLS OUT FURTHER STIMULUS

REF: CANBERRA 1036

SUMMARY
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1. (SBU) The Australian Government announced a $4.7 billion
(USD 3.2 billion) nation building package, on 12 December
2008, with the aim of strengthening the economy and creating
up to 32,000 jobs. The package provides new funds for rail
investment, brings forward road spending, allocates funds for
education infrastructure and provides tax relief for small
business and investment. It was developed in consultation
with the Australian Chamber of Commerce and Industry (ACCI)
and A$1.5 billion will be spent in 2008-09, A$2.7 billion in
2009-10 and A$700 million in 2010-11. The main architect of
the package told us that it was designed to take "off the
shelf" projects to get maximum stimulus with minimal
budgetary impact. END SUMMARY.

Strategic Approach
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2. (U) The Rudd Government is actively using fiscal policy to
match the stimulatory direction on the Reserve Bank,s easing
of monetary policy. In recent months the Government has so
far announced a $10.4 billion stimulus package for
pensioners, parents, carers and first-home buyers, a $6.2
billion car industry support plan announced last month, $300
million in assistance to councils, in addition to this latest
$4.7 billion infrastructure package. The Government has also
committed $10 billion in bond market investments to free up
funds for bank lending and state government borrowing, and
extra funding to the states for a range of services,
including hospitals and education. Over the past three
months, the Rudd government has bought more than $3 billion
in state government bonds to help the States keep down the
costs of infrastructure financing. More fiscal measures are
expected and on 17 December, Treasurer Swan said the GOA
would go beyond the current $22 billion in economic stimulus
measures if necessary.


3. (SBU) Steven Kennedy, Chief Macroeconomic Advisor to PM
Rudd, told us that the package has been in the works for some
time. Kennedy, whom Treasury contacts told us was the main
architect of the package, said that it had been designed to
incorporate a number of ideas that have been "sitting on the
shelf" in a way to front load their impact. Noting the
continuing political debate surrounding the possibility that
the Australian Government will resort to deficit spending, he
noted that the package had been designed with an eye to
minimizing the impact on the budget. In that regard, he
pointed out that several elements do not count against the
budget's bottom line, such as allowing small businesses to
defer their quarterly tax payments as well as purchasing an
equity stake in the Australian rail corporation.


Package Outline
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4. (U) There are three key infrastructure elements in the
package: (1) an injection of $1.2 billion in new funds into
the Australian Rail Track Corporation; (2) Bringing forward
$711 million in road spending to this financial year and next
and (3) Investment of $1.6 billion in critical university and
Qand (3) Investment of $1.6 billion in critical university and
vocational school (Technical and Further Education aka TAFE)
infrastructure. The package also includes two vital tax
changes (1) A 10 per cent temporary investment allowance to
encourage capital investment by Australian businesses; and
(2) A 20 per cent cut in the next quarterly pay-as-you-go
(PAYG) tax installment for 1.3 million small businesses. The
package builds on the Rudd Government,s $10.4 billion

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Economic Security Strategy, the $6.2 billion New Car Plan,
the $300 million local infrastructure funding boost, and the
$15.1 billion COAG package. The Government will apparently
make further announcements about nation building projects,
funded from the Building Australia Fund, and subject to the
Infrastructure Australia priority list, early next year.

Rail, Road and Tertiary Education Infrastructure Investment
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5. (U) Over the next two years, the GOA will inject A$1.2
billion into the Australian Rail Track Corporation (ARTC) in
17 projects to improve the reliability and efficiency of the
nation,s rail freight network. Of this, A$580 million will
be used to expand capacity along the rail corridors from
Hunter Valley coal mines to the Port of Newcastle. The A$1
billion project should double the amount of coal being
transported to export markets from 97 to 200 million tonnes a
year. The GOA will bring forward A$711 million this year
financial year and next to accelerate the commencement of 14
road projects. Investment in the Black Spots" program to
improve particularly accident-prone roads increases from A$50
million to A$110 million. Further, the GOA will also set
aside A$195 million for investment in agricultural and social
infrastructure to develop irrigated agricultural land in the
Kimberley region of Western Australia. (The latter project
aims to relocate agriculture from eastern Australia to the
Ord River region, which is less affected by climate change to
increase food security). The investment package also
allocates A$1.6 billion in investment towards building better
universities and TAFES and fast tracks the spending of A$580
million into 11 projects focused on strengthening the
research facilities at Australian universities, funded
through the Education Investment Fund. The GOA will also fund
a one-off A$500 million investment to target capital
expenditure towards the development of teaching and training
infrastructure.

Tax Changes to Business and Investment
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6. (U) The GOA will invest A$1.6 billion in a 10 per cent
temporary investment allowance -- provided as an additional
tax deduction -- which will encourage capital investment by
Australian businesses. The allowance will be equal to 10 per
cent of the cost of an eligible asset. The package will also
help small business by cutting the next quarterly
pay-as-you-go (PAYG) installment for 1.3 million small
businesses by 20 per cent. This reduction in the February
2009 installment will provide immediate cash flow relief to
small businesses over the summer. According to the GOA, the
federal Budget will remain in surplus once this and other
packages announced this year are taken into account.

Response to New Stimulus Package
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7. (U) There has been widespread support for the package. The
Business Council of Australia said the package would help
QBusiness Council of Australia said the package would help
increase the productivity of the Australian economy. The
Minerals Council of Australia praised infrastructure spending
to overcome coal supply bottlenecks in the Hunter Valley.
Western Australia Premier Barnett had called for spending on
projects with immediate flow-on effects for private
investment, such as his state's proposed expansion of the Ord
River scheme (which is supported in the package) and the
deep-sea port development north of Geraldton (which is not
yet supported, but may attract Chinese investment). The
Opposition is concerned over the budget impact of the package.

Comment
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8. (SBU) The expansion of infrastructure spending by the
Rudd government is supported by business and analysts to
avoid recession. However, its impact is lessened by the trend
of State governments to wind back infrastructure projects
worth billions of dollars as state budgets slip into the red
(because of falling royalties and taxes from the failed
resources boom). The dramatic decline in federal budget
revenues in 2008-09 (down A$40 billion according to Treasury
estimates)also means the commonwealth is struggling to fund
the major federal-state funding agreements (under Kevin
Rudd's federal reform agenda) without going into deficit. It
is likely that future GOA infrastructure packages will be
deficit-funded and both the Treasurer and Prime Minister have
already canvassed this possibility. END COMMENT.