AUSTRALIA ROLLS OUT NEW STIMULUS PLAN

C O N F I D E N T I A L CANBERRA 000116


NOFORN
SIPDIS

STATE PLEASE PASS USTR/BELL

E.O. 12958: DECL: 02/03/2019
TAGS: ECON EFIN AS
SUBJECT: AUSTRALIA ROLLS OUT NEW STIMULUS PLAN

REF: A. PERTH 7

B. 08 CANBERRA 1036

C. 08 CANBERRA 1121

D. CANBERRA 95

Classified By: ECONCOUNS E KAGAN, REASONS 1.4 B, D


1. (SBU) SUMMARY. Responding to increasingly dire economic
forecasts, PM Kevin Rudd announced February 3 a A$42 billion
(US$26 billion) economic stimulus package, the second in four
months, equal to about 4% of GDP. It is largely focused on
rapid spending on education infrastructure and cash payments
to low- and middle-income families. Further emphasizing the
challenges facing Australia despite still low unemployment of
4.5%, the Reserve Bank of Australia today cut interest rates
100 basis points to 3.25%. The Government announced the
budget would go into deficit, and reduced predictions for
growth. These moves come at the end of three solid weeks of
bad economic news in Australia which has changed the debate
from whether Australia will go into recession to how bad will
the recession be. The Government's aggressive action may not
be enough to mitigate the worst of the downturn but does
reflect a desire to be seen to be doing whatever it can to
limit the damage. End Summary.

THE BAD NEWS KEEPS COMING
--------------


2. (U) There has been nothing but bad news for the Australian
economy over the past two weeks. The IMF again revised
downward its estimate of Australian growth for 2009.
Originally around 3%, they now predict the Australian economy
will contract 0.2% for the year. The word "recession" is now
a regular feature in the Australian economic and political
debate. An Australian index for job advertisements slumped
in December to levels last seen in the recessions of 1991 and
1982, and is expected to worsen in January. Layoffs -
including a huge cut of 3300 domestic jobs by resource giant
BHP Billiton (ref A) - have begun, various mining projects
are being delayed and economists are predicting that
unemployment (at 4.5% in December) could go as high as 9%.
Australian exports to China are predicted to drop by
one-third as China slows down. Even what would be seen
usually as good news - a trade surplus in December - was
soured by the fact that it was down by over half from two
months earlier; with commodity prices likely to drop further
in 2009 as contracts signed during the boom end, that
commodity-driven surplus is likely to disappear no later than
midyear.


3. (SBU) PM Rudd and Treasurer Wayne Swan are no longer coy
or evasive about the prospects for the budget going into
deficit. Now they are stressing that it will go into
deficit, in a big way. Rudd and Swan over the past few days
have stressed that the predicted deficit will be A$115
billion (US$72 billion at current A$1 = US$.635 exchange
rate) over the next four years, about a tenth of the
estimated tax take over that period. A drop in collection of
corporate taxes makes up A$50 billion of that shortfall.
While admitting that the budget will go in deficit, Rudd has
clearly decided that attack is the best defense. He has
Qclearly decided that attack is the best defense. He has
begun to aggressively criticize the leader of the opposition,
Malcolm Turnbull, for his "neo-liberal" economic policies
(never mind that Turnbull is distinctly to the left of former
PM John Howard and is viewed with suspicion by some of his
more conservative Liberal Party colleagues). Rudd also is
publishing on February 4 an 8000-word article on the global
financial crisis in the Australian magazine "The Monthly",
which in addition to describing how the global crisis began,
blames free market fundamentalism for creating the conditions
for the banking and economic crisis.

GOA UNVEILS SECOND STIMULUS PACKAGE
--------------


4. (U) On February 3, the Rudd government announced a new
A$42 billion (US$26.5b) "National Building and Jobs Plan" -
double the stimulus package from November (ref B). Swan said
the new legislation was designed to "cushion the effects of
the global economic crisis" by putting this money into
education and community infrastructure, public housing,
business tax breaks and one-off cash payments. The GOA said
it would "support and sustain" over 90,000 jobs, boost
economic growth b 0.5% of GDP over the course of the
2008-2009 fiscal year, keeping overall growth for the current
fiscal year at 1%. In the announcement, the GOA said it was
forecasting unemployment to rise to 7% next year.

CONSTRUCTION SPENDING
--------------


5. (U) According to GOA data, A$15 billion (US$9.5b) will go
into public schools, giving each A$200,000 cash for
maintenance, upgrading infrastructure such as libraries, and
building 500 new science laboratories and language centers in
schools with a demonstrated need. The plan would build or
upgrade libraries and lecture halls in every public primary
school in Australia. The GOA will spend A$6.6 billion to pay
for over 20,000 new public houses and 800 Department of
Defence houses to be built and 2500 others upgraded. It will
provide free insulation to 2.7 million homes, which the GOA
says could cut A$200 from home energy bills and reduce
greenhouse gas emissions by 49.4 million tons by 2020. Small
businesses will be able to access A$2.7 billion to bring
forward capital maintenance.

CASH HANDOUT
--------------


6. (U) The GOA will give a second cash handout (first was in
December, ref B) totaling A$12.7 billion (US$8b) to about 10
million people, aimed at low- and middle-income households,
farmers, single-income families, and students. Those earning
less than A$100,000 a year will receive a tax bonus of up to
A$950 (US$600) at a cost of A$8.2 billion (US$5b). The GOA
will also give cash payments of A$950 in March to
single-income families, farmers facing hardship due to
drought, parents with children in school (2.8 million
children),and students and unemployed returning to school.



7. (SBU) In their roll-out of the stimulus, the Rudd
Government, making the best out of a necessity and trying to
undercut the opposition which continues to call for tax cuts
to be the focus of economic policy, said it would be
"irresponsible" not to act now to try to mitigate damage from
the global downturn. Rudd and Swan again said they were
committed to a surplus over the course of the business cycle.

GOVERNMENT VIEW: SPEED IS KEY
--------------


8. (C/NF) Stephen Kennedy, Chief Macroeconomic Advisor to PM
Kevin Rudd, told us February 3 that the Government picked the
largest of several stimulus options, but one focused on
"getting money out the door and into circulation as quickly
as possible." Kennedy said that the school construction
component will require coordination with State governments,
but that the plans have already been prepared. He said that
the payments are controversial, with critics arguing that the
Qthe payments are controversial, with critics arguing that the
Government,s last stimulus payments were largely saved
rather spent. Kennedy acknowledged that some were saved,
while arguing that the increase in December retail sales
(about 2.4% over December 2007) and the continuing strength
of retail employment through the end of December are due in
part to the stimulus payments as well as the greater optimism
they generated among retailers. Australia faces very serious
challenges and even a stimulus package of this magnitude may
not be enough to avert a severe downturn. That said, Kennedy
expressed confidence that the latest spending will help
cushion the downturn in the coming 12 months.

UPDATED ECONOMIC OUTLOOK - DOWN
--------------


9. (SBU) The GOA said growth will be 1% for 2008-09 (July
1-June 30),and 0.75% for 2009-10 - more optimistic than the
IMF but down significantly from what they predicted in the
mid-year economic outlook (ref C),2% in 2008-09 and 2.25%
for 2009-10. Including this stimulus package, the GOA will
face a deficit of A$22.5 billion, or 1.9% of GDP which Rudd
and Swan noted, compares well with the 7% average forecast
for advanced economies.

RESERVE BANK SLASHES RATES AGAIN
--------------


10. (U) Shortly after the stimulus roll-out, the Reserve Bank
of Australia (RBA) at its monthly meeting decided to cut the
cash rate 100 basis points, to 3.25%, to try to cushion the
economy from the effects of the global economic downturn.
This is the fourth such move since early September, when the
cash rate stood at 7.25% following a long round of rate hikes
to dampen inflation - last year,s problem. Governor Glenn
Stevens in his statement again noted the significant
deterioration in global economic conditions in late 2008,
downturns in major economies and greatly reduced growth in
China. He described the outlook for the global economy as
the weakest for many years. He noted that the Australian
economy has been affected, albeit less than in other
economies. Stevens said the Australian financial sector
remains sound, but the financial turmoil of the past year and
drops in commodity prices have hit confidence and prospects
for growth of demand.


11. (SBU) This move was as expected, although some were
urging a 1.5% cut as done recently in New Zealand. The RBA
decision puts the official cash rate at its lowest level
ever. The RBA has been aggressive in using its buffer (the
7.25% rate at the beginning of September); given the need for
Australia to maintain some sort of reasonably significant,
positive interest rate to finance its current account
deficit, it is probably approaching the lowest level where
the RBA would feel comfortable.

COMMENT
--------------


12. (SBU) The RBA 100 basis point cut was expected and
uniformly seen as the appropriate move given dropping growth
rates, contracting credit availability, rising unemployment,
and poor consumer and business confidence. The Rudd
Government's stimulus package looks well designed to save
jobs - "support and sustain" jobs, not "create" them per
their statement. Treasury still predicts up to 300,000 jobs
could be lost over the year. Like the move to help the
commercial sector last week (ref D),this will provide a
boost to the Australian construction sector and related
areas; the Housing Industry Association was very quick to
sing the Rudd Government,s praises. Like the previous
stimulus package, the various A$950 bonuses are targeted to
groups with a greater propensity to spend - although the
Treasury has acknowledged that a significant proportion of
the payments that went out in early December were saved by
consumers rather than spent.


13. (SBU) Comment, Continued: Politically, the Rudd
Q12. (SBU) Comment, Continued: Politically, the Rudd
Government is determined to give the impression that it is
doing all it can to stop or at least soften a recession and
the impact on working Australians - and it has been effective
so far in doing so. Australia has only limited means to
limit the impact of a major economic downturn the economic
impact, given the global economic conditions that this
medium-to-small, open, trade exposed and commodity-based
economy must deal with. All of its major trade partners are
either in recession, or for China, suffering from the
practical equivalent in significantly diminished growth.
Australia entered this economic crisis unusually
well-positioned, with high interest rates, significant budget
surpluses, and low unemployment. Today, the GOA and the RBA
have fired a volley of cash and liquidity they hope will prop
up the economy. But both the RBA and the GOA have now used a
significant portion of their monetary and fiscal ammunition -
and recession will probably strike Australia nevertheless.


CLUNE