Australia's ailing economy got a double dose of desperately needed stimulus today as the government pledged billions in new spending to avoid recession and the central bank cut interest rates to record lows.
"Australia is facing an unfolding national and international economic emergency," said Prime Minister Kevin Rudd in announcing a A$42 billion ($26.5 billion) stimulus package to protect the Australian economy from the global financial crisis.
The plan includes A$28.8 billion for infrastructure, schools and housing, as well as A$12.7 billion cash payments for low and mid-income earners to be paid in March, 2009.
Citing the grimmest global outlook in many years, the Reserve Bank of Australia (RBA) cut its key cash rate by a bold 100 basis points to 3.25 percent. That brought its easing since September to a massive 4 percentage points, and investors were counting on further easing to 2.0 percent or less by May.
"The RBA may want to judge what impact these cuts and the stimulus package has on the economy before moving further, but still, it would rather cut too much than not cut enough," said Michael Blythe, chief economist at Commonwealth Bank.
Australia's stimulus spending announced since September 2008 now totals A$78 billion or nearly 8 percent of gross domestic product, and adds to a raft of packages developed in major economies, including $819 billion in the United States.
The extra spending and deteriorating global financial conditions meant the government budget would fall into deficit of 1.9 percent of GDP in 2008/09 and 2.9 percent in the following year.
Rudd said his stimulus moves would stave off recession in the A$1 trillion export-driven economy, but not everyone agreed.
"Its not enough to ward off a recession. Nothing Australia will do will stop recession here because it is recession everywhere," said Chris Richardson from Access Economics.
Six of Australia's top 10 trading partners are already in recession. Japan's exports fell by a third in December, and South Korea this week reported a similar drop for January.
The government on Tuesday more than halved its earlier growth forecasts and now predicts the economy will expand by 1 percent in 2008/09 and by 0.75 percent the following year.
But Rudd will be hoping he's right as the government faces an election in late 2010 and needs to avoid recession and save jobs to win a second term.
Rudd's stimulus package reinforces his political focus on families, education, the environment and homelessness.
The government will spend A$28.8 billion from late 2009 and through 2010 on building and infrastructure, including 20,000 new houses for the poor, free ceiling insulation for homes, new buildings for 9,500 schools, and money for local roads.
Rudd said insulating homes would reduce greenhouse gas emissions by 49.4 million tonnes by 2020, the equivalent of taking one million cars off the road.
"This is a plan of unprecedented scope. That is because the challenge we have been delivered by this global recession is also virtually unprecedented." he said.
But it looks like being a tight call as, even after all this stimulus, the government still expects unemployment to rise to 7 percent by mid-2010, from just 4.5 percent currently.
Yet employers, welfare groups and green groups all welcomed the latest stimulus package.
"The nation building and jobs plan announced by the federal government today is simple and substantial, and will provide a big stimulus to help keep the economy moving," said Heather Ridout, chief executive of the Australian Industry Group.