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Economists welcome stimulus package -

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Economists welcome stimulus package

The World Today - Monday, 8 December , 2008 12:14:00

Reporter: Brigid Glanville

ELEANOR HALL: Economists say the $10-billion worth of handouts which the Federal Government is
sending out today will boost the economy.

Families and pensioners receiving their one-off cash bonuses are being encouraged to spend the
money, rather than save it.

And economists are forecasting that Australians will spend around one third of the stimulus
package.

But they say it will only give temporary relief to the slowing economy.

Brigid Glanville reports.

BRIGID GLANVILLE: From today $8.7-billion will be paid to pensioners, carers and some families over
the next two weeks - just in time for Christmas.

Retailers are confident Australians will spend a large portion of it in their shops and that's
exactly what the Government wants them to do.

Economists such as Bill Evans from Westpac agree.

BILL EVANS: Well, I think it will certainly provide a stimulus to economic growth. We estimate that
if all of the money was to be spent and when you combine, combining that with about a $6-billion
that we think consumers are saving from lower interest rates, the savings rate would have to go to
11.7 per cent. That is entirely unrealistic.

It is currently at 3.9 per cent. We expect it to rise over the next six months to around seven per
cent but that still means that consumers will spend about 30 per cent of the money over the next
couple of quarters. That will be enough to hold growth in positive territory.

BRIGID GLANVILLE: Adam Carr, the senior economist with ICAP says the most dangerous period for the
Australian economy is the December and March quarter.

Mr Carr says this is because the Reserve Bank increased interest rates too much at the beginning of
the year which is now having a lag effect. He says the stimulus package will balance this out.

ADAM CARR: Oh yeah, look it is only a short-term fix. I think that is appropriate though because
you've got monetary policy which acts as a lag also acting to sort of stimulate the economy and
that, sort of, kicks in, you know, maybe six months down the track. Whereas the fiscal stimulus is
much quicker; it acts immediately and you know, or, when consumers get the money.

So I think that the timing of it is actually pretty good because the biggest risk period for
Australia, in my opinion, is Q4 and Q1. So yeah I think it is a good policy.

BRIGID GLANVILLE: While the retailers are hoping the money will be spent in stores to boost their
sales it won't necessarily keep Australia out of recession.

Chris Richardson is from Access Economics.

CHRIS RICHARDSON: It will work by limiting the damage we now face.

BRIGID GLANVILLE: Why won't it keep us out of recession?

CHRIS RICHARDSON: Because it is hard to stop the shoppers strike that we are in at the moment.
People are scared and so they are not spending. This money has been deliberately targeted at the
people who are most likely to spend but there are no guarantees.

BRIGID GLANVILLE: Will it make us fall harder into a recession post-Christmas?

CHRIS RICHARDSON: No. Recessions are tragedies. Unemployment absolutely jumps. Because our
recession risk is the next six months, if you keep people spending at the moment, more than they
would otherwise have done, that helps a lot.

BRIGID GLANVILLE: That's why the Government's short-term fix is welcomed, but analysts argue there
must be a longer term plan.

Bill Evans is the chief economist at Westpac.

BILL EVANS: Well, I think long-term, if we say what is our objective, our objective long-term is to
increase our growth rate and the growth rate is driven by productivity gains and by increases in
your workforce. To increase your work force you need to raise your population growth. You can't do
that unless you are investing in social infrastructures - schools, hospitals etc.

So that is one leg to the growth target. Obviously raising productivity is the other one and that
of course means investment in infrastructure associated with transport, associated with ports etc.

BRIGID GLANVILLE: As well as the $8-billion provided in cash payments there's another $1.5-billion
to help first home buyers purchase a new home.

ELEANOR HALL: Brigid Glanville reporting.