Australia Unveils $26.5 Billion Second Stimulus

Australia's government unveiled a A$42 billion (US$26.5 billion) second stimulus on Tuesday in a bid to buttress the rapidly cooling economy from the global slowdown, and halved its 2008/09 growth forecast to 1.0 percent.

CNBC.com

Treasurer Wayne Swan said the plan included 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.

"The plan is a rapid response to deteriorating global economic conditions," said Swan in announcing the package.

Australia's stimulus spending announced since September 2008 now totals A$78 billion and adds to a raft of packages developed in major economies, including $819 billion in the United States and $586 billion by China.

The latest stimulus would stave off recession, said Swan, ensuring growth was 0.5 percent higher in 2008/09 and giving a boost of between 0.5-1 percent the year after.

But the spending and deteriorating global financial conditions meant the government budget would fall into deficit of A$22.5 billion in 2008/09, or 1.9 percent of GDP, and A$35 billion in deficit, or 2.9 percent of GDP, the following year.

Unemployment would also hit 7 percent in mid-2010, up from 5.75 percent previously forecast in November.

"The plan will help support and sustain up to 90,000 jobs over the next two years," said Swan.

If the stimulus moves fail to protect the Australian economy from the worst of the financial crisis, and save jobs, Prime Minister Kevin Rudd faces the risk of losing the next election in 2010 as many voters will accuse him of economic mismanagement, say political analysts.

The A$42 billion stimulus is the latest in a series of financial moves by Australia's center-left government aimed at shoring up the fast-cooling A$1 trillion economy.

"All these are large amounts of expenditure for infrastructure over the next three years. That is extremely positive as most of the money will be spent domestically. The cash handouts will also be good for consumption," said Michael Workman, a senior economist at Commonwealth Bank of Australia.

In October 2008 a A$10.4 billion package, mostly in pre-Christmas cash payments, was aimed at helping the elderly, poorer families and first-home buyers.

Other measures include A$8 billion to fund purchases of residential mortgage backed securities after global lines of credit dried up, and A$6.2 billion in car industry assistance to help protect jobs and develop environmentally-friendly vehicles.

In September 2008 the government announced it would guarantee public bank deposits and wholesale funding to banks.

The Reserve Bank of Australia has already slashed 3 percentage points from its key cash rate, taking it to a six-year low of 4.25 percent, and markets are pricing in a cut of 100 basis points later on Tuesday.

Copyright 2009 Reuters. Click for restrictions.