P 030706Z FEB 09
FM AMEMBASSY CANBERRA
TO SECSTATE WASHDC PRIORITY 0942
INFO AMEMBASSY TOKYO PRIORITY 
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AMEMBASSY SEOUL PRIORITY 
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USEU BRUSSELS PRIORITY
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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