Agility needed as economy falters

The stimulus package will be effective in the short-term but Government needs to remain flexible going forward.

The stimulus package will be effective in the short-term but Government needs to remain flexible going forward.

THE Federal Government’s $42bn economic stimulus package, announced last month, is simple and substantial and will provide a big stimulus to help keep the economy moving. Together with Reserve Bank of Australia’s February interest rate cut, it appears all hands are on deck to help prop up our faltering domestic economy.

However, it’s important for the Federal Government to remain flexible on policy decisions going forward. Uncertain times call for adaptable measures that can be implemented quickly and effectively.

Economic data released last month confirmed Ai Group’s view that 2009 is going to be a difficult and unpredictable year. The downgrade of forecasts followed a constant stream of bad news about the economy, suggesting the outlook is deteriorating.

The Government’s stimulus package targeted consumer spending, which is absolutely critical to Australia’s near-term economic prospects. It also boosted capital expenditure, which is looming as one of the real casualties of the downturn.

The bonus payments to taxpayers will provide an immediate stimulus to household and consumer spending. This will bolster retail businesses and flow up through production chains to manufacturing and services.

As we’ve seen in the United States, an economy is in big trouble once households stop spending. We need to have that money in the pockets of people pretty fast.

Any delay means we risk losing momentum in terms of building on both the effect from the package itself and the tick up in consumer activity following the ongoing interest rate cuts and earlier stimulus measures.

In addition, the $2.7bn investment incentive was very welcome, as it will help sustain business investment and support jobs and productivity improvements.

The big boost to housing and education infrastructure spending and the emphasis on new capital works, together with comprehensive maintenance programs, will deliver lasting benefits and again, much needed support to jobs and business activity.

While the Government’s strategy is prudent, there is some way to go in managing the downturn.

The May Federal Budget provides another opportunity for further action to help manufacturers to both manage through the downturn and emerge stronger.

In our pre-Budget submission, Ai Group proposed a package of fiscal measures designed to help the Australian economy weather the global crisis and to emerge from it stronger and more resilient.

The main principle of Ai Group’s submission was to align any necessary shorter-term economic stimulus with the longer-term imperative to support productivity and growth.

Ai Group has proposed an integrated set of measures designed to boost consumer and business spending; to support the jobs market; to develop workforce skills and business capabilities; and to upgrade Australia’s existing public infrastructure.

It would work alongside further interest rate reductions and measures aimed at ensuring a return to healthy functioning credit markets.

Ai Group also urges the Government to be wary of adding to the pressures that are already affecting manufacturing. Proposed changes in the areas of workplace relations and climate change have the capacity to be costly for the sector at this difficult time.