Global Economic Issues

Government

Governments all over the world responded very quickly to the crisis as it unfolded. While the governments in the USA and England were forced to spend a significant amount of money saving some of their largest firms, the Australian government was able to take a much stronger approach. Through a series of two stimulus packages, the Australian government helped to ensure that our economy experienced a relatively mild downturn when compared to the rest of the world.

Stimulus Package #1

In late 2008 the federal government announced extra spending of $10.4 billion. This package was passed through parliament just after the collapse of Lehman brothers. This money was focused on three main programs:

1. Many people who were already receiving transfer payments from the government were given an extra payment. This meant that carers, war veterans and pensioners received $1,400 for individuals, or $2,100 for couples. The total cost of this package was $4.8 billion.

2. People who were receiving the family tax benefit were given an extra payment as well. A total of $3.9 billion was spent on this part of the package.

3. The government also set aside $1.5 billion to expand the first home-owners grant. The grant for people buying their first home was increased from $7,000 to $14,000, while the grant for people building their first home was increased to $21,000. This part of the package was eventually extended during 2009.

Stimulus Package #2

Most people received $900 The government quickly realised that the $10.4 billion that was allocated in the last quarter of 2008 would not be sufficient. By March of 2009 it was apparent that the Australian economy had contracted by 0.5% in the December quarter despite the new initiatives. As Prime Minister, Kevin Rudd new that he had to act quickly to restore confidence in the Australian economy. As a result, a second stimulus package was announced.

This package was far more extensive than the first. Many of the policy ideas were designed to help the Australian economy to achieve more than one economic goal. While the underlying goals of growth and employment were always at the fore, a quick glance at this list will make it apparent that other concerns were also weighing on the government minister’s minds at this time.

1. The Education Revolution – this project was worth $16.2 billion over three years. It was designed to keep builders working, and also to ensure that schools were given the opportunity to build a physical structure that was deemed necessary. Many schools were able to build new classrooms, sporting facilities and cafeterias as a result of this funding.

2. Road and Rail – Improving transport is vital to the long term growth of the country, and it also helps to keep people working in the short term. The government spent $2.3 billion improving our roads, and $1.2 billion working on train lines. For example, some level crossings that had not previously had boom gates were given access to this important resource for the first time.

3. Housing - $5.238 billion was allocated to extend the very popular first home owners grant that had been announced as part of the first stimulus package. Most Australians have the majority of their wealth tied up in their houses; by increasing demand for housing, the government helped to ensure that wealth in this country was not eroded to the same extent as it had been in the United States.

4. Insulation and solar hot water – It was clear that the government was also thinking about its commitment to reduce carbon emissions, and these initiatives have certainly helped to achieve this goal. By providing $1,200 to any household that installed insulation or between $1,000 and $1,600 for installing a solar hot water heater, the government added to growth and our long term environmental sustainability.

5. Bonus payments – The most widely discussed aspect of the stimulus package was the $900 payments that were given to most taxpayers. Although the payments were means tested to a certain extent, the truth is that most people were able to qualify. The cost of this initiative was $12.2 billion

The total cost of this package was $42 billion. The government would argue that it was a tremendous success, as the economy avoided a recession and unemployment was significantly below the OECD average. On the other hand, the Liberal Party argued that there was far too much intervention in the Australian market, and that the most telling outcome was the increase in public debt. This debt will eventually need to be repaid, which could mean higher taxes or lower spending in some areas in the future.

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