Rudd's Economic Tonic ($10bn)

The $10billion stimulant to the economy announced by Kevin Rudd, aimed at retirees and the lower income sector, will only work if the funds are invested on deposit in the banks, and this is most unlikely.

What was really needed was a stimulus to bank liquidity because it is the cut-back in lending that has hurt the economy, particularly the property industry. Rudd should have required every recipient to put the money on deposit in one of any number of banks (not just the four “pillar” banks). In that way he could have satisfied his labour constituency as well as increasing bank liquidity.

By handing out a sum of $1400 to individual pensioners and $1,000 to carers and low income earners (per child) without directing it strategically the funds will go largely to retailers, which will do nothing for liquidity.

Another alternative could have been to use the $10billion to buy sank shares, which are at their lowest price now. They could have been sold at a later date when the share price has increased. A larger amount than $10billon could have been realised to effectively increase liquidity, perhaps $50billon, from the Future Fund.

As for the first home owner grant increases to $14,000 for established homes and $21,000 for new homes, this will increase consumer confidence if only for a short while. The problem is going to be the lending margins offered by the banks under the reduced liquidity regime. We may see 90-100% mortgage loans dissapear and instead the banks are likely to revert to 70-80% mortgage loans, which leaves first home buyers to gather up a 20-30% deposit. Considering the average home in Brisbane and Gold Coast is $450,000, a home buyer would need up to $135,000 for their deposit!

All in all, the Rudd crisis package will improve the circulation of money in the Austrlaian economy but will not cure the main problem of low bank liquidity and hence reduced lending capability. In addition, the package will be inflationary.