Rudd to Spend A$10.4 Bln to Guard Australian Economy

By Gemma Daley
More Photos/Details

Oct. 14 (Bloomberg) -- Australia will give pensioners, home buyers and families A$10.4 billion ($7.3 billion) in a spending package to boost the economy as the global financial crisis freezes credit and slows growth.

Prime Minister Kevin Rudd will use half the government's estimated budget surplus to encourage consumer spending and bolster the economy, which grew at the slowest pace in more than three years in the second quarter as the housing market slumped, retail sales dropped and stock markets tumbled.

``This strategy will strengthen the national economy and support Australian households, given the risk of a deep and prolonged global economic slowdown,'' Rudd told reporters in Canberra today.

The spending package follows moves this week by Rudd and his Treasurer Wayne Swan to guarantee all deposits and ``term wholesale funding'' among the nation's banks. They also doubled the government's investment in residential mortgage securities to A$8 billion in a bid to unlock credit. Australia's central bank pre-empted global interest-rate cuts last week.

``This package could boost economic growth by 0.9 percentage point in the fourth quarter of this year and the first quarter of 2009,'' said Riki Polygenis, an economist at Australia & New Zealand Banking Group Ltd. in Melbourne.

Stocks Surge


The Reserve Bank of Australia in August said the economy would expand 2 percent in 2008, slowing from 4.3 percent in the previous calendar year.

Australian stocks surged for a second day, led by banks, energy and resources companies, on speculation U.S. measures to rescue the financial system will help revive the global economy. The benchmark S&P/ASX 200 Index has gained 10 percent this week, rebounding from its worst week since 1987.

The government will spend A$4.8 billion on cash payments to the elderly, A$3.9 billion on one-off handouts to families and A$1.5 billion on increased grants to first-home buyers, Rudd said. It aims to boost consumption and investment as financial turmoil slows job growth and the A$1 trillion economy.

Rudd will fund the spending from the 2008-09 budget surplus, forecast in May at A$21.7 billion. Today's measures will leave a ``comfortable'' surplus, he said.

``The truth is that we are going through the worst financial crisis in our lifetime,'' Rudd said in a televised national address. ``There will be tough times ahead but the government remains determined to take whatever action is necessary in the future to steer the economy through this global financial crisis.''

Home-Buyer Grants

In December, single pensioners will get a A$1,400 payment and couples a A$2,100 bonus under today's package. That will flow to 4 million pensioners, Rudd said.

A first-home-buyer's grant will double to A$14,000 for existing houses and triple to A$21,000 for newly built dwellings, a benefit to go to some 150,000 people.

About two million low-income families will receive a A$1,000 payment for each child under their care. The government also will fund an extra 56,000 training places in the workforce to boost employment.

European nations have committed 1.3 trillion euros ($1.8 trillion) to guarantee bank loans and take stakes in lenders amid the global credit crisis. Britain took majority stakes in Bank of Scotland Group Plc and HBOS Plc as a global lending freeze threatens to push the world into recession.

Toxic Debt

The U.S. will spend $700 billion buying toxic bank debt and possibly recapitalize banks. Federal Reserve Chairman Ben S. Bernanke led co-ordinated interest-rate cuts around the world last week. The Reserve Bank of Australia earlier cut its benchmark rate by 1 percentage-point to 6 percent, the biggest reduction since a recession in 1992.

The RBA will cut its overnight cash rate target by 50 basis points at its next meeting on Nov. 4, according to a Credit Suisse index based on overnight swaps trading.

Australian home-loan approvals dropped in August to a seven-year low, cited as one of the reasons Reserve Bank Governor Glenn Stevens reduced rates to the lowest in almost two years. The rate cut reduced monthly payments on an average A$250,000 mortgage by almost A$140.

The construction industry contracted at a record pace in September as work was cut on commercial and apartment buildings. Building work has been shrinking for seven months.

Household Spending

Spending by households contracted by 0.1 percent in the second quarter, the first decrease since 1993, slowing gross domestic product to 0.3 percent from the previous three months.

``This is a significant fiscal stimulus,'' opposition Liberal-National coalition leader Malcolm Turnbull told reporters in Canberra after today's package was announced. ``It will provide stimulus to the economy, that's for certain.''

Stocks surged across Asia today on more expected action by the U.S. to help credit markets.

The U.S. government will announce a plan to rescue frozen credit markets that includes spending about half of a total of $250 billion for stakes in nine major banks, people briefed on the matter said.

The S&P/ASX 200 Index of Australian stocks rose 3.7 percent as of 2:38 p.m. in Sydney. Australia & New Zealand Banking Group Ltd. led financial stocks higher, surging 6.1 percent. BHP Billiton Ltd., the world's largest mining company, gained 3.8 percent.

``Things have changed dramatically in the past couple of weeks,'' Treasurer Wayne Swan, who today returned to Canberra from the U.S., told reporters in Canberra.

Slower global growth has slashed prices for commodity exports that have fueled Australia's 17-year economic boom.

The International Monetary Fund's World Economic Outlook last week forecast global economic growth will slow to 3 percent in 2009, a world recession under the fund's informal definition.

To contact the reporter on this story: Gemma Daley in Canberra at gdaley@bloomberg.net