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Treasury officials believe the global downturn will be deeper and longer than first thought and that the Australian economy may fall into recession without further interest rate cuts. The officials gathered at Parliament House on Thursday evening for the start of a hastily-convened Senate inquiry into the government’s $42 billion economic stimulus package, aimed at heading off a recession in Australia. Treasury Secretary Ken Henry indicated that the stimulus measures needed to be complemented by further cuts in official interest rates to do the intended job. Growth forecasts released on Monday predicted gross domestic product (GDP) would grow by just one per cent in 2008-09, and by only 0.75 per cent the following year.

Dr Henry said these forecasts were based on last year’s $10.4 billion stimulus package, the most recent measures, recent cuts in official interest rates, as well as further loosening of monetary policy. “(It takes account) of all the factors I mentioned earlier and, indeed, after taking into account a further cut in official cash rates, that is further monetary policy loosening by the Reserve Bank on top of what was announced on Tuesday,” he told the inquiry.

Senators agreed to the inquiry on Thursday morning after MPs sat into the early hours to pass the package of stimulus bills during a marathon sitting of the House of Representatives. The coalition opposes the $42 billion in infrastructure investment and cash payments, which will take the budget further into deficit and the nation into debt. But Dr Henry says weakening demand for Australian goods, and its impact on economic growth, meant fiscal stimulus was needed - and urgently. “These are highly unusual circumstances and we have advised government … that there was a need for fiscal policy action (and) that it was quite urgent,” Dr Henry told the inquiry. And, according to Dr Henry, deep cuts in interest rates are needed as well. “The weakness in aggregate demand that we are confronting in the Australian economy calls both for very substantial reductions in interest rates and very substantial fiscal stimulus,” Dr Henry said.

Since September last year, the Reserve Bank of Australia (RBA) has cut the official cash rate four percentage points - to 3.25 per cent, its lowest level in 45 years. David Gruen, executive director of Treasury’s Macroeconomic Group, said the global recession was much worse than predicted just months ago and the stimulus was designed to prop up demand over the next couple of years. “Australia is suffering from insufficient aggregate demand for the whole economy,” Dr Gruen said. “The package has been framed with the thought in the back of our mind that it is important to come up with spending plans that will deliver stimulus to the economy quickly. “That’s based on a current assessment of what we think is the nature of the global recession. Namely, we think it’s deeper and longer than we thought several months ago.”

The latest efforts to stimulate the domestic economy follow a $10.4 billion package targeted at pensioners, low-incomes earners and first home buyers last year. Latest retail sales figures suggest cash bonuses, delivered just before Christmas, helped boost spending but the opposition disputes their effectiveness. Dr Gruen said evidence so far suggested the original package had supported consumption and, as a result, jobs. “We do have evidence that the package did stimulate consumption and we have strong reason to believe that would have lead to more people being employed than otherwise would have been the case,” he said.

 

Courtesy of Lending Central 06/02/2009

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