World recession `worse than thought`

The global recession is forecast to be longer and deeper than previously expected, a
Senate inquiry has been told.
Treasury officials on Thursday explained the rationale of the $42 billion stimulus
package announced by the government, which is aimed at countering the global
recession.
Treasury official David Gruen said the global recession was worse than previously
forecast, and as a result the package was developed to support demand over the next
couple of years.
"Australia is suffering from insufficient aggregate demand for the whole economy,"
he 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 ... perhaps, let's say, over 2009 and perhaps into 2010.
"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.
"We are focused on spending which will have a material effect on demand in the
economy over that sort of timeframe."
Treasury Secretary Ken Henry said the slowing economy justified very substantial
interest rate cuts.
"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.
Dr Henry said it was too early to say how much of last year's stimulus had been
spent as opposed to saved.
Data released by the Australian Bureau of Statistics on Wednesday showed retail
spending grew by a much stronger than expected 3.8 per cent in December to a record
$19.2 billion.
However, retail sales were only a minor proportion of household consumption, the
Treasury secretary said.
"One should expect the fiscal impact of the October package to come through not only
in retail sales."
And it was never expected that all of the first fiscal stimulus would come through
in December.
The impact would come through in subsequent quarters because savings were simply
"deferred consumption", he said.
Dr Henry added that he didn't know if savings were up.
"We will get an estimate of what happened to household savings in the December
quarter in the first week of March," he told the inquiry.
As for the packages' impact on the Australian dollar, Dr Henry said if Australia
didn't undertake an expansionary fiscal policy it was possible "our dollar would
depreciate even further than it already has".
"Maybe that would provide some measure of support for some sectors of the economy,"
he said.
"But it would also reduce forecast growth in the Australian economy."
Under questioning from Labor Senator Doug Cameron, the Treasury secretary said there
was no reason to sit and wait before implementing another stimulus package.
"Obviously that's not the view that we've taken in providing advice to government,"
Dr Henry said.
"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 was also asked by Senator Cameron how much it would cost for the government
to pick up businesses' super contributions.
Labor has accused Opposition Leader Malcolm Turnbull of being a "budget vandal" for
opposing its $42 billion stimulus package, while putting forward costly
alternatives, including a proposal for the government to pay the nine per cent
superannuation obligations of a range of businesses.
"Preliminary advice indicates if the government were to make the full superannuation
guarantee payments of all small businesses in Australia the cost to the budget would
be of the order of $10 or $11 billion a year," Dr Henry said.
Nationals Senate Leader Barnaby Joyce questioned whether "pink batts and boom gates
and school halls" were the optimum investment for the nation.
Dr Henry was quick to admit they wouldn't increase Australia's GDP in 10 year's time
to the same extent as expenditure on "supply-enhancing infrastructure projects" such
as rail and ports.
But he said that wasn't the point of the latest nation building plan.
"This package is about trying to minimise the extent to which aggregate demand falls
below potential gross domestic product," the Treasury secretary said.
Because if that occurred "many people will end up unemployed".
"These are measures which can have a timely impact," Dr Henry said.
"They can be introduced reasonably quickly."