The $10 billion fiscal stimulus plan unveiled by the Australian government to bolster the economy in the face of the global financial crisis, may provide a short term boost to consumer and home spending, but in the long term it will just drive hyper-inflation and lead to a massive devaluation of the Australian dollar. Short term relief for long term pain.
The stimulus plan, which is equivalent to 1% of Australia's GDP, includes A$4.8 billion for pensioners and A$3.9 billion for low and middle-income groups. First-time home buyers will receive about A$1.5 billion in additional support measures and about $187 million will go toward a labor-skills program. From an individual perspective this is equivalent to doubling the first-time home buyer's grant (to $14,000) and triple it to A$21,000 for those who purchase a new home. Low and middle income families will receive a Christmas bonus of A$1,000 per child, pensioners living alone will receive A$1,400 and pensioner couples will receive A$2,100. The bonus payments are to be made on December. 8.The Australian stimulus plan, follows additional support to the economy announced recently, including a one-percentage-point interest-rate cut the past week and weekend measures to guarantee banks' deposits and term funding.
"Australia is exposed to the potential drag from the global downturn and its already begun to weigh on the commodity markets which are the lifeblood of their economy," said David Cohn, director of Asian Economic forecasting at Action Economics in Singapore, in a recent article. Some analysts said the measures ran the risk of stoking asset-price inflation. "The major contention that we have with it is the measures to boost the first-home ownership scheme," said Glenn Maguire, Asia Pacific economist in Hong Kong with Societe Generale. "The government seems to have completely overlooked the fact that the entire reason we are in this mess is too many people in the U.S. were given access to first homes, which led to asset inflation and when the cost of servicing that became impossible it led to deflation and the massive defaults that we are seeing now."
I agree. The government is trying to force consumption and boost housing, and all this will lead to is inflation in the longer term with some short term gains. By trying to artificially breathe life into the housing sector we could be creating an Australian sub prime like housing crisis by 2015. Sacrificing prudent long term economic planning for short term savings is a sure fire strategy to getting us all into the poor house.