Stimulus Package

[SS8_Gohan]

how soon everyone seems to forget that it was the Coalition Howard Government that was in power for 12 years during which this total f...k up of the economy slowly developed and became a crisis, and what did they do to warn about or to prevent this global meltdown and its impact on Australia - did they speak up about it ? did they even tell you it was on the way -NO- they did NOTHING - as long as the money was turning over and a good proportion of the population was maxxing out on credit cards building debt that was beyond their capacity to repay and inflating values beyond anything resembling real worth no-one said anything much

dude, honestly, that's a load of bollocks and you know it. Do you remember the Labour campaign? Do you remember Kev'07?? It seems YOU have forgotten that. HE never mentioned a coming world recession, HE never mentioned a bursting of the asset buble, HE never mentioned will be needing to stimulate the economy. You know what he did mention? Spending was out of control and needed to be slashed. The inflation "genie" had been let out of the bottle and was going to cripple Australia. We are the fiscal conservatives. Now compare that to what he's done since in office. Already a $10.2 billion dollar package, that by most accounts was largely saved or used to pay off debt. The budget ALREADY in deficit BEFORE the $42 billion was passed. I watched the senate estimates committee proceedings for the first stimulus package, and they couldn't even answer a simple question. "How did you come up with the $10 billion figure?" No one from Treasury could answer that, not even the partisan Dr Ken Henry could answer that. And he had to run off to Swan to check whether or not he could answer a question about correspondence between himself and the reserve bank governor.

Not all of the $42 billion coming is a waste (cash handouts are) but the first $10 billion was almost a complete waste and it seemed they looked at the surplus, saw $20 bil, and thought, we'll use half. They could not adequately explain how they even formulated the package. And you know full well Swan would not have a f*cking clue how it was put together.

So to blame the previous Government is bordering on lunacy. Sure they weren't perfect, no government is but for something that STARTED in the U.S., for something that was started by creating these complex financial instruments, for something that started in the finance industry, very few people (if any) accurately predicted the full extent of it's impacts. EVERYONE has been startled by the speed of which things have gone bad. Japan's economy has contracted some 13-14%... think about that 13-14%! That is just un-f*cking-believable! But of course it was the Coalitions fault.

If you're blaming the previous Gov, you gotta blame Kev as well because he sure as hell did not say anything about it either. No one can argue this point because if he DID know it was coming, then the razor gang wouldn't have come out and sliced the budget up a bit (but in actual fact, the new gov could have sat there and done nothing, and STILL have a surplus of about $18-$19 billion because that's what was left by Costello). If he knew, he would have dramatically increased spending to try and "get ahead of the curve" as they are putting it. I don't see that happening, they were too preoccupied with inflation. It's funny, now we're worried about possibility of deflation...

and for all the loonies saying business tax breaks are the answer - at least put your thinking hats on before speaking - the indisputable facts are - firstly its businesses having no trust in other businesses that is the main problem at the moment (banks no longer lending to keep businesses operating and preferring to make billions by slugging ATM users with new charges rather than lending money to businesses and earning profits that way) - no Government can force banks to lend money to businesses - that is one reason why the Government is putting extra cash into the economy in the hope banks start going back to lending to businesses consequential to the infusion of massive extra funds into the economy - its a gamble of course but what else can be done?

calling us loonies and you're saying the "indisputable facts" are business don't trust each other and banks are making billions from ATM fees? The Reserve Bank put in the new reforms to ATM fees, not the banks, so blame the RBA but even despite this, the estimated outcome is $200 million in a worst case scenario... yeah, the "indisputable facts" of "billions"

The issue of credit is one that the RBA tried/trying to resolve by adding liquidity to the financial markets. The Gov putting extra money into the economy is NOT a reason to increase the credit flow! You can very well have the situation where a business is doing well, the books look good, everything is in order BUT they STILL can't get credit due to the availability of funds! The economy and the financial markets are two different beasts. So this "reason" to add money to the real economy to increase credit flow is another interesting "indisputable fact"

secondly tax breaks for business provide no guarantees of improving the economy or aiding job retention or growth, and unless you are blind stupid or have been living in a dark tunnel for the past 6 months you should know that even the key business advocacy organisations like the Chambers of Commerce and Industry etc in Australia (every single one of them) who usually back Coalition type policies have put their full support behind the current Government's economic stimulus policy - and they are on record as saying that business tax cuts are not the answer Or maybe you think the CAI etc are commies posing as capitalists.

you're misrepresenting the ACCI and in some cases out-and-out misrepresenting them and their state counterparts. Here's what Peter Anderson CHIEF EXECUTIVE of the ACCI had to say...

"Well the package doesn’t contain all of the elements that we were looking for. There is a

proper debate about the mix of measures. But in a broad sense it does address major infrastructure issues, and it also

does provide some increased stimulus even though we would have preferred to see that stimulus in the form of tax cuts

rather than lump sum payments."

"We certainly saw a stronger case for tax cuts to occur rather than a cash handout. Tax cuts have

the benefit of flowing through the economy over a period of time, and they do also represent some structural reform to

the tax system and bringing forward tax cuts would not have had quite as big an impact on the budget..."

Yep, he's certainly not after tax cuts

But wait, there's more! this time for the state branches of the CCI - Tasmania

http://www.abc.net.au/news/stories/2008/10/21/2396712.htm - "Plea for business to tax cuts"

And this, STRAIGHT from the CCI WA website

http://www.cciwa.com/content/Challenging_e...mic_reform.aspx - "Challenging economic times call for tax cuts, greater infrastructure investment & renewed commitment to economic reform'

but i guess we must be

blind stupid or have been living in a dark tunnel for the past 6 months

...

signed,

-indisputable facts-

[tets]

SS8_Gohan calm down man.

u need to chill a bit and hit the brothels to stimulate the economy.

[Downforce]

wow! in your opinion!?! i totally agree with you Matthew

yes it was an informed opinion which i took from you

[cosmic starz]

dude, honestly, that's a load of bollocks and you know it. Do you remember the Labour campaign? Do you remember Kev'07?? It seems YOU have forgotten that. HE never mentioned a coming world recession, HE never mentioned a bursting of the asset buble, HE never mentioned will be needing to stimulate the economy. You know what he did mention? Spending was out of control and needed to be slashed. The inflation "genie" had been let out of the bottle and was going to cripple Australia. We are the fiscal conservatives. Now compare that to what he's done since in office. Already a $10.2 billion dollar package, that by most accounts was largely saved or used to pay off debt. The budget ALREADY in deficit BEFORE the $42 billion was passed. I watched the senate estimates committee proceedings for the first stimulus package, and they couldn't even answer a simple question. "How did you come up with the $10 billion figure?" No one from Treasury could answer that, not even the partisan Dr Ken Henry could answer that. And he had to run off to Swan to check whether or not he could answer a question about correspondence between himself and the reserve bank governor.

Not all of the $42 billion coming is a waste (cash handouts are) but the first $10 billion was almost a complete waste and it seemed they looked at the surplus, saw $20 bil, and thought, we'll use half. They could not adequately explain how they even formulated the package. And you know full well Swan would not have a f*cking clue how it was put together.

So to blame the previous Government is bordering on lunacy. Sure they weren't perfect, no government is but for something that STARTED in the U.S., for something that was started by creating these complex financial instruments, for something that started in the finance industry, very few people (if any) accurately predicted the full extent of it's impacts. EVERYONE has been startled by the speed of which things have gone bad. Japan's economy has contracted some 13-14%... think about that 13-14%! That is just un-f*cking-believable! But of course it was the Coalitions fault.

If you're blaming the previous Gov, you gotta blame Kev as well because he sure as hell did not say anything about it either. No one can argue this point because if he DID know it was coming, then the razor gang wouldn't have come out and sliced the budget up a bit (but in actual fact, the new gov could have sat there and done nothing, and STILL have a surplus of about $18-$19 billion because that's what was left by Costello). If he knew, he would have dramatically increased spending to try and "get ahead of the curve" as they are putting it. I don't see that happening, they were too preoccupied with inflation. It's funny, now we're worried about possibility of deflation...

calling us loonies and you're saying the "indisputable facts" are business don't trust each other and banks are making billions from ATM fees? The Reserve Bank put in the new reforms to ATM fees, not the banks, so blame the RBA but even despite this, the estimated outcome is $200 million in a worst case scenario... yeah, the "indisputable facts" of "billions"

The issue of credit is one that the RBA tried/trying to resolve by adding liquidity to the financial markets. The Gov putting extra money into the economy is NOT a reason to increase the credit flow! You can very well have the situation where a business is doing well, the books look good, everything is in order BUT they STILL can't get credit due to the availability of funds! The economy and the financial markets are two different beasts. So this "reason" to add money to the real economy to increase credit flow is another interesting "indisputable fact"

you're misrepresenting the ACCI and in some cases out-and-out misrepresenting them and their state counterparts. Here's what Peter Anderson CHIEF EXECUTIVE of the ACCI had to say...

"Well the package doesn't contain all of the elements that we were looking for. There is a

proper debate about the mix of measures. But in a broad sense it does address major infrastructure issues, and it also

does provide some increased stimulus even though we would have preferred to see that stimulus in the form of tax cuts

rather than lump sum payments."

"We certainly saw a stronger case for tax cuts to occur rather than a cash handout. Tax cuts have

the benefit of flowing through the economy over a period of time, and they do also represent some structural reform to

the tax system and bringing forward tax cuts would not have had quite as big an impact on the budget..."

Yep, he's certainly not after tax cuts

But wait, there's more! this time for the state branches of the CCI - Tasmania

http://www.abc.net.au/news/stories/2008/10/21/2396712.htm - "Plea for business to tax cuts"

And this, STRAIGHT from the CCI WA website

http://www.cciwa.com/content/Challenging_e...mic_reform.aspx - "Challenging economic times call for tax cuts, greater infrastructure investment & renewed commitment to economic reform'

but i guess we must be ...

i don't know what to say to this... i think the stupidity in this statement speaks for itself

signed,

-indisputable facts-

________________________________________________________________________________

___________________

its good to get a debate going as having just one sided viewpoints is unhelpful - and my comments were actually meant to be entirely bi-partisan as evidenced by my saying that no one person (i.e. Rudd or Turnbull or whoever) or any one political party has the answer

be honest now are you aligned to a party or system - a Liberal Party member perhaps

Iam amused how much your own arguments are mutually exclusive - you criticise the economic stimulus pkg as a huge cost but advocate tax concessions for business - these are a huge cost too, and in a time of falling goverment revenues may trigger a huge budget deficit by themselves

you can't have it both ways

if as you say this meltdown is a total surprise then you have yourself explained why Kevin Rudd made no mention of it in 07 (and neither did John Howard)

so using your own logic its fair for the current Government to now move away from its election platform as the circumstances have changed after the election and it should now face the changed circumstances - so why criticise the Government for doing just that

are now you getting to see how illogical your assertions are....

but theres more

the junk bonds are not "complex financial instruments" - they are worthless JUNK traded for GOOD HARD CASH - a huge swindle and fraud on both individuals and the business sector alike

you try and do the same and you go to jail - Wall Street gets Government money bail-out and gives out employee bonuses - where is the justice?

your talk about "complexity" - lol - the only complexity was in how the JUNK was disguised as sound finacial instruments

do you want more................

do you know why the BANKS in Australia are solid compared to o/s banks ? Even I hate to say it but Paul Keating in the 1980s as Prime Minister reformed the banking sector and made it the strongest and best regulated in the world - hell a socialist doing something right - unspeakable is'nt it

most would agree that there was a change in Government in Australia because the Coalition's promises to prevent interest rate rises was broken by the then government - you seem to be a Coalition supporter rather than bi-partisan so my question to you is how do you criticise one government but praise another government for breaking a promise when both have done do the same thing ?

and no the Reserve Bank did not do what you claim - it deregulated bank ATM charges it DID NOT INTRODUCE THEM - the presumption being the banks would compete for business and reduce existing charges - so how do you blame the Reserve Bank for trying to get more competition in that sector?

and I am perfectly correct in saying that the biggest current danger to business growth and stability is the reluctance of the banks to acutally LEND MONEY TO BUSINESS - this is the central issue that all Governments around the world are facing UK USA China Japan everywhere - this is what all governments' stimlus packages are trying to address

and who cares what some business group in Tasmania may or may not have said - that State cannot exist if it does not get massive Federal Government taxpayers subsidy in a variety of forms - they only exist thru 'socialist' handouts that the rest of us taxpayers have to pay for, and they want more subsidy - they gotta be kidding

we could wite a book about this "economic meltdown' but we better not - anyway every one to their own thoughts but keep it apolitical please - debate is good!!!!!!!!!!!!!!

and in conclusion let me say this : I am still waiting for that fount of all knowlege, that self described budgetary guru and finacial wizz person, that almost Prime Minister, our former Treasurer Peter Costello to expound on how and what he would be doing right now to get Australia out of this mess ...............but you know I don't think he is going to say anything soon as I think he is really as clueless as everyone else - and this guy was touted as a Leader.

Maybe you can get Peter to say a few words ..................maybe you might even ask Johnnie Howard to explain it all..........

Cheers

[Ant97GTR]

aw poor little business owner... maybe we should employ trickle down economics just like the Bush administration has been doing over the last 8 years... that worked well... didn't it?

don't think for a second that business owners aren't using every trick known to man to make sure they pay as little tax as possible... they have clever accountants to help them find the loopholes... which there are many

I'm not sure about how wise this version of a stimulus package is but I've never received a single cent from the government so hey at least I get something back!

I would have preferred to see it being spent on infrastructure though... in Vic for example we need recycled water infrastructure and extension of rail services badly... we haven't had any major infrastructure projects apart from roads in a very long time... could possibly kill 2 birds with one stone, stimulate the economy by creating jobs and improving the standard of living at the same time

G'day Nick...long time no see My first post was an example of one way to stimulate the Ozzie economy without handing out cash. Sure business owners try and reduce their tax as much as possible (as every australian should) but reducing that from the get go means more money to spend on their business which benefits everyone from the workers to the shareholders.

Look at it from a personal point of view...as an individual I get taxed through the nose....income tax, gst, fuel, property etc etc Reducing my tax means that I have more money in my hands which I can use to spend and believe me I can think of plenty of things that I could spend it on

As for the infrastructure.....I couldn't agree more - not only is there a need to build these projects but it will keep australian companies going and keep people employed.

[lilkaaay]

and for all the loonies saying business tax breaks are the answer

-Post September 11 2001: CEOs from more than 30 multinational corporations pleaded before the U.S President for tax cuts to stimulate the economy

-Security Traders Association to the United States Congress regarding the need for a tax cut to stimulate the economy and the stock market.

-On January 28th a $819 billion expenditure and tax cut package in the US was approved by the House of Representatives in order to combat the financial crisis after the failure of the Troubled Asset Relief Program. Furthermore, “Economic advisers to President Barack Obama have suggested avoiding bailout programs which would only deepen the recession” (Sasseen, 2009).

-As stated in the Economist, even the International Monetary Fund (IMF) has projected tax cuts to be “worth 1.5% of global GDP to kick in this year” (2009, p79-80, 2p).

-U.S. House Republican Leader John Boehner proposed eliminating the capital gains tax, as well as other tax cuts. It features the members of Obama's economic team (Wall Street Journal, 08)

secondly tax breaks for business provide no guarantees of improving the economy or aiding job retention or growth, and unless you are blind stupid or have been living in a dark tunnel for the past 6 months you should know that even the key business advocacy organisations like the Chambers of Commerce and Industry etc in Australia (every single one of them) who usually back Coalition type policies have put their full support behind the current Government's economic stimulus policy - and they are on record as saying that business tax cuts are not the answer Or maybe you think the CAI etc are commies posing as capitalists.

Taken from the Australian Chamber of Commerce and Industry official website:

‘STIMULUS PACKAGE PASSES – A CHANGE TO AVOID RECESSION’ (Friday 13th Feb 09)

“ACCI will continue to advocate taxation reform as a stimulus measure. We will also continue to seek measures in the May Federal Budget to rein in non-productive government expenditure in order to restore the budget to surplus over the economic cycle" (Anderson, Chief Executive, 2009, pg.1

ACCI Pre Budget Submission to the Department of Treasury: Enhancing Incentives to support jobs and growth

"Good macroeconomic outcomes rely fundamentally upon solid macroeconomic foundations. Tax relief enhances both labour force participation and work incentives" (ACCI, 2009, pg.8).

"A focus on income tax cuts and infrastructure spending would be well targeted to support those sectors of the economy that are expected to be experiencing most difficulty... Tax cuts will bolster household incomes and assist in alleviating the extent of the downturn being experiences in the retail sector of the economy. Income tax relief also has a range of favourable effects in terms of efficiency gains, enhances work incentives, increased labour force participation and international competitiveness, all of which will improve Australia's longer-run rate of economic growth" (ACCI, 2009, pg.8).

Blind?

Stupid?

Or have you been living in a dark tunnel for the past 6 months??

[SS8_Gohan]

K, i know you know what's going on I provided statements by Peter Anderson, Chief Executive of the ACCI, but i guess it didn't fit with the "indisputable facts"

KV2R34GT, mate, don't muddy the waters here.

1) i'm not aligned to anything, i'm not a member of anything

2) you started your post with an assertion the Coalition presided over the "f*ck up of the economy" and did nothing about the upcoming financial crises. If you're so bi-partisan, tell me what the opposition did in this period to warn us? Tell me what Kevin did in his election campaign to warn us? Tell me what Kevin did before the first package to stimulate the economy? Last time i checked, he was trying his hardest NOT to stimulate the economy for fear of fueling inflation. Swan in all his party rhetoric was "fighting the war on inflation", not heralding the coming GFC. So in the interest of "bi-partisanship", i would have thought you would have versed the forum on the actions of the opposition at the time.

3) I'm for the stimulus, not the MAKE-UP of the stimulus! If you read my post, instead of reading what you wanted to read (as evidence by your assertion i'm against the package) you'd see i wrote the $42billion coming is not a complete waste, but the cash handouts are. I don't say anywhere it's a "huge cost", you're just inferring party criticisms based on your political persuasion. We need a fiscal stimulus, just as much as we need monetary stimulus. We're getting both. It's just the fiscal stimulus could be better spent.

4) Sure the government should do something, but i was only pointing out to their election platform as a rebuttal to your argument that the Coalition did nothing and didn't warn us. The Opposition was in the exact same boat mate. So the only reason i brought this up, was to point that fact out. The government is correct in providing a stimulus package, i've never refuted that, don't twist my words.

5) The credit default swaps, and the like are indeed complex financial instruments. I believe they were initially created with good intentions but they have gone to sh*t, not just of their own doing but also because of policy decisions in the U.S and to some extent the loosening of monetary policy but the Fed. These packaged "debts" whilst are complete junk now, were not even that well understood by the finance industry and because the sophistication of which was beyond the types of products we have seen before, there was no chance the existing regulatory framework at the time would have been to keep tabs. They are junk, yes, but FAR from simple junk. The mis-understanding of which was part of the problem. We were too sophisticated for our own good.

6) Bi-partisanship seems to be going well with you doesn't it? You start by bashing the previous government. Praise Keating in the middle, and end by bashing Costello. Talk about contradictory

7)

most would agree that there was a change in Government in Australia because the Coalition's promises to prevent interest rate rises was broken by the then government - NOPE, WORKCHOICESyou seem to be a Coalition supporter rather than bi-partisanso my question to you is how do you criticise one government but praise another government for breaking a promise when both have done do the same thing?

- Classic deflection. I merely debating you on the points YOU raised!! Now you feel you have to deflect be bring back the reforms of the keating gov, or talking down costello's time as treasurer. That's NOT what we're talking about! When the hell were we talking about interest rates! Don't go off on some tangent because i put a valid argument across.

8) ATM fees, you talked about NEW fees, and i said the REFORMS with respect to the new fees, were introduced by the RBA. That is 100% correct, and in your OWN context, NEW FEES! You're twisting my words again. If you don't like these NEW fees, then perhaps speak to the RBA. It might not be working as they intended...

9) Yes, lending is a problem, but you would also know that perfectly GOOD business are struggling to obtain funds. Whilst some of this could come from private sources, the issue of liquidity is one LARGELY left up to the central banks of these countries/unions. The Fed, ECB, RBA, etc... have dumped money in to increase liquidity, to try and get the banks lending again. I was making the distinction between the financial markets and the REAL economy. The stimulus packaged is targeted at the REAL economy, NOT the financial markets. And that's where my previous point comes in, a perfectly good business can still have difficultly obtaining funds due to the credit supply. So no, one of the primary goals of the stimulus packages is not to try and increase liquidity.

10)

and who cares what some business group in Tasmania may or may not have said

Mate, again, i'm responding to what YOU brought up! The Chamber of Commerce and Industry. CCI. I referred you to two statements from state branches of the CCI and then also to the CHIEF EXECUTIVE of the ACCI, Peter Anderson, on their thoughts about tax cuts. Again, responding directly to what you brought up. At at State and National level, they are in favour of tax cuts. You stated they weren't.

And lastly you want this to stay apolitical, but the VERY NEXT paragraph, you have a dig at Costello. Hypocrite much?

I'm all for debate, and that's what we're doing but i took issue with some of your "indisputable facts" and i thought i refer to the "horses" mouth, so to speak to show the actual facts.

If you look at my previous posts, i was actually saying it's all over and done with, the money's coming, lets just try and spend it in the best way possible. I don't agree with the cash handouts, but i agree with a fiscal stimulus. You were the one to make it all partisan.

[lilkaaay]

Here is my logical, rational and educated response

Tax cuts? Or cash payments?

After 5 consecutive cuts in the loosening of monetary policy, the 7% to 3.25% cash rate target has been deemed insufficient to combat the economic downturn and many econometric models reveal that without the stimulus package Australia may be headed in the footsteps of most of their trading partners.

-$4.8 billion for an immediate down payment on long-term pension reform

-$3.9 billion in support payments for low and middle-income families

-$1.5 billion investment to help first-home buyers buy a home

-$187 million to create 56,000 new training places in 2008-09

(ABOVE STATS FROM: NineMSN: Money, News & Analysis, Rudd unveils $10 billion stimulus package viewed 9th February. 2009, ..)

It took the Liberal party 10 years to pay off the $90Billion debt… how long will it take to pay off a $200Billion debt?

6/10 of Australia’s trading partners are in recession… Everyone thinks we are headed into a recession.

SO during this pessimistic time about future market conditions deteriorating, isn’t it rational that people will save and not spend? I spoke to some friends about it today and it seems as though a lot of people want to save as opposed to spend, but the objective here is short term expenditure-to inject billions of dollars into the economy and create a multiplier effect in order to combat the economic downturn which has been projected to add 1% to Australia’s Gross Domestic Product according to ANZ.

This boost in the economy is supposed to be stimulated by a huge increase private consumption resulting from higher levels of consumer and business confidence. WHY are people planning to save when it defeats the whole purpose of the stimulus package??!

So here is $950 with one catch… you repay the $200 Billion debt under the future steepy progressive taxation system over the next few decades.

Consider the effects of a tax cut to stimulate the economy in the short and the long term: the expansionary fiscal policy.

A tax cut occurs when the government implements an expansionary budgetary deficit or a smaller budgetary surplus relative to the previous year’s budget surplus. This was the case for Australia during 2005-2006 in comparison to 2004-2005.

A budget deficit is a situation where the “total value of government outlays exceeds the total value of its receipts for a period of time” (Morris, 2004, pg.294).

In the short run a tax cut will induce individuals to spend more relative to save due to the increase in their disposable income and hence purchasing power. The increase in total expenditure (private consumption and business investment) will increase planned expenditure- that is the amount that the household, private and government sector would like to spend on goods and services. Planned expenditure is dependent on the level of income because a higher level of income results in higher consumption levels, representing a part of planned expenditure.

Consumption increases by the marginal propensity to consume; “the increase in consumption resulting from a one-dollar increase in disposable income” (Mankiw, 2007, pg.560); multiplied by the change in taxes.

Additionally, for a given level of income (denoted as Y), planned expenditure is now higher. The overall effect on income of the decrease in tax can be illustrated by tax multiplier:

^y/^t = - MPC / 1- MPC

This shows the amount of income changes in response to a $1.00 change in taxes.

In connection, the tax multiplier in the Keynesian Cross indicates that the change in policy increases the level of income at any given interest rate by: ^T x MPC / 1 – MPC (Mankiw, 2007).

As a result the IS curve to shift to the right, as illustrated in the diagram below:

The shift in the IS curve to the right increases the level of national income from Y1 to Y2. This in turn increases the real interest rate from r1 to r2. Due to John Maynard Keynes notion of sticky wages, prices in the short term remain fixed, illustrated on the AD diagram, on point P2. Because the level of income has increased but the price level remains the same, the level of consumption is increased from y1 to y2.

Moreover, the increase in interest rates represents an increase in the cost of credit, which is unfavourable to investors. As a result, investment decreases.

In the long run however, prices can alter. The aggregate demand curve shifts to the right to AD2 due to the increase in expenditure. Additionally, the free forces of demand and supply interact until they equilibrate at point 5, at the natural rate. The interest rates are further increased to point r3 as well as price levels, at P3. Consumption is returned to its original level, due to the decrease in the real value of money and investment decreases due to the increase in the real interest rate. Overall the impact of a tax cut will increase the price levels as well as the interest rates in the long term.

Consider the effects of an injection to stimulate the economy in the short and the long term: the expansionary fiscal policy.

When the government is increasing the budget deficit they are adopting an expansionary stance in their objective to stimulate the economy by raising injection into the economy relative to outlays, or by increasing government outlays relative to the collection of revenues. An increase in the deficit will stimulate planned expenditure, causing the IS curve to shift to the right.

In connection, an increase in the budget deficit can take form in an increase in government consumption (current spending) and government investment (capital spending) or a decrease in taxes.

The Keynesian Cross states, in respect to this policy that the government purchases multiplier raises the level of income at any given interest rate. This can be illustrated using the equation: ^G / ( 1 – MPC )

As a result of this increase in planned expenditure, the IS curve shifts to the right. In addition, the increase in planned expenditure resulting from an increase in government expenditure increases production and hence increases the level of national income.

The liquidity preference theory states that an increase in the level of total income will increase the quantity of money demanded at every interest rate, given that demand is dependent on income. However, supply has not been altered, but a higher level of money demand results in an increase in the interest rate. This increase in the real interest rate induces firms to save more relative to spend because the increase represents an increase in costs. The decrease in investment “offsets the expansionary effort of the increase in government purchases” and hence investment becomes unfavourable (Mankiw, 2007, pg.305). These events are illustrated in the diagrams below:

Nevertheless, in the long run, national income returns to its natural rate as AD decreases. The interest rate is further increased to R3 and the price level alters and is increased to P3. Furthermore, consumption returns back to its natural level due to the increase in the price level and the decrease in the real value of money. Also, investment is decreased due to further increases in the interest rate.

Ultimately an increase in the budgetary deficit will increase the price levels and the interest rate.

Black, J. (1997), A Dictionary of Economics, Oxford University Press, New York.

Mankiw, N. G. (2007), Macroeconomics, 6th edn, Worth Publishers, USA.

Morris, R. (2004), Macroeconomics Down Under, 2nd edn, John Wiley & Sons, Queensland.

NineMSN: Money, News & Analysis, Rudd unveils $10 billion stimulus package viewed 9th February. 2009, <http://money.ninemsn.com.au/article.aspx?id=646631>

RBA revised 2009, viewed 9th February, 2009, <http://www.rba.gov.au>

[NickR33]

G'day Nick...long time no see My first post was an example of one way to stimulate the Ozzie economy without handing out cash. Sure business owners try and reduce their tax as much as possible (as every australian should) but reducing that from the get go means more money to spend on their business which benefits everyone from the workers to the shareholders.

Look at it from a personal point of view...as an individual I get taxed through the nose....income tax, gst, fuel, property etc etc Reducing my tax means that I have more money in my hands which I can use to spend and believe me I can think of plenty of things that I could spend it on

As for the infrastructure.....I couldn't agree more - not only is there a need to build these projects but it will keep australian companies going and keep people employed.

Hi Ant

I was just trying to point out that generally the more wealth you have the easier it is to avoid tax... and yes not a terrible thing when it gets spent on the business but not so good when it ends up offshore (which it often does when trying to avoid paying tax on it)

[Downforce]

Wow... that's some impressive analysis Kay! You obviously know what you're talking about since you study economics =]

Knowing how the economy works is not as straight forward as many people think without understanding the contributing factors and long term effects.

[Ant97GTR]

I was just trying to point out that generally the more wealth you have the easier it is to avoid tax... and yes not a terrible thing when it gets spent on the business but not so good when it ends up offshore (which it often does when trying to avoid paying tax on it)

That is true for business but not for individuals (most of the time!). Not only that but I think you have to take the feeling of security into account too. Sure a lump of business money may head offshore to avoid tax, but the heads of that company would feel pretty secure knowing that that money is there. As such I would think that they would be more inclined to spend on the business to keep it going - not only that but they may have an opportunity to gain due to the current climate.

As for individuals, I'm not an expert and people like karla above clearly have more knowledge on the subject in regard to what tax cuts will do to the economy. However what I do know is that tax cuts to individual tax would increase spending in this country and isn't that what the govt is trying to do?

[J3TR33]

Here is my logical, rational and educated response

Tax cuts? Or cash payments?

After 5 consecutive cuts in the loosening of monetary policy, the 7% to 3.25% cash rate target has been deemed insufficient to combat the economic downturn and many econometric models reveal that without the stimulus package Australia may be headed in the footsteps of most of their trading partners.

-$4.8 billion for an immediate down payment on long-term pension reform

-$3.9 billion in support payments for low and middle-income families

-$1.5 billion investment to help first-home buyers buy a home

-$187 million to create 56,000 new training places in 2008-09

(ABOVE STATS FROM: NineMSN: Money, News & Analysis, Rudd unveils $10 billion stimulus package viewed 9th February. 2009, ..)

It took the Liberal party 10 years to pay off the $90Billion debt… how long will it take to pay off a $200Billion debt?

6/10 of Australia's trading partners are in recession… Everyone thinks we are headed into a recession.

SO during this pessimistic time about future market conditions deteriorating, isn't it rational that people will save and not spend? I spoke to some friends about it today and it seems as though a lot of people want to save as opposed to spend, but the objective here is short term expenditure-to inject billions of dollars into the economy and create a multiplier effect in order to combat the economic downturn which has been projected to add 1% to Australia's Gross Domestic Product according to ANZ.

This boost in the economy is supposed to be stimulated by a huge increase private consumption resulting from higher levels of consumer and business confidence. WHY are people planning to save when it defeats the whole purpose of the stimulus package??!

So here is $950 with one catch… you repay the $200 Billion debt under the future steepy progressive taxation system over the next few decades.

Consider the effects of a tax cut to stimulate the economy in the short and the long term: the expansionary fiscal policy.

A tax cut occurs when the government implements an expansionary budgetary deficit or a smaller budgetary surplus relative to the previous year's budget surplus. This was the case for Australia during 2005-2006 in comparison to 2004-2005.

A budget deficit is a situation where the "total value of government outlays exceeds the total value of its receipts for a period of time" (Morris, 2004, pg.294).

In the short run a tax cut will induce individuals to spend more relative to save due to the increase in their disposable income and hence purchasing power. The increase in total expenditure (private consumption and business investment) will increase planned expenditure- that is the amount that the household, private and government sector would like to spend on goods and services. Planned expenditure is dependent on the level of income because a higher level of income results in higher consumption levels, representing a part of planned expenditure.

Consumption increases by the marginal propensity to consume; "the increase in consumption resulting from a one-dollar increase in disposable income" (Mankiw, 2007, pg.560); multiplied by the change in taxes.

Additionally, for a given level of income (denoted as Y), planned expenditure is now higher. The overall effect on income of the decrease in tax can be illustrated by tax multiplier:

^y/^t = - MPC / 1- MPC

This shows the amount of income changes in response to a $1.00 change in taxes.

In connection, the tax multiplier in the Keynesian Cross indicates that the change in policy increases the level of income at any given interest rate by: ^T x MPC / 1 – MPC (Mankiw, 2007).

As a result the IS curve to shift to the right, as illustrated in the diagram below:

The shift in the IS curve to the right increases the level of national income from Y1 to Y2. This in turn increases the real interest rate from r1 to r2. Due to John Maynard Keynes notion of sticky wages, prices in the short term remain fixed, illustrated on the AD diagram, on point P2. Because the level of income has increased but the price level remains the same, the level of consumption is increased from y1 to y2.

Moreover, the increase in interest rates represents an increase in the cost of credit, which is unfavourable to investors. As a result, investment decreases.

In the long run however, prices can alter. The aggregate demand curve shifts to the right to AD2 due to the increase in expenditure. Additionally, the free forces of demand and supply interact until they equilibrate at point 5, at the natural rate. The interest rates are further increased to point r3 as well as price levels, at P3. Consumption is returned to its original level, due to the decrease in the real value of money and investment decreases due to the increase in the real interest rate. Overall the impact of a tax cut will increase the price levels as well as the interest rates in the long term.

Consider the effects of an injection to stimulate the economy in the short and the long term: the expansionary fiscal policy.

When the government is increasing the budget deficit they are adopting an expansionary stance in their objective to stimulate the economy by raising injection into the economy relative to outlays, or by increasing government outlays relative to the collection of revenues. An increase in the deficit will stimulate planned expenditure, causing the IS curve to shift to the right.

In connection, an increase in the budget deficit can take form in an increase in government consumption (current spending) and government investment (capital spending) or a decrease in taxes.

The Keynesian Cross states, in respect to this policy that the government purchases multiplier raises the level of income at any given interest rate. This can be illustrated using the equation: ^G / ( 1 – MPC )

As a result of this increase in planned expenditure, the IS curve shifts to the right. In addition, the increase in planned expenditure resulting from an increase in government expenditure increases production and hence increases the level of national income.

The liquidity preference theory states that an increase in the level of total income will increase the quantity of money demanded at every interest rate, given that demand is dependent on income. However, supply has not been altered, but a higher level of money demand results in an increase in the interest rate. This increase in the real interest rate induces firms to save more relative to spend because the increase represents an increase in costs. The decrease in investment "offsets the expansionary effort of the increase in government purchases" and hence investment becomes unfavourable (Mankiw, 2007, pg.305). These events are illustrated in the diagrams below:

Nevertheless, in the long run, national income returns to its natural rate as AD decreases. The interest rate is further increased to R3 and the price level alters and is increased to P3. Furthermore, consumption returns back to its natural level due to the increase in the price level and the decrease in the real value of money. Also, investment is decreased due to further increases in the interest rate.

Ultimately an increase in the budgetary deficit will increase the price levels and the interest rate.

Black, J. (1997), A Dictionary of Economics, Oxford University Press, New York.

Mankiw, N. G. (2007), Macroeconomics, 6th edn, Worth Publishers, USA.

Morris, R. (2004), Macroeconomics Down Under, 2nd edn, John Wiley & Sons, Queensland.

NineMSN: Money, News & Analysis, Rudd unveils $10 billion stimulus package viewed 9th February. 2009, <http://money.ninemsn.com.au/article.aspx?id=646631>

RBA revised 2009, viewed 9th February, 2009, <http://www.rba.gov.au>

haha goldd... dnt make me take out my thinking cap and Macroeconomics knowledge...

All i can say is that Politics and Economics don't mix, you have the RBA doing one thing and then you have the Government doing another to win votes...

Even if you get 10 economists on the issue on how to stimulate the economy, each and everyone one of them will have a different idea,

good monetary policy + good fiscal policy combined together focusing for the long run will combat a recession... or reduce the impact

why would the governments talk about a recession? they want people to keep spending, they dont want to inject fear into people, they have to be optamisitc, or else the situation will get worse,,

before this whole mess started, everyone was talking about a "bubbling australian economy", we were all talking about inflation and interest rate rises, but now its all about having a recession, no one could have predicted the sitatuon to get this worse, and America hiding its real GDP figures doesnt help either

the best we can do do combat the up and coming recession is Spend Spend Spend, build a house, buy a new car, i know people are fearing that they might lose their jobs, and want to save money for the future, but if everyone saved their money then we will be in deep shyt...

Banks need to keep lending money to businesses, businesses have to invest and expand, and customers need to spend and buy goods and services,

its a revolving circle that needs LIQUIDATION,

the government has some smart economists working for them, its not like they can pull out a policy out of their a**, tax cuts or payments is a good argument,

but im sure the government has data from the last payments it ditched out to the pensioners, they would have seen how this money was spent, so they decided with the payments again,

P.S where did you pull $200 Billion dollar debt from, and being in Debt to stimulate an economy everyonce in a while is a good thing

my 2 cents

[lilkaaay]

P.S where did you pull $200 Billion dollar debt from, and being in Debt to stimulate an economy everyonce in a while is a good thing

Question time ABC a couple of weeks back [=

and yes debt is not necessarily a negative thing so long as it does not result in political instability

[SS8_Gohan]

P.S where did you pull $200 Billion dollar debt from

Government has seeked permission to borrow "up to" $200 Billion. Treasury has confirmed that all this has been pretty much accounted for, that will most likely be the debt outcome. And i guess with the passing of the bill, the $200 billion has been approved.

Question time ABC a couple of weeks back [=

you watch question time!? man, i thought i was the only one to watch that! hahahah The grillings handed out in the Senate committee's are great to watch as well Channel 607 on foxtel, if you didn't know already

[AGE]

WOOHOO!!!!!!!!!!!!

[cosmic starz]

see I was right, a robust debate is a healthy thing - in the end we are all right on at least some issues and on some points maybe can get a new or improved insight by listening to others if not necessarily always agreeing with them

anyways enough from me for now on this dry topic of the economy - time for a good strong coffee

have fun guys and ciao

T