Recession we don't have to have

THIS is the Rudd Government's scramble towards audacity. It is about preventing Australia from sinking into recession and saving Labor's political credentials and economic reputation.

The Government yesterday took its most decisive action so far. The economic security package is about timing, psychology and risk. The timing is imminent, the psychology is spend, and risk has moved from inflation to recession.

Kevin Rudd and his senior ministers are acting ahead of the looming downturn with a hefty government stimulus over 2008-09, knowing that there will be a nine-month lag before the Reserve Bank's robust interest rate cut last week has an impact.

This is a double hit to keep growth alive: direct payments into households and lower interest rates. The Government took its lead from the Reserve Bank with its signal last week that the world had decisively changed. This was reinforced by Treasurer Wayne Swan's sobering experience at the G20 meeting in Washington, where global growth estimates were slashed.

The package is a hasty, one-off, naked economic stimulus to boost demand. It is straight from the economic textbooks. It launches the second phase of the crisis: resort to conventional cash injections to salvage confidence and hold up activity.

Neither Rudd nor Swan will utter the R-word. At his media conference yesterday, Rudd said official advice to ministers was still that Australia would record positive growth, thereby averting recession.

But Rudd won't die wondering. Australia's central bank and its national Government have acted with dispatch. In such unpredictable times, they have erred on the side of action, a calculation that is probably correct. The critical assumption is that inflation, while still high, is no longer on the prowl.

Rudd was governed by one idea above all: that the best way to manage a recession is to prevent it from happening. That is what drives the present flurry of activity.

Once a recession arrives, the most perfect stimulus package, by definition, is too late.

At the weekend, a senior official told ministers in the cabinet room that the lesson from the early 1990s recession was to "go hard and go early" with the stimulus. The Government has recalled that Paul Keating's One Nation stimulus of February 1992 was far too late because the Hawke government had misjudged the extent of recession.

The fiscal package is worth a total of $10.4 billion, of which $9.65 billion will be spent in 2008-09. The package equates to just under 1 per cent of Australia's gross domestic product but it is crammed into about eight months, so the impact is greater.

The package is targeted, going to pensioners, families, carers, seniors card holders and first-home buyers, and this suggests that it will be spent. These payments are supposed to be one-off, which is another bonus since genuine one-off payments do not compromise future policy.

Nearly half the previous budget surplus of almost $22 billion was expended yesterday in a substantial hit. The budget for 2008-09 stays in surplus. The Government does not anticipate future budgets will be forced into deficit, and Swan repeated the existing policy of being in surplus "over the cycle".

The reality, however, is that Rudd and Swan declared they would do "whatever is required". The message is palpable: they did not come to office to preside over a recession.

Senior ministers had Treasury advice at the weekend that Australia faces a significant growth slowdown. The package unveiled yesterday is political in its timing and content but rests on a firm foundation of economic advice. Rudd said the entire idea of building the surplus was to deploy it when the situation changed. And that is now.

The Government's hope is that with proactive policy it will limit the extent of Australia's downturn, thereby enjoying better growth and better surpluses in future years than otherwise expected. That, at least, is the optimistic theory.

Understand what Rudd and Swan are doing: they are counteracting the downturn before they know its depth. At this point the cautious character of the Government has surrendered to a calculated urgency.

The Government is using the stimulus to solve its political problems with pensioners and families. The biggest slice of the package, $4.8billion, goes to four million pensioners, carers and seniors. The payments will be made from December 8. They will be replaced from July 2009 with the Government's long-term pension reforms. The second biggest slice, $3.9billion, goes to two million families. A total of 150,000 first-home buyers will receive grants of up to $21,000 for contracts entered into by June 30, 2009.

It seems a happy conjunction of economic stimulus and political reward. The reality, however, is that the stimulus is needed because the Government believes times will get a lot tougher as growth slows, confidence falters, lending shrinks, asset prices fall and jobless numbers rise.

Rudd and Swan say the global financial system "is experiencing its most significant upheaval since the Great Depression". That crisis is totally external to Australia, a message Rudd has effectively sold. His announcement on Sunday was about the first phase of the crisis: how to keep liquidity in the system and keeping Australia's banks functioning. This is when Rudd branded his Government as "calm, methodical and rational in the way in which it approaches challenges", a neat insight into the way Rudd sees himself.

But for Australia the immediate liquidity crisis, though difficult, is probably the easiest part of the unfolding crisis. The harder part concerns the impact on the real economy. Rudd and Swan stare down the gun barrel of likely recessions in the US, much of Europe and Japan. The IMF is forecasting that developed nation growth in 2009 will sink to 0.5per cent. As Rudd said, "this will be the slowest growth in the advanced economies for over a quarter of a century". Swan has returned from the International Monetary Fund alarmed at the extent to which the crisis has undermined the outlook for emerging economies.

In this situation, Rudd decided the risk to Australia was too great. We were sailing too close to the wind. Australia, precisely because it is well governed, has weapons to unleash. The Reserve Bank has scope for more interest rate cuts and Rudd can recruit his strong surplus for more stimulus.

It is too difficult to predict the depth of global downturn. Much depends on how far deleveraging - winding back huge corporate and household debt - becomes the dominant global theme, provoking a downward spiral in asset prices and a consumer retreat.

Rudd and his senior ministers want to ensure their first term is not doomed by recession. After 11 years of growth under John Howard, a recession - though imposed from abroad - would shatter Labor's authority.

Achieving a soft landing is basic to Labor's economic credentials and its political success.

Make no mistake, Rudd's message is that he will take whatever action is needed to avoid a recession.