The pitfalls in talking up the economy

Those wanting to spend Australia out of possible recession or worse will face a new harsher credit market for the bigger items with mandatory deposits to ensure equity for the credit provider in the event of future default. A good savings record may also be needed.

It will be interesting to see just how much of the $10.4 billion stimulus package will be "splurged", saved or repatriated to pay for the imports.

Many consumers will be under pressure to reduce credit card debt, mortgage payments and purchase agreement repayments just to save their credit ratings. Debt reduction represents money already spent and not new consumer spending.

Pensioners, experienced from earlier downturns and suffering massive reductions in income due to superannuation asset decimation will recognise the need to save for the tougher times ahead. Those facing imminent retirement are even worse off.

As for the families, Rudd also needs to give due consideration to those parents whose offspring cannot afford to move out and may face unemployment.

Rudd also has to make provision for declining commodity prices and share yields and somewhere along the way the cost of Kyoto, energy, water and other related cost increases. The economic effect of plummeting oil prices will also represent a major challenge.

True, if consumers do not spend, recessionary pressures will increase, but then again, what of those whose homes and/or survival depends upon savings.

Unlike the depression, it will not be a matter of allocating surplus manpower to major infrastructure construction projects.

Rudd's intention is to motivate massive spending to blunt the economic figures for the 2008 December quarter. He also needs time to delay the release of the 2009 March quarter that will reveal the real impact of the global crisis on Australia's economy.

2009 will herald a new economic climate for Australia with declines in both volume and prices for our resources exports as China is followed by cut backs by Japan and South Korea. Now the coal industry will join the steel industry in cut backs, further increasing unemployment. State and federal treasuries will be hit hard by declining revenues at a time when the $10.4 billion consumed by the spending splurge package may have been better used in new and more urgent demands.

Swan's scenario of "possible deficit" with short term implications now appears more like a "certain deficit" with longer term implications. It is the price that inexperienced government pays for poor preparation and self promotion by rushing in with rhetoric and grand visions before determining the full extent of the crisis.

Mr Rudd should have checked his facts before arrogantly lecturing the leaders at the APEC conference to talk up the global economy and not talk of doom and gloom. The change in body language and ensuing talks of a possible deficit on his return to Australia were clear signs that the students were in fact the headmaster.