This is a variant on the 'saving for a rainy day' problem. What might seem like a rainy day could pale by comparison to a later deluge. My gut feeling is that Christmas retail will be subdued, handouts or not. As Senator Joyce points out, there will be lot of discarded wrapping at the tip in January with 'made in China' stickers on it.

The problem is that some perhaps inevitably needed infrastructure is very expensive. Low carbon power generation, interstate fast rail, desal plants and hospitals all have multibillion dollar price tags. If they get a kickstart from current budget spending there won't be much left for tax cuts and giveaways. Moreover I think people will feel reassured by such programs and they might tend to open the purse strings. So in a bizarre kind of way people might lash out more knowing their city was going to get a wind powered desal plant than $1000 in the hand which might be salted away.

The one off payments to pensioners and low income groups will be welcomed but the benefits will surely flow through the economy and be dissipated. The world economy is destined, we are told, for a recession which that will last several years. What is the government going to do for an encore? The proven way of overcoming economic downturns has been investment in infrastructure that will last generations and not frittered on consumer goods.

Mr Eslake correctly criticises doubling FHOG for purchase of existing dwellings. It is unlikely to do anything for economic growth, other than maintain current housing purchase and rental prices. This may of course be intended as a way of cushioning a perceived housing bubble.

On the other hand, surely it is premature to be talking about going into debt in order to maintain positive economic growth. Injection of cash into areas (eg. pensions) where it is likely to be spent in the short term not only improves liquidity, it also improves profits and yield from company tax.

There is no need to assume that it will be necessary for the current budget to go into deficit or that accumulated surpluses will have to be used up to sustain economic growth. Perhaps Mr Eslake would enlighten us on reasons why the banking sector might hope this will happen? Opportunities for growth in bank profits maybe?

What is clear is that the public interest is not always best served by governments which have to pay increasing sums as interest on borrowings rather than as investment on infrastructure. Incurring debt is the very last thing government should resort to.

We are all Keynesians now

Saul,

A balance sheet has two sides. In the GD many people "did" have money but they parked in term deposits, especially importers.

With Banks tightening credit policy and risk assessment, while people/companies did not spend, Bank cash ratios blew-out, on the deposit side. The Australian Bank of Commerce circs 1931 was and exception, and was taken over by the Bank of New South Wales (8/31

I think the government is somewhat restrained by the risk of house prices dropping and is doing it's best to prevent it.
Once the investors see negative returns and negative equity in the market there is a very real risk of the sort of downward spiral experienced in the US and UK.
The last thing they need is for *our* bubble to burst just as the implications of the US debarkle are sweeping the world.
Of course it will burst evenutally.
I'm just saving, hoping employment keeps up and waiting for the panic.