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.

I have heard that the business community has been pushing both parties for this handout so they can move the christmas stock they have purchased and avoid the need for a series of mysterious warehouse fires in january. They will be more circumspect next christmas, and only purchase depression level stocks. So this one should signal the end of the party for all, and the start of a long period of austerity. The younger generation have never known a downturn, and now they are going to get one in spades.

We should also look at the positives.This will knock the BS out of Govt,the legal system ,insurance companies,banks and greedy corporates.It is time to look at the true wealth in our society.It is our people and not just the insecure excesses of a minority who want to subjugate the masses just to feel important.

The free market is the way to go,but internationally we do not have rules that are fair.Would we play the world game of football as we play the globalised game of economics?Not likely.The level playing field is a delusion perpetrated by those who want the maximum profits for the least amount of effort.Coles and Wollies in Aust presently practise preditory pricing,both the Rudd and the Howard Govts have failed to address the laws which Canada has enacted.We have the highest food inflation in the Western World yet both our major parties are toady boys to the Corporates.We call this Democracy!

Ajay,

We have been drifting away from the Free Market for decades towards State Capitalism opposed to Market Capitalism. Governments working for the Corporates is at the other pole to having Unions run the place. Ordinary people are what really matters in a true democracy, not the powerful.

It does not take much imagination to see 600 oliarchs around the World pulling the strings of government, not aways in the best interests of the other 6 billion inhabitants.

"An asset can be illiquid for several reasons, including genuine uncertainty about its underlying value. If private institutions took on additional liquidity risk, confident that the central bank would always help them out if liquidity conditions tightened, they could easily end up taking on more of these other risks as well. This would leave both them and the central bank in an awkward position at some future time should things take a turn for the worse. And for the central bank to act as a market‑maker of last resort in markets for more exotic instruments would be a very big step, potentially with many unforeseeable consequences." - Glen Stevens (RBA) 4/2008

I never thought I would side with Turnbull against Rudd, but the idea of the Government guaranteeing all lenders, good & bad, is a dangerous step. This silly idea promotes the possibility of exploitation, without penalty, foolhardiness and risk. The sharks will milk million dollar salaries and when all goes bad cry help to the Government.

The Sir Eric Neal Board, at Westpac, c. 1990-1992 were poor business managers ignoring the risks of lending to high profile Western Australian entrepreneurs against its own credit risk and assessment policy. Look what happened there, and it took years to recover. The government giving a guarentee to every little tinpot lender is mad