KEY POINTS:
When Prime Minister Kevin Rudd gave six million Australians $12 billion in pension and family benefit bonuses last week he urged them to go out and spend it. Our Government has not been quite so plaintive but there is no doubt it has the same desire. As consumers
we hold the recession's cure in our hands.
Spending is not normally a social duty. For much of the past prosperous decade we have been scolded for spending too much, particularly on credit. We did this, apparently, because we saw our house values rising wildly and we suddenly felt inordinately rich. To the extent that was so, the property slump since last year has put paid to it. Our wisest course was, and remains, to clear debt.
But house prices were not the only source of additional wealth during the boom. Wages rose strongly in a labour market short of workers as well as skills. Good wage growth continued into this year as the country entered a mild recession that we could count as over by now were it not for global events of the past few months.
By happy chance household finances were further boosted by the first round of tax cuts delivered by the previous Government in October, just as the Wall St crisis was beginning to unnerve economies everywhere. The Treasury calculates that the tax relief and additional spending in the Budget for this year amounts to a stimulus that is proportionately as large as any given by Governments anywhere.
Yet banking and business confidence remain stunned. Credit is short, companies are trimming their costs, suspending any contemplated expansion, cutting staff. It's the last step that hits home, and probably hits consumption hardest. People do not spend freely when they fear for their jobs.
Yet the less they spend the greater the risk may be to their jobs. Business starts a vicious spiral with lay-offs and consumers continue it when they take fright. There is no point saving money in a recession. Prices are low, builders, electricians and the like are available again. There is no better time for households to stock up, do repairs and extensions, afford some luxuries.
If households do not, the Government will. Parties in the recent election campaign were throwing caution to the winds. From somewhere Auckland was offered an inner-city underground rail link. And why not? If the object is to provide immediate employment, costs are no longer calculated against likely use. Consumers generally are not that rash. They buy what they mean to use.
The new Government has put its hope in consumers with another wave of tax cuts legislated to take effect in April. Further cuts are due in April of each of the two following years. The programme will represent a substantial transfer of wealth from the public sector to individuals, households and companies and makes private decisions to spend or save even more crucial to the country's future.
Spending in these circumstances is the more socially responsible course. The economy needs to be revitalised from the streets. Every purchase rings loudly in the ears of fearful shops and their suppliers, helping to offset the doleful predictions they read and hear from supposed seers.
Pessimism is self-supporting in this climate. It will continue until people are simply sick of the same tune, or until companies notice their cash registers are still ringing.
Certainly there is not as much wealth in any economy now as there was a year or two ago, but much of that was inflated asset wealth. The money in our pockets now is more reliable. Pass it around.
Spend generously for Christmas and help generate a happy new year.