David French | 24/03/2009 11:00:14 AM

This article was published in Capricorn Investment Partners Limited's March 2009 Newsletter

The government brings out the chequebook as growth slows. This response may very well be described as the single largest fiscal policy stimulus in Australian history.

There is a common generalisation in Australian politics that the Liberal party are economic conservatives, believers in small government and averse to debt, while the Labor party prefers to adopt more of a big-spender approach to economic policy.

The Rudd Government has done its bit to live up to this stereotype, unveiling Australia’s largest ever spending package as it seeks to cushion the economy from the worst of the global financial crisis.

The ‘Nation Building and Jobs Plan’ amounts to a projected spend of $42 billion. Key measures include free ceiling insulation for 2.7 million homes; to build or upgrade a building in every Australian school; $900 one-off cash payments to most Australians and $650 million to be spent on local community infrastructure and maintenance on Australian highways.

While some may quibble with the exact proposals under the stimulus package, the package succeeds in its most important goal – getting the money flowing into the community and stimulating economic activity, be it retail, building and construction or other related industries.

Many other governments around the world have taken similar steps. Accepted economic policy is for the government to step in when the private sector is unable or unwilling to maintain the desired level of economic activity.

The government’s balance sheet acts like a shock absorber: expanding during the bad times as it takes on debt and increases spending; and contracting during the good times, when increased tax revenues allow for reductions in both debt and spending.

While no government action will be able to completely immunise the economy from the full impact of slowing global growth, targeted spending initiatives will assist in shortening the length of any downturn or recession.

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