Will the Government’s $10 billion handout help your business? A SmartCompany Q&A

Thump! That sound you can here this morning is the sound of $10.4 billion worth of Federal Government handouts hitting the bank accounts and letter boxes of pensioners and families across Australia.

Thump! That sound you can here this morning is the sound of $10.4 billion worth of Federal Government handouts hitting the bank accounts and letter boxes of pensioners and families across Australia.

The handouts are part of the Government’s efforts to stimulate the economy and prevent Australia sliding into recession. Prime Minister Kevin Rudd has urged families and pensioners to spend the handouts and pump money into the economy, but there are big doubts whether shell-shocked consumers will actually open their wallets.

So will the handouts actually help business? And which sectors will benefit most? Time for a SmartCompany Q&A.

What’s this I hear about free money from the Federal Government? Who is getting the cash?

The handouts are targeted at low-to-middle income earners. Single aged pensioners will get a lump sum of $1400, while pensioner couples will receive $2100. Families that receive the Government’s Family Tax Benefit A will receive $1000 per child, with $3.9 billion in total going to these families.

Right, well I think I miss out on the free money. So how am I going to benefit again?

Well, the Government is hoping that these people will go out and spend up big, thus pumping billions of dollars in the economy and hopefully turning this slowdown around.

Nice theory. Will it work?

Probably not as well as the Government might hope. A number of surveys have shown that households plan to save the bulk of their payments, or spend them on boring things like paying off credit card debt or their mortgage. Last week’s national accounts also showed that most households saved the tax cut they received in July.

Shane Oliver, chief economist as AMP Capital Investors, says the glass-half-full view of the handouts is that had they not been paid, retail spending would take an even bigger hit over Christmas than it will. He particularly expects pensioners – who have less debt than households – will spend up.

“It’s likely to result in a bit of a spurt in the December quarter, but not enough to pull us out of our current malaise and not enough to keep us out of a mild recession,” Oliver says.

What’s wrong with these families? Don’t they know what’s good for the country?

Oliver says the problem is rising unemployment. “The threat of unemployment is so immense at the moment. Even though most of us will keep our job, people are going to remain nervous.”

So until households are sure that the threat of unemployment has subsided, they are likely to keep their wallets shut.

And when will that be?

Probably not until the middle of next year. By then, interest rates are going to be at historic lows (with the official cash rate at or even below 3.5%) and the Government is widely-expected to have launched more fiscal stimulus measures such as tax cuts.

What about in the short term? Will anyone benefit from today’s handouts?

Retailers are likely to be the big winners, particularly with Christmas looming so closely. Indeed, new figures from the Australian National Retail Association indicate that households’ determination to save their payment may well be weakening. The ANRA says the proportion of households planning to put their payment towards their mortgage has fallen from 19% to 11% since October.

Anyone else?

Tourism operators will get something of boost heading into the holiday season, as will those entrepreneurs running restaurants, cafes and hotels. But don’t expect too big a boost. Things are still tough out there.