Feb. 13 (Bloomberg) -- Australian Prime Minister Kevin Rudd won parliamentary approval for a A$42 billion ($28 billion) stimulus plan at the second try, allowing for cash handouts and public works spending to prevent the first recession in 18 years.

The package includes A$12.7 billion in payments to low and middle income earners and A$28.8 billion for schools, bicycle paths and environmental projects. The package is equivalent to 1.3 percent of gross domestic product this fiscal year and 2 percent next, according to Treasury forecasts released last week.

Rudd, 51, was forced to increase spending on the environment and reduce the cash handouts to win support today for the bills, which he says will prevent the economy from contracting next year. The first ballot in the Senate yesterday was defeated by one vote.

“This will unlock infrastructure spending, incentives for business to invest in new plants and equipment and add a stimulus to household incomes,” Australian Chamber of Commerce and Industry general manager Peter Anderson said in a statement. “Today’s decision is the right one for these extraordinary times.”

The government was forced to alter its original package to gain support from the upper house, where it needed seven opposition or minor party votes to ensure passage. Independent Senator Nick Xenophon today reversed his no vote after the government promised more money for his home state.

Able to Compromise

“We have been able to reach a compromise,” Xenophon told the Senate today after obtaining A$900 million in spending for the Murray-Darling river in South Australia. “I’m willing to support the government’s economic stimulus package.”

The Liberal-National coalition opposed the bills, saying the proposed cash payments were too large. The five Australian Greens Senators, Family First Senator Steve Fielding and Xenophon joined the government to approve the amended bills today.

The government’s package will create a A$22.5 billion deficit in the year ending June 30, the first shortfall in seven years and the biggest as a percentage of GDP since 1996.

The Reserve Bank of Australia last week cut the benchmark interest rate to 3.25 percent, the lowest since 1964, and the government since September has announced almost $88 billion of fiscal stimulus to prevent the economy entering its first recession since 1991.

Dollar Rises

The Australian dollar rose to 65.63 U.S. cents at 12:30 p.m. in Sydney from 65.57 before the vote. Retail stocks led a gauge of consumer discretionary stocks on the benchmark S&P/ASX 200 index to a 1.8 percent gain, the biggest among ten industry groups. Harvey Norman Holdings Ltd., Australia’s biggest furniture and electronics retailer, rose 3.4 percent and David Jones Ltd., the nation’s second-biggest department store chain, climbed 3.5 percent.

Australia’s economy grew 0.1 percent in the third quarter from a month earlier, the weakest pace in eight years. It expanded 1.9 percent from a year earlier.

By comparison, Japan’s economy contracted 0.5 percent in the same period and the U.S. shrank 0.2 percent in the fourth quarter from a year earlier.

The Australian economy would contract in 2009-10 without the stimulus, Treasury forecasts showed last week. The spending will help gross domestic product grow 1 percent this fiscal year and 0.75 in the year ending June 30, 2010, Treasury said.

Investment bank Macquarie Group Ltd. and mining operator BHP Billiton Ltd. are among companies firing workers, while job advertisements slumped for a ninth month in January, according to a report this week.

Jobs Added

Australian employers added 1,200 jobs in January and the unemployment rate rose to 4.8 percent from 4.5 percent as more people looked for work, the Australian Bureau of Statistics said today.

The government reduced its one-off payments to people earning up to A$100,000 by A$50 to win Senate support.

Japan’s 10 trillion yen ($111 billion) economic package is worth about 2 percent of its GDP and the U.S.’s $819 billion stimulus is equivalent to around 6 percent of the world’s biggest economy.

“There are some signs of hope,” International Monetary Fund Managing Director Dominique Strauss-Kahn said on Feb. 12, according to a statement on the IMF Web site. “Large stimulus packages have been implemented, especially in the United States.”

Obama Concessions

President Barack Obama had to offer concessions to U.S. lawmakers to pass his stimulus plan. The bill is headed for passage in Congress by the end of this week after lawmakers agreed on a $789 billion plan that aims to stem the recession through a mix of government spending and tax cuts.

Voter support for Rudd’s Labor government increased after the package was unveiled last week, according to a Newspoll published in the Australian newspaper this week.

Support for Labor rose four percentage points to 58 percent, according to a poll of 1,133 people. The poll had a margin of error of plus or minus three percentage points.

To contact the reporter on this story: Gemma Daley in Canberra at gdaley@bloomberg.net

Last Updated: February 13, 2009 02:29 EST