Just when it looked like Kevin Rudd and Wayne Swan were reasonably sensible managers and that the Liberal party had lost the mantle of safe-keepers of economic rationalism, the Labor party comes up with its $10 billion arbitrary wealth transfer, otherwise known as the “stimulus package”.

From an economic perspective the package is myopic, ill-considered and randomly punishes isolated pockets of society. From a political perspective, it will probably be a winner, appealing to “working families” which occupy the marginal rust-belt sets in eastern Melbourne and western Sydney.

The foolishness of the stimulus lies not only in its unfairness, but from the missed opportunity to use the crisis to underpin real and lasting economic growth. The prevailing economic crisis gave Rudd and Wayne Swan the ability to pursue a path of diligence and foresight, to invest in renewable energy or conduct nation-building infrastructure. But instead of a Snowy Mountains Hydroelectricity Scheme, Australians have been dealt an enlarged home-owners grant and random cash hand-outs to powerful voting blocs.

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It is usually forgotten that when the Government makes a grant to one part of society, be it pensioners or families, it is not so much a “grant” but a direct transfer of wealth from one group to another. The government does not “generate” money, it collects it from taxpayers. To pay a grant, the Government effectively needs to take it from someone (or print the money, which has the similar effect of just reducing the value of everyone’s assets).

The most misguided policy announced yesterday was the expansion of the First Home Owners grant. The grant, one of John Howard’s greatest follies, should have been killed off years ago — instead, Labor are actually increasing it to $14,000 (or $21,000 for new homes).

The most obvious problem with the grant is that it doesn’t actually benefit home buyers. Most recipients of the grant will be purchasing lower-end properties, probably in competition with each other. Giving them extra money will have the effect of “bidding up” the property up by the value of the grant. It is inflation in its purest form. That’s not to say no-one benefits from the grant. Those selling their property will receive an extra $14,000. Moreover, by increasing the grant to $21,000 for new properties the Government is in effect transferring cash from taxpayers to property developers. (Unsurprisingly, property developers have rushed to applaud Rudd’s move.)

What’s more, not only does the grant transfer wealth from one sector of the community (everyone) to another (property vendors), but the grant actually disadvantages those which it is ostensibly trying to benefit — the first home buyers themselves. A higher property price (courtesy of the grant) means that purchasers pay additional stamp duty and initial finance costs. Even more misguided is the fact that renters, who, even with the benefit of the grant would be unable to purchase a property, are required to pay taxation which is effectively transferred to those selling their property.

The grant should be more accurately called the “Home Sellers Grant”.

The home grant is not the only example of Rudd’s economic myopia. The stimulus also involves a one off wealth transfer to parents, pensioners and carers.

While the pensioner and carer payments are defensible on compassionate grounds, the transfer of even more cash from the childless parents is little more than political bribery towards Rudd’s favourite constituency — working families. Those without children are already funding those with children through the health and education system and the “baby bonus”. Like the first-home buyers grant, this policy involves a direct transfer of wealth, away from working twenty something’s who have not yet had children, or couples simply unable to conceive, or those in homos-xual relationships or even couples whose children have passed away. This is the sheer absurdity in favouring one random group over all others.

Pity the working couple on low income, who cannot have children and who are renting a property — they are paying taxes which are handed to those who are selling an investment property, or families who with three kids and income of $160,000 per year want to take a trip to Disneyland or upgrade the plasma.

Some commentators have claimed that the package will stimulate economic growth. That is a bit like saying you will run faster if you inject cocaine. A short burst of hyperactivity will result, followed by an even bigger crash.

The experience shown in the United States, through Greenspan’s negative real interest rates to Bush’s tax cuts are that improperly targeted stimulus actually causes more harm than it does good. The impending US recession shows that politically expedient decisions are rarely economically prudent. Kevin Rudd may well have earned a few votes, but his inequitable and ill-considered stimulus package will significantly weaken Labor’s claims of economic credibility.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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