Is the stimulus package actually any good? Are we getting the most stimulation for our borrowing?
While the size and structure of the package differs from last October’s first effort, in essence the Government has targeted two key sectors both times: retail and construction. The cash handouts, aimed at those who are most likely to spend them, are aimed at the retail sector. Yesterday’s December retail figures appear to demonstrate that giving cash to low-income earners ends up being spent.
The Government also boosted the first home owners grant last time around and this time has gone for a massive direct investment in both housing and school infrastructure construction, with a mammoth insulation instalment program thrown in as well.
Other alternatives are less targeted. Tax cuts would filter out more slowly into the economy and, going to high, middle and low income earners, would be less likely to go directly into retail. Business tax cuts, intended to improve cash flow and reduce the pressure to cut staff, would work at a thinner level across the entire economy — maybe too thin, given the magnitude of the downturn hitting us. Investment in economic infrastructure is supposed to generate greater returns than social infrastructure — an ABN Amro analyst castigates the Government in the AFR today on that — but that ignores that the Government is already ramping up major project infrastructure investment through Infrastructure Australia, and doing it properly by independently assessing projects on their merits rather than whether they’re “shovel-ready”.
Investment in renewable energy has excellent long-term economic and environmental benefits but it will take an extended period to ramp up and does not have large employment potential just yet. There have also been complaints from the health sector about the lack of investment in hospitals, but it’s only a couple of months since the Commonwealth handed over a significant boost in ongoing funding for health at COAG, as well another billion in training funding.
There are plenty of worthy uses for this flood of money. There’s a whole debate to be had about what investment would yield the best long-term economic return — and whether even the biggest return would be less than avoiding debt altogether. But the issue is not the broader economic effectiveness of the investment, rather just how effective it will be in the specific context of the Government’s intention for it — to save jobs over the next two years.
And that’s why the Government has concentrated on retail and construction. These are two of the biggest sectors in the economy and two of the most labour-intensive. Construction employs just under a million Australians and directly contributes about 6% of GDP. Retail employs over 1.5m people and generates 5-6% of GDP, with an extra 440,000 employees in wholesale trade and another 515,000 in hospitality, another beneficiary of the cash splash. Only manufacturing and property services employ more people.
So in effect, the Government is cluster-bombing two of the biggest-employing sectors of the economy with cash, rather than diffusing the effect by spreading the money more widely. Construction and retail also have strong multiplier effects. Multipliers are notoriously subjective, and most sectoral representatives will explain just how huge the multiplied benefits of investment in their areas actually are compared to other sectors — claims that should always be viewed with suspicion. The Housing Industry Association estimates, using ABS data, that an extra million dollars of construction generates seven direct jobs, four jobs in building material production and another 2 in supplier industries, and has an overall multiplier effect of 1.87.
The National Retail Association claims retail has the second-highest a multiplier in the economy, of 2.2. The ABS describes the construction industry as “one of the driving areas in the economy, having a significant contribution to GDP and a multiplier effect on the activity in other industries” and there’s also ABS data that an extra million dollars of retail output generates 16 direct jobs 5 indirect jobs and a further 8 in related consumption.
If the Government’s goal is to achieve the biggest splash for the billions it is throwing into the economy, then keeping it targeted, and targeting it at the biggest-employing sectors with substantial multiplier effects maximises its chances of generating and sustaining jobs.
But along with every other developed country, we’re engaged in a massive economic experiment in how boost to induce economic growth. Other countries have gone for different combinations of tax cuts and infrastructure investment. Between economists who’ve lost their bearings in the crisis, the demands of individual sectors for assistance and politicians with an eye for electoral advantage, anyone who claims certainty about the outcome of the experiment is fooling themselves. At least the authors of the next generation of economics textbooks will do all right.