The feeling among most economists and voters is that the Rudd Government’s stimulus has been a roaring success, rescuing the economy from certain malaise and deep recession. In one sense, the stimulus has worked — Australia has been one of the few major economies to avoid recession (at least in a technical sense). However, there is a very big difference between avoiding a recession and successful economic policy.

AAP yesterday reported that “motor vehicle sales data showed a seasonally adjusted 6.9% fall in July, the worst monthly fall in eight years”. With Westpac senior economist Matthew Hassan [stating] the data is a critical bellwether of consumer demand, usually falling early in a downturn as consumers worry about losing their job.

There is a simple explanation for the record drop in vehicle demand — that is the tax break offered to business for purchasing a new vehicle before June 30 simply caused demand to be pushed forward. No fresh investment was made, rather, people who would have bought a vehicle in July or November or next year purchased it before June 30.

An insider from a major Australian vehicle manufacturer told Crikey that orders for June were well above expectations, with businesses buying multiple vehicles to take advantage of the lucrative tax breaks on offer. In some cases, business owners were able to get upwards of $15,000 off the purchase of a new vehicle (when the tax investment allowance and GST refunds are considered). No matter whether the vehicle was a ute or a luxury European sports coupe.

Rarely is a government’s decision proven so foolhardy, so quickly. While economic growth ostensibly strengthened as a result of the various stimulus measures, that growth came at a steep cost — specifically, the repayment of borrowings for decades to come. Measures such as the $900 stimulus payment (which led to a record month for pokies operator Tabcorp) and the vehicle allowance (which gave business owners a tidy discount on their new Mercedes SLK) was paid for by taxpayers. And now with the stimulus over, car sales have promptly plummeted by a record amount. It appears that the Rudd Government’s stimulus is reminiscent of a school student who receives an extension on their project due — the project still has to be finished, just a little bit later.

The Government’s stimulus measures (and the measures taken by the Bush and Obama administrations in the United States) have delayed the inevitable and propped up unsustainable businesses with taxpayers’ money (and borrowed funds). No better example is that of the ham-fisted vehicle allowance, which placed taxpayer monies in the pockets of car dealers and compelled businesses to simply bring forward their capital investment in what is usually a non-income producing asset.

Peter Fray

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