There was talk yesterday that the Government wouldn’t actually mind a flat or even a negative GDP number, in order to take the wind out of the sails of those advocating a winding back of the stimulus, and the Reserve Bank board, which seems to be champing at the bit to start reversing its emergency interest rate settings.

Meantime economists were rapidly recalibrating their estimations in the wake of yesterday’s balance of payments figures. 0.7% became 0.3%. We’d all forgotten a similar downward revision of expectations happened on the eve of the release of the March quarter figures and everyone had been made to look a fool.

So, suddenly, 0.6% is gale-force economic growth — although the previous quarter’s figure was revised from 0.4% to an even more anaemic 0.3%, and the Government has a growing problem with the success of its stimulus. The Opposition, having turned on a dime from claiming the stimulus had no effect to having too much effect, can prosecute its case for reversing the stimulus with renewed vigour.

So even when we have the best-performing economy in the developed world the Government can’t win. Oh well.

But before the wind-back-the-stimulus debate gets too wound up, notice that most of the 0.6% is derived from the stimulus package. The biggest contributors were new machinery and equipment — the Government’s 30% tax deduction on any new assets valued at over $10,000 ended on 30 June — and household consumption from the cash splash (the June quarter was the point of greatest impact from the cash component of the stimulus).

After the March quarter figures, anti-Labor commentators like Michael Stutchbury tried to argue that the modest growth was a consequence of exports only, ignoring the fact that the stimulus packages had prevented domestic demand from collapsing the same way it had in the US, the UK and other developed economies. Today’s figures blow the Stutchbury argument clean out of the water, with exports a trivial contributor to the overall growth figure — although like the Coalition, Stutchbury has now switched to urging that the stimulus has been too successful and needs to be wound back.

The Government’s primary goal with its stimulus package has been to prop up unemployment. The evidence keeps mounting that it has been highly successful in doing that, but it is the unemployment numbers that will preoccupy the Government more than today’s data. In any event, from its point of view the stimulus debate is nearly over. “The cash stimulus has its maximum impact in the June quarter,” Wayne Swan said yesterday. “The direct investment stimulus — which is 70% in total of stimulus — has its maximum impact in the September quarter. And from then the stimulus is gradually withdrawn.”

That is, even a sudden reversal of stimulus spending now will only cut the tail off; the bulk of it is rolling out right at the moment. The goal for the Government should now be to use its better-than-forecast fiscal position as a springboard for a more concerted attack on the budget deficit than it could have previously considered. That’s why the 2010 Budget will be critical. It won’t be the opportunity for the usual pre-election handouts but quite the reverse: it will be an opportunity to confirm Labor’s reputation for economic management by cutting back on spending and demonstrating it is capable of fiscal discipline. It was a card Rudd brilliantly played in the last days of the 2007 election campaign and one he’d be happy to play again.

The Government has a temporary problem with the success of its stimulus, but it’s a problem to be infinitely preferred to the opposite one, and it will enable it try for a repeat of the claim that was so important to Rudd’s success: I’m an economic conservative.

Peter Fray

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