Oct 8, 2009

Stimulus isn’t money for nothing. Time to wind it back

Calls are mounting for the Federal Government to reduce its wide-ranging fiscal stimulus package as economists continue to upgrade the prospects for the Australian economy.

Adam Schwab — Business director and commentator

Adam Schwab

Business director and commentator

Calls are mounting for the Federal Government to reduce its wide-ranging fiscal stimulus package as economists continue to upgrade the prospects for the Australian economy. The decision by the Reserve Bank to raise interest rates by a quarter of a percent, with another potential raising coming in November added to the contradiction of the Government continuing to spend freely while monetary policy is tightened and economic growth is forecast to hit 4.5 percent by 2011. While the masses have strongly approved of the Federal Government stimulus (only 20% of respondents to a Fairfax/AC Nielson poll wanted the stimulus wound back), that is largely because people tend to like to receive "free money", even if that money isn’t really free -- their children will most likely be paying for it for a long time. This column has been a fervent opponent of much the Federal government’s fiscal spending. Not because the economy isn’t potentially falling in a bigger hole (it quite possibly is), but rather, due to the manner in which the spending has occurred. The Keynesian premise of increasing spending to substitute for falling private demand is not entirely devoid of logic -- however, the use of such discretionary stabilizers depends not only on spending appropriately but also maintaining some sort of fiscal responsibility during preceding boom years. Courtesy of the Howard Government’s spendthrift ways that was not the case. The old parable of Joseph (of Technicolor Dreamcoat fame) advising Pharaoh to stock up during the seven years of plenty and spend during the seven years of famine is primarily dependant on the "stocking up" part. Most Governments prefer to spend during boom years (especially on voting special interest groups like retiring baby boomers) and splurge even more during the bust, resulting in a large debt or debasement of currency. Some of the Federal Government’s fiscal spending has been completely idiotic, whereas other elements have been merely stupid. The boosted first home owner’s grant takes the cake for lunacy -- unless handing taxpayer dollars to wealthy property investors and loading up young first home owners with 90% LVR mortgages is considered wise policy. Had the grant been exclusively aimed towards new properties, while greatly assisting property developers, there would have at least been some merit by stimulating construction. No such benefit is achieved by applying the boost to all properties, rather, the Government simply caused house prices to inflate and buyers to assume greater debts. The wanton $900 stimulus payments, while ostensibly designed to boost discretionary consumer spending, appeared little more than an arbitrary transfer of wealth. That a chunk of the stimulus was pumped into poker machines (gaming companies reported record revenue rises in the month the stimulus payments were made) does little to dispel the notion that votes, rather than rational economic policy, was the underlying motivation for the payments. The Government’s vehicle investment allowance is possibly worse. As witnessed in the US after the recent demise of the "cash for clunkers" policy, when the artificial stimulus was withdrawn, vehicle sales promptly slumped (GM sales dropped by 45% -- almost half -- in the month after the "clunkers" program ended). All a vehicle allowance really does is bring forward future demand and effectively hand money to one sector of the community (car companies and dealers) at the expense of the rest of the community (low and middle income taxpayers). The other beneficiaries of the vehicle investment allowance are business owners who used the allowance to upgrade their vehicle. Crikey knows of several business people who have used the allowance to purchase luxury sports cars for $7000 off the normal price. If Australian voters actually realized that their PAYG tax payments were going towards a discount for someone’s new Mercedes CLK350, perhaps they would not be such ardent supporters of the Government’s economic genius. The home insulation spending, while ostensibly good in theory (making Australian homes more energy efficient), like many government initiatives, was deeply flawed in practice. Yesterday the Financial Review reported that “about 100 companies approved to install ceiling insulation under the Government’s $2.7 billion rebate program have been dumped…complaints of dodgy behaviour from installers -- including fraudulent invoicing, overcharging and shonky workmanship -- forced the Government in August to write to all home owners who had received the rebate to check if there were any problems. More than 1200 complaints have been received.” Stimulus spending may boost GDP but does not achieve the ultimate aim of economic management -- higher overall living standards. If the Government were to spend money on real nation building or desperately needed infrastructure projects (much of Sydney and Melbourne’s train system is in dire need of improvement, for example), while it would be of little immediate benefit to GDP (or the Government’s popularity), it may actually be a wise use of taxpayers monies. Unlike handing cash to property vendors or luxury car buyers.

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8 thoughts on “Stimulus isn’t money for nothing. Time to wind it back

  1. BH

    Whinge, whinge!! Many of us appreciated that $900. If you received it and didn’t need it then pass it on to someone who does.

    Mmany of us have paid off previous recessions including Howard’s in the early 80s. We didn’t whinge – we just got on with it and paid it off.

    The repayment of this small deficit is nothing compared to the misery if more people had been thrown out of work. Quick fixes needed, quick fixes given by the Govt.

    Economists have been wrong on so many occasions – why should you be right now.

  2. John Bennetts

    How about supporting your opinion re government debt with a few statistical comparisons?

    How does Australia’s GFC response compare per capita with other nations?
    How much Government debt is Australia carrying per capita and as a percentage of GDP compared to other nations?
    How do our real and actual interest rates compare with other nations?
    How are our banks going wrt other nations?
    How are our GDP growth/deflation indices compare?
    How many of our private citizens not meeting loan repayments for houses? Credit cards?… Compare.
    How are our employment rends going wrt other nations? Wrt previous downturns?

    Perhaps the elephant in the room… How big is Aussie private foreign debt when compared to other nations?

    My gut feeling is that on many of the above measures, Australia is doing quite well at a government level and that private foreign debt is a continuing problem.

    And on the subject of fixing public transport in capital cities, especially Sydney. Why is it necessary for NSW to sell its sole profitable country-based public asset, the power industry, at bargain basement prices to support the poorly planned and serviced Sydneysiders? If Sydney, after bleeding the remainder of the state dry year after year, needs money, why not sell off Sydney Water? The locals could consider the relative merits of privately owned water supply versus subsidised capital works for transport. Where I live, public transport is just a wish, apart from the school bus. We do have taxis, but very unreliable and not exactly cheap.

    Back on topic, I will not be persuaded by an article which is long on opinion and almost devoid of statistical basis.

  3. Adam Dunsford

    All right, I don’t disagree on the examples you gave except the $900 (which benefited people/small businesses across the board not just pokey machines) and I’m glad you avoided the nasty clanger of attacking the school infrastructure spending (if you had that big a problem with this type of spending then why didn’t you say so when Howard gave God knows how much to the private schools).

    I think you could have probably said it better but I agree in principal in what you said.

    Oh and I don’t agree with the home loaners grant for new properties. I don’t agree with the urban sprawl argument, it costs too much in infrastructure expenditure.

  4. Scott

    Surely the proof is in the pudding here. Unemployment down, GDP up slightly. Not bad

    The major criticism of Government spending in the economy is that it takes so long to make an impact on the economy. The crisis “might” be over and done with by the time the money actually starts being spent so the spending just becomes inflationary and tightening monetary policy is the end result.

    But the Rudd government went with the transfer payments first. The effectiveness of these payments is their speed. It was a way they could ramp up consumer spending immediately so that aggregate demand would be maintained until the Government investment in infrastructure could kick in. Not a bad strategy really, and it’s worked.

    I think the Government has been rather clever about their targeting of spending as well. Consumer Spending is a key economic indicator. Sale of cars and equipment is a measure used to track business Investment. House construction approvals are used as a guide as well. All these indicators maintained their levels due to the Government’s stimulous packages and tax cuts. The level of confidence given to punters and business in having these indicators holding steady cannot be underestimated.

    You can argue that the spending might be too big (I disagree..better to overstimulate fiscally and have rising interest rates from 3%, than have interest rates at 0% and try to stimulate out of a slump. Japan anyone?) However, once the economy recovers, the deficit will start being bought under control due to increased tax receipts and decreased unemployment benefits. It’s already happening with our debt levels not as high as forecasted. Remember the power of the automatic stabilisers and the multiplier effect.

  5. ..fred

    the real benefit behind the ‘stock up during the seven years of plenty and spend during the seven years of famine’ can only be gained through seven years of planning
    you have to be ready to start spending as soon as that famine starts, and, regardless of how obvious the bust was in hindsight, governments simply didn’t / refused to see it coming

    it takes many years for governments to plan big infrastructure projects and the payback to the community doesn’t start until well into the construction stage
    the reason why governments like big infrastructure projects is because government spending requires lots of checks and balances, and checks and balances cost lots of money… small projects are difficult because these checks are not cost effective and hence allow dodgy operators to line their pockets

    it seems to me, the government just tried to get money flowing, as much a promise to encourage business confidence as anything

    the real test of the government is not how well they manage a quick spend
    it is how well they plan for the next 7 years of plenty and 7 years of famine

  6. james mcdonald

    Fred: exactly right. Rudd talked about pumping money into “shovel-ready” infrastructure projects, of which there were almost none. Not for lack of a growing pile of detailed proposals and cost-benefit studies over the last decade! All dustbinned when they didn’t scratch some political itch within weeks of being released. All forgotten when Rudd asked for “shovel-ready” projects.

    Some others commenting show a very limited imagination.

    BH: Did you think getting $900 was like winning scratchies? Where do you think the money comes from?

    John Bennetts: You’re asking for a comparison to countries which failed far more badly than Australia did. The mainly west European countries of the OECD we so love to idolise may have a lot to offer in ways of dealing with social problems such as crime and healthcare, but economically many of them are plagued by more populism and stupidity in politics than we are. In the crisis, most of them have really fallen over rather than just stumbled as Australia did, and they are examples we should be running away from as fast as we can (with the exception of forward-looking Norway, which never assumed their oil boom would last).

    Adam Dunsford: You want to cap the number of residential properties in Australia, a bit like Noosa Council? Great idea–for those who own properties before development stops. And please explain how Glenn Stevens is wrong when he warns about the risk of rising prices versus rising stock of homes.

    Scott: Your argument is logical and sound. But I disagree with you. Businesses should have been allowed to go broke in what would have been a spring cleanout and tightening-up of the economy. People should have been allowed to lose their jobs, unemployment benefits should have been significantly boosted (doubled or trebled) to allow them to keep maintaining the necessities for their families. People could have gone to TAFE or Uni to do the vocational training they’ve wanted to do for years but didn’t have the time and couldn’t support their families on welfare.

    Summary: we wasted a good crisis.

  7. John Bennetts

    Re James McD: I don’t disagree generally with the points you make. However, I drew attention to the author that completely failed to offer any facts or comparisons to support his allegations. By all means be careful wghen comparing statistics from various countries, however it is too trite to make an affirmation that is essentially ” I think that the satimulus spending should be wound back, because that is what I happen to think, so there!”

    Adam has been around for long enough to know that he would not be swayed by this depth of argument and that it is a bit of an insult to the intelligence of his audience to not make his case better.

    If Norway is an apropriate comparison country, so be it. Let’s at least try to agree the facts before we seek to push our conclusions.

    For all I know, Adam may be absoultely, rationally correct – it just doesn’t come through in a persuasive way.

  8. james mcdonald

    John, fair enough but I think it’s not so much a case of “what do the numbers tell us” or “how do our numbers compare in the OECD” so much as:

    What is the stimulus trying to achieve now that growth is forecast at 4.5% in 2011, RBA is retreating from emergency mode, and a very expensive FHOG has not even boosted house construction? (When Glen Stevens warned about what might happen, he was actually referring very diplomatically to what had already happened.)

    If Adam Dunsford’s comment above is a typical voter opinion, then it’s very hard to say where the emergency blood transfusion stops and political pork-barrelling begins.

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