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.