The Government’s fiscal stimulus impact has peaked and will rapidly decline later this year, sufficient that it will subtract from GDP growth next year, Ken Henry told the Senate Economics Committee at his long-awaited appearance this morning.

However, the immediate removal of the stimulus package would reduce GDP by a further 1.5% in 2010.

Addressing a hearing of the Senate Economics committee’s inquiry into the Government’s stimulus packages, Henry said that the stimulus impact had peaked in the June 2009 quarter, would make “a substantial contribution” in the September quarter, make a “much smaller” impact in the December quarter, and actually have a negative impact in the March 2010 because of the relative withdrawal of Government spending.

The removal of the stimulus now would cost 100,000 jobs more than likely job losses over 2010, Henry said. Even with the full stimulus, growth will remain below trend.

Henry acknowledged that the economy was performing better than forecast, even taking into account the stimulus provided by the Government, the Reserve Bank and a low exchange rate in 2008 and early 2009. However, Treasury view remains that unemployment had not yet peaked, and Henry in effect challenged opponents of stimulus spending to argue that 7% unemployment — an IMF figure Henry believed was a reasonable guess at to the unemployment peak — was too low.

Peter Fray

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