Are we overstimulated?
The news yesterday that the headline rate of GDP rose by 0.9% in the December quarter and 2.7% in annual terms has stirred the nation’s economic dries into action with loud calls for the immediate garroting of government spending. But it’s an election year, and the chance of that happening in real terms is receding by the day — while spending on pink batts has dwindled, the media set pieces and spending announcements, like yesterday’s $15 billion health reform package, will be repeated again and again as the poll gets closer.
Crikey asked a group of leading economic hard heads whether it was finally time to wind back the stimulus in light of yesterday’s growth number and the RBA’s decision on Tuesday to hike interest rates. If, as the nation’s economic overlord, you had total control over the purse strings, what would you do?
John Quiggin, The University of Queensland: The government’s got the balance pretty much right in terms of the macro settings; it seems petty to suggest that in one of the few countries that’s escaped the economic crisis we’ve done too much steering. Looking at the longer-term picture, the real issue is the government needs to bite the bullet and raise more tax revenue. The idea of giving up complete control to the private sector is totally discredited in the wake of the global financial crisis. We really need to be thinking about a much more substantial role for government in the future.
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Scott Haslem, Chief Economist, UBS: I’m definitely not in the camp that says the government should aggressively wind back the fiscal stimulus. On that basis I’d give the government a big tick in managing the economy through the economic downturn — what’s most important is that they commit immediately to banking all of the gross dividend in the fiscal accounts. It’s not necessarily about radically altering the settings — we’re desperately short of infrastructure — but the government must bank the dividend and return the budget to surplus. It’s tough to calibrate the balance between monetary and fiscal stimulus but the government has done a reasonable job.
Stephen Walters, Chief Economist, JP Morgan: Yes were are overstimulated — we’ve got an accomodationist interest rate setting; the RBA has been open in making that claim. But the main problem is on the fiscal side: while the government’s tinkered at the margins by winding back the cash grants, the first home owners grant and spending on insulation, there’s still a lot of work to be done in the areas of school building, for example. But, of course there’s an election looming and history would suggest that governments are hesitant to hack spending during a campaign.
If I was a politician I’d be inclined to not tinker too much in order to get re-elected. If I was a neutral observer, and concerned about the longer term, I’d be much more inclined to take a hard look at whether the stimulus is still necessary.
Adam Carr, Senior Economist, ICAP: The big temptation for some people will be to dismiss yesterday’s growth numbers as a one-off, as a freak result driven by fiscal stimulus measures. Public spending was certainly very strong, but as I’ve argued numerous times this is the wrong way to think about things — private demand was still up over 1%! For a start, the public investment and consumption numbers aren’t likely to moderate too much over the next two quarters — a little bit, sure, but not a lot as there is still much nation building infrastructure to come. Moreover, the stimulus to the private sector from the government’s tax bonus isn’t as great as people believe.
The absence of private investment will prove short-lived. People’s minds should be focussed on what, if anything, will offset it? The answer is probably not a lot. Look at the components of expenditure — we know public investment is only going to drop back a bit, consumption not a bit (strong jobs growth and stimulatory rate settings) and with business investment intentions being revised up, I don’t think we can expect much of a sustained drop in machinery and equipment either.
GDP is only going to accelerate from here. The RBA knows this, which is why they upped the ante on rates.