The Stimulus Package I: Economist Response
Remember how, about five minutes ago, we were all debating whether Kevin Rudd had made fatal error in promising tax cuts in an election campaign he was always going to win? Inflation was running out of control, the RBA was madly hiking the cash rate, and it was apparent with hindsight that Kevin Rudd would have won the election just as easily by making no campaign promises at all. Now Australia was going to get a consumer stimulus via tax cuts and mortgage rates were under threat of entering double figures.
Rudd was forced to reluctantly concede that a promise was a promise, and he was not going to set the tone of his new prime ministership from Day One by reneging. His predecessor turned that into an art form, which is one substantial reason why he became the predecessor. But at the time, economists would have loved for Rudd to renege on tax cuts on a justifiable argument they were now a dangerous policy in a new world of ever-rising commodity prices.
How quickly life has changed. Today's reports shows there is not one mainstream economist who believes the fiscal stimulus package announced by the government yesterday was not only necessary but welcome. Yet as Westpac's Bill Evans suggests, this is "a larger stimulus package than any in recent history".
There's no need to discuss why a stimulus package is needed. The stock market is the leading indicator of economic growth and its 40% fall says it all. It was John Maynard Keynes who suggested a government must spend its way out of recession but since memories of the Great Depression and and the big recession of the seventies have faded away Keynesians have become somewhat of an anachronism in economist circles. One economist speaking on ABC radio this week suggested he had been waiting thirty years for the Australian government to see the light, and it was a hot time in the old town last night as Keynesians everywhere emerged from their bolt-holes to celebrate long and hard.
The details of the stimulus package are well-documented. For a total cost of $10.4bn the government will provide one-off lump sum payments to pensioners, carers, and low and middle income families. Planned infrastructure spending will be brought forward, money will be spent on new training places and first home buyers will receive increased grants. The whole package is worth 0.95% of GDP.
The home loan grants will be discussed in Part II.
Probably the best thing an Australian can take from this package, apart from the cash, is the fact that of all the developed world economies facing economic crisis, Australia is one economy that "can". We have a fiscal surplus of great magnitude, and if ever there was justification for pulling money out from under the mattress it is now. The US, by comparison, is still throwing around ideas of another stimulus package of its own (it already provided one in June), but the US is running a deficit. It would have to come from yet more borrowed money. Nevertheless, it is now an election issue, and someone's potentially going to find themselves in the same tough position Kevin '07 did when the ramifications of his election promises were realised in early 2008.
The tax cuts past and future now form part of the overall welcome relief package. Thank God for the surplus eh? Of course, the Opposition is taking all the credit for having put all the money under the mattress in the first place. Pity about the infrastructure, hospitals, schools and transport systems that rotted away in the meantime.
One might ask whether the one-off payments are best spent on the lowest of income earners when the whole point of the package is to stimulate the economy. What stimulus can the poor provide? But the fact is the people most likely to take the money and spend it - put it straight into the economy - are those who live hand to mouth. Those in higher income brackets are more likely to use the money to pay down debt - laudable, but of no help to economic growth.
Westpac has looked back at previous tax cuts and one-off payment increases to pensioners et al, and estimated that this new package will provide a boost to consumer spending that should add 0.6% to December quarter GDP growth.
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