I have very mixed views on the Australian Government's stimulus package. In a post this morning, Keeping a sense of perspective, I suggested that the Rudd Government should not rush into an economic stimulus package. There I said:
Managing the real economy is a matter for sensible fiscal and monetary policy. Yet here the rhetoric of at least Australia's leaders is still dominated by the financial crisis - we must avoid global melt-down.
Please, Mr Rudd, take a deep breath. Yes, we need to take action to reduce the effects of economic downturn. But we also need time to think the best ways through.
Later that day the Government announced its economic stimulus package. I have summarised it here.
I have complained before about some elements of Mr Rudd's style. See, for example, Slow down Mr Rudd, for all our sakes, slow down. His tendency to rush, his focus on activity, can combine to create bad results.
I generally supported the Government's approach to bank guarantees because this was a response to an immediate crisis that really required a fast response. The same cannot be said for the latest measure.
Yes, and as I have argued, the economy will need stimulation. However, I also saw the downturn as an opportunity to do new things because downturn makes resources available. It is hard for a Government to do major new things when the economy is pressed hard against capacity constraints.
The wording of the announcement is an example of modern word spin set within an atmosphere of crisis.
This is an "Economic Security Strategy". It is not. It is an immediate stimulus measure.
The package is designed to "strengthen the Australian economy in the face of the worst global financial crisis since the Great Depression." The package will stimulate, not of itself strengthen, the Australian economy. "In the face of the worst global crisis" is a sales pitch.
When we turn to the detail, we find that the word "spend" has been replaced by "invest". We "invest" by providing pensioners with a one-off payment. This may be a good thing, but is hardly an investment.
I could provide further examples, but I think that you will see what I mean.
Turning now to the details of the statement, the measures break into three.
The first is one-off payments to pensioners and other welfare recipients, payments to be made from 8 December. This has been targeted to those most likely to spend. The statement presents this as a down payment on future changes to the pension system.
It is hard for me to argue too strongly against this measure given some of my previous statements on the social welfare system. However, the effect of the measure on domestic demand is a little difficult to gauge because of the spend patterns of those involved. Specifically, I would expect it to add to sales of food, drink and clothing . I am not sure how far beyond this effects will spread.
The second is an increase in first home buyer grants for new and existing homes. I have put the and in bold because therein lies a problem.
The substantial increase in the grant for new homes will translate to an increase in home building, if with a lag. However, the increase for existing homes makes little apparent sense because it is likely to translate to an immediate increase in house prices with no demand effects.
That's fine if the aim is to underpin house prices, although I do not think that this is a good thing. Otherwise its a waste of money.
The last and smallest immediate element of the package is its longer term elements.
The first is an increase in training places. That's good.
The second is a stated intention to bring infrastructure spending forward. That's puff. The Government was trying to do this already.
In all this, there is the question of value for money.
Take, as an example, this post, Business misses in the stimulus package, from the Australian Newsagency Blog. The argument here is that things such as investment incentives would have stimulated business activity. The writer has a point.
My view of the "Economic Security Strategy" is that it's a missed opportunity, that we could have got better long term results for the same spend if we had just taken a little more time to discuss it.
It's very rare that we do get an opportunity to spend a large sum of Government money outside normal parameters. I think that we have just muffed such an opportunity.