Friday, October 17, 2008

Confidence tricks fail to secure our economic future

The Rudd government's $10.4 billion fiscal stimulus package is nothing more than a set of confidence tricks played out on the Australian people.

The centre piece of the package is an immediate $4 billion payment to pensioners.  This equates to an additional $1,400 for singles and $2,100 for couples just before Christmas.  Self-funded retirees with a Commonwealth health card can also look forward to extra money.

There is little doubt that pensioners will be grateful for the addition support about to go their way.  From the government's perspective, it also solves the dual political problems of placating pensioners, on the one hand, whilst defusing the Federal Opposition's attack on the other.

However, the pension announcement highlights the extent to which so many older Australians remain captive to the budgetary whims of government.  Where today Rudd decides on giving pensioners a break, tomorrow he can refuse on budget grounds to give them another increase down the line.  Moreover, it creates a "moral hazard" in discouraging people to save for their own old age.

The fiscal stimulus package also provides $3.9 billion in extended benefits for 2 million families.  Families eligible for Family Tax Benefit (A), Youth Allowance, Abstudy or a benefit from the Veterans' Children's Education Scheme payment will each receive $1,000.

Again, this funding sounds nice on the surface.  Yet, most economists warn of the extensive waste of "churning" -- where families pay tax to get it straight back as a government benefit -- and this proposal only worsens the situation.

Kevin Rudd and Wayne Swan also announced an increase in the First Home Owner Grant, at a cost to the budget of about $1.5 billion.

This proposal does not tackle the root problem of excessive house prices, a problem caused by regulatory restrictions on the part of state governments in releasing land.  New houses on the periphery of Australia's metropolitan centres should be $50,000 to $150,000 cheaper than their current price, and a relaxation of zoning laws would be a more effective way of helping people and industry than a hike in the subsidy proposed.

The announcement of the Rudd government to fast-track the implementation of its education, health and infrastructure funds is another key element of the fiscal stimulus package.

There is little question that the state governments will be eagerly wanting to dip their paws into these honeypots.

However, the lack of additional detail that came with the announcement is disconcerting.  For example, it ignores important questions as to how scarce labour and materials will be sourced to build the dedicated infrastructure, without putting further pressure on inflation and interest rates into the future.

Issues about the delivery of efficient infrastructure through these funds is left absent by the government's rush to be seen to be doing something.

The government seems to have forgotten the lessons of decades past.  Keynesian-style fiscal pump priming had a poor record in terms of practically stimulating economic activity in a sustained manner.  This is because any government spending has to be financed by taxation sooner or later.  The increasing value of Smith's government benefit is offset by the rising taxes paid by Jones.

Other economic costs had become apparent as a consequence of fiscal stimuli, including an upward pressure on interest rates leading to a "crowding out" of private sector capital accumulation.

Instead of a fiscal stimulus package inspired by the worst of the bygone "Keynesian consensus", a better course of action for government would have been to instigate significant tax cuts all round, financed by reductions in wasteful government spending.

The tax cut would have increased rewards to work, investment and saving to get Australia moving again, whilst the reduction of spending restricts the likelihood of inefficient "roads to nowhere" and other special interest projects.

With the grandiose title of "Economic Security Strategy", the knee-jerk fiscal expansionism of Kevin Rudd and Wayne Swan does nothing to bring about the economic reforms that Australia desperately needs in this time of economic uncertainty.

At a political level, it is ironic that Rudd castigated the former Howard government in Opposition for its irresponsible, wasteful spending, only to now copycat the former government.

The economic implications of the Rudd government's stance are much more serious.  Where it thinks that showering Australians with their own money will steer the country through tough times, the reality is that it has missed yet another opportunity to properly secure Australia's economic future.

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