A Waste of Taxpayers' Money | BTalk Australia

(15min 53) This week the Australian Federal Government announced a $42 billion fiscal stimulus package to protect the economy from the ravages of the world downturn. Will it work?

That’s a question Phil Dobbie puts to Robert Carling, a Senior Fellow at The Centre for Independent Studies. Robert has been a treasury official for many years for the NSW state and federal governments.

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• Today’s Transcript

Phil Dobbie: Hello I’m Phil Dobbie and welcome to BTalk Australia where today we ask is the government’s fiscal package to rescue the economy from the economic downturn a waste of money?

Dobbie: Kevin Rudd’s 42-billion-dollar stimulus package is big, there’s no denying it. But is it too big? Well Robert Carling is a senior fellow at The Centre for Independent Studies. He’s also been a treasury official at both New South Wales state and federal level. So you’ve been playing in this game for a while, Robert. Under what regimes were you operating in when you were at the treasury?

Robert Carling: Well at the federal treasury my experience went all the way back to the Whitlam government but most of it was under the treasurer-ships of John Howard and Paul Keating and at the state level it was the Carr government and part of the Iemma government.

Dobbie: Right, now Malcolm Turnbull says we need a stimulus package but he says that we should be spending half that 42-billion-dollar figure. It is an immense figure isn’t it? Has Kevin Rudd gone over the top, do you think?

Carling: Well yes I think they’ve certainly gone too far. The budget would have gone into deficit even if the government had done nothing. If no changes in policy, no stimulus. It was going to go into deficit anyway next year. Not this financial year but next financial year. We can see that from the figures that they released on Tuesday. Just through the loss of tax revenue and increases in certain government expenditures as the economy weakens and nobody has any argument with that. I certainly don’t have any argument with it so the issue is not whether the commonwealth budget should be in deficit or not, in these circumstances that’s OK. The question is how much, whether the government should go beyond that and make policy changes that push it further into deficit and it’s done that in a very big way, not just with this package but also with what they did before Christmas. And that all adds up to not just 42 billion that was announced on Tuesday but if you include what they did last year it’s about 68 billion dollars of what we call discretionary policies stimulus and that’s the part that’s questionable. It certainly, I think, is too bleak and of the wrong kind and too far into the future as well.

Dobbie: So do you think it makes sense to push spending? I mean that really was the focus of the pre-Christmas stimulus package and to an extent we’re told it worked and that we spent 4 percent more shopping in December but it cost a lot of money too to get that return. I think we got an extra 700 million dollars spent in the shops but it cost a lot more than that. So I guess first question is was that the right approach and did it work?

Carling: Well the jury is still out on that episode, we don’t have all the data needed to make that assessment but certainly when they did a similar thing in America last year there is evidence that it didn’t work and there’s a theory, where a theory ascribed to Milton Friedman, of all people, that says that households when they decide how much to spend they have in their minds a notion of what their permanent income and wealth is. And these temporary blimps affect saving more than spending. That applies to what they did in December and it’s going to apply to these, I think they call them tax rebates, $950 to be paid in April. They won’t achieve their stated objective and they’re quite a wasteful use of the taxpayer’s money.

Dobbie: I guess the other thing as well is that Australia generally is so heavily in debt but Kevin Rudd seems to be focusing on areas of the population where the debt is highest. So as you’ve just said people have an idea of what their annual income is if they get a shot in the arm it’s probably going to go to paying off debt, isn’t it, rather than being injected back into the economy.

Carling: Especially in current circumstances where household debt is high and where people are a bit fearful about the future. There’s a lot of uncertainty around. Their confidence has taken a hit. So in those circumstances it’s even more likely that they won’t spend it.

Dobbie: So what’s the alternative? What’s a better approach for giving that stimulus that’s going to give an immediate impact?

Carling: I’m not keen on the whole idea of discretionary physical stimulus because there is a lot of theory and evidence to say it’s offset by other things. When it hits the economy it tends to be offset by private sector decisions and behaviour. And these so-called multipliers are not all they’re cracked up to be and there is a history to this. There was a lot of faith in this so called counter-cyclical fiscal policy until the 1970’s but then it was increasingly questioned. And now there’s a whole literature of theory and evidence about ineffectiveness and that governments get the timing wrong and so on and so forth. And until recently governments had stepped back from using fiscal policy for that purpose. Now they’ve dived in with a vengeance because they want to be seen to be doing something and they’re desperate to prop up sagging economies. But that doesn’t mean that it’s going to be effective. But if they desperately wanted to do something, if there were worthwhile capital expenditure projects sitting there waiting to be done they could have been brought forward and done as quickly as possible. But that’s easier said than done, in practice. Any capital expenditure project that’s undertaken should be undertaken because it’s worthwhile and should have been done anyway regardless of the short-term economic exigency and governments are never good at organising these projects quickly.

Dobbie: So it’s too late now, in other words?

Carling: Yes and by the time the impact is felt it would probably be too late. Now there’s also been talk about the next two instalments of tax cuts that have already been legislated being brought forward. I think that could have done a bit of good because there is no permanent fiscal cost to that. The cost was going to be incurred anyway. It just would be a bit earlier and that’s a permanent change. It’s not one of these temporary boosts.

Dobbie: So actually going back to your Friedman quote then people would adjust their spending accordingly because it’s an ongoing benefit.

Carling: Yes that’s right. So they could have done things like that, that are in the long-term interest of Australia anyway and bringing them forward could have some short-term benefit as well as a long-term benefit. But I don’t think that most of the things they’ve done fall into that category and the amount that they’ve gone for in my view are far too big.

Dobbie: These are interesting times aren’t they? I mean this is a little bit different to previous recessions we found ourselves in that you can have a business that might be successful through the year but suffers cash flow problems through perhaps a down season. And it’s finding it hard, even as a profitable concern, to try and secure the finance that they need. So should the government be doing more to help that sort of business and allowing those businesses to remain operative through this downturn?

Carling: Well I think yes and they’ve done some things like that with reduction in the tax instalments due soon for businesses. They’ve given certain investment allowances and accelerated depreciation allowances for capital expenditure incurred by a certain date and I don’t have any quibble with all of that. But what you’re talking about is essentially the consequences of the credit crunch and that’s a global phenomenon. And the key to it doesn’t lie within Australia. It really is in the United States and our credit crunch is a consequence of what’s happened there and we can only hope that the Obama administration and the congress in their wisdom come up with some new formula to eventually address that credit crunch problem in US, the weakness of their financial institution.

Dobbie: So your belief is that really in everything we’re doing, almost everything we’re doing we really are kidding ourselves that we can’t stave off the inevitable. We’re throwing good money at something that’s going to happen anyway.

Carling: Yes, certainly if there’s going to be a recession in Australia and we don’t have one yet, but if there’s going to be this is certainly not going to stop it. It might soften the blow a bit but that effect will be very modest.

Dobbie: And the cost to the economy of this extraordinary level of debt that we’re going to find ourselves in compounded presumably by all the other costs. I mean the budget was going into deficit anyway. We’re going to find with rising unemployment we’re going to have increased social welfare benefits that have to be paid as well. So we’re going to be in budget deficit for quite some time aren’t we? And what impact is that going to have on the economy?

Carling: The way things are going yes. The projections that they put out on Tuesday show deficits totalling, I think, 118 billion dollars this year and the next three, which is a startling turnaround from projections at the time of last years budget which were for surpluses totalling 79 billion dollars over those four years. So it’s a huge turnaround. Fortunately, the commonwealth government’s finances were in a very strong position to start with. So we’re not going to end up with a level of debt like they’ve got in the US and the UK, for example, which is about 40 percent of GDP and rising rapidly. Here we’re starting at zero and even with the four-year deficit we’ll only go up to maybe 10 percent of GDP. So it’s not a disaster in that sense but the question is, is there a way out of it? And if people in businesses think that these deficits are going to become entrenched and there is no way out without some drastic corrective action some time in the future then their confidences is going to be damaged from that fear. There will be a fear of tax increases to come sometime in the future to correct the situation.

Dobbie: Yes and obviously all of that just prolongs the whole affect.

Carling: And offsets any short-term benefits from these packages. But we shouldn’t dwell on the negative because there is a lot of monetary policy stimulus in the pipeline anyway and we’ve had a huge turnaround in the budget. We’ve also had a huge turnaround in monetary policy in a short space of time. The reserve bank only started cutting interest rates last September and in those five months we’ve come down from seven and a quarter to three and a quarter. Probably the biggest turnaround in modern history. That’s all in the pipeline and it takes time to have its effects. Some people say up to 18 months before you see the full effects of it. So that’s still to come and also there’s that automatic stimulus from the turnaround in the budget into deficit just from the government doing nothing but that’s helping to prop up the economy as well. So those things are there even before we start talking about discretionary policy stimulus.

Dobbie: Given that the Australian economy has become so dependent on the construction industry and obviously the resources sector as well and given the preoccupation we’ve had over the last 10 years or so of insuring that the budget remains in surplus. If the government over the last 10 years had taken a more proactive stance in terms of infrastructure investments would that have held up employment because more people would be employed in public funded jobs and could that have shielded the economy?

Carling: You’d be hard pressed to make a case that the previous government underspent. Certainly they had surpluses but at the same time their expenditure increased at quite a rapid rate. It certainly kept pace with the fast growth of the economy. So government expenditure as a share of the fast-growing economy remained and it certainly didn’t fall. You can argue and quibble with what they spent it on but I don’t think that you can make a case that they should have spent more in total. And those surpluses that we had over those years were probably justifiable just on the grounds that the economy was strong and they were building up for sort of a rainy day reserve.

Dobbie: Alright. Well thank you very much for your time, Robert. Those rainy days are certainly here. And you certainly feel it when you’ve had good times, you certainly feel the bad times don’t you, when they come along?

Carling: Yes indeed, especially when we’ve had such a long expansion.

Dobbie: Thanks so much for you time today, Robert.

Carling: Thank you, bye.