The Business Council on the Rudd Stimulus Package | BTalk Australia

(14min 55) After some argy-bargy in the Senate, the Australian government has passed a $42 billion fiscal stimulus package. About a third of the money will go in cash handouts to low and middle income earners, with most of the remainder allocated on infrastructure projects.

There’s been some discussion about whether the size of the package is over-the-top and whether it will have the desired outcome. Today on BTalk Australia Phil Dobbie hears the views of the Business Council of Australia from David Walker, BCA’s Director of Strategic Communications and Advocacy.

It’s a very different view to that heard from Robert Carling, a long-time treasury official, who was a guest recently on BTalk Australia.

What’s your view? Add comments in the Talkback section at the end of this post.

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• Today’s Transcript

Phil Dobbie: Hello I’m Phil Dobbie, and welcome to BTalk Australia. Today, once again, we look at the government’s fiscal stimulus package and ask is it going to do any good? Kevin Rudd’s $42 billion dollar stimulus package we heard recently from Robert Carling from The Centre For Independent Studies doubting that it’s going to have the envisaged impact. But the Reserve Bank is showing more optimistic signs; so let’s get a view from The Business Council of Australia. David Walker is the Director of Strategic Communications and Advocacy at the BCA. And the BCA’s membership, of course, includes the CEOs of a hundred of Australia’s top companies. So David, should the government be sending us into deficit at this stage and buy as much as they are do you think?

David Walker: Phil, we think that they are pretty much picking the right attack at the moment, but we do need to be running a large deficit over the next year or two. And that is the best course to minimise the effects of the downturn that we’re having in Australia, largely, though not totally, as a result of the global downturn.

Dobbie: Now the RBA has said that they expect some good news to come from the package later in the year. Will that reduce the need for further rate cuts? I mean could we have the problem? It’s often the case, isn’t it really, the government spends less, because there’s less need for the RBA to act and vice versa? So they could almost be acting against each other, couldn’t they?

Walker: We think the danger of that is pretty low in this episode. At the moment, federal government policy and reserve bank policy are working together. The federal government and the Reserve Bank, I think, have broadly the same assessment of where the economy is, where it’s going, and what needs to be done. So you have seen, for instance, both the federal government and the Reserve Bank starting in the middle to late last year, both easing up on policy. The Reserve Bank started earlier than almost any other central bank, in dropping rates. And the federal government started earlier than almost any other government to try to stimulate the economy. And part of the reason for that is that both institutions, the government and particularly the treasury, and the Reserve Bank both feel that in previous cycles they have waited far too long before acting.

Dobbie: Now what do you see as being the main objective of the stimulus package? Is it job protection? And should that really be the measure of success?

Walker: That’s one of the measures of success, and one of the most important ones. Really what the package aims to do, and indeed what rate cuts aim to do, is to catch the economy before it falls too far. To short circuit falling confidence, get people spending again, and keep the economy running at nearer its true capacity. The fear is that if the government and the Reserve Bank don’t act you will have a continuing cycle of, if you like, a cycle of fear, a loss of confidence where people decide not to spend. They want to save their money, because if they save their money there’s less spending going on. Jobs have to be cut. The economy becomes even worse. People get even more fearful. Save even more. And the whole cycle goes on and on. This is known as the paradox of thrift.

Dobbie: Yeah.

David Walker: Everyone suddenly wants to save and the result is that a lot of people can’t save enough, because the economy is falling in front of them.

Dobbie: I guess this is the most contentious area though, isn’t it? As to how successful a package is going to be. Because, you know, some people like you and I, I mentioned Robert Carling, an ex-treasury official who I spoke to recently. His argument is that you put a slug of money in someone’s pocket and they’ll save it. Where as, you give them a tax cut they see the longer-term improvement in their income and they start spending. Similarly with the pre-Christmas package as well. You give people a bunch of money; they don’t necessarily spend everything they get.

Walker: It’s quite clear that no matter how you deliver money to people, whether it’s tax cuts or additional handouts, it’s not all going to be spent. Some of it will be saved. What the discussion is at the moment is about how much of what sort of stimulus will be saved and spent. Now there is plenty of room for different ideas about the right numbers for saving and spending under different circumstances. And the truth is that nobody knows for sure, because our data on this is quite limited. But there is, I think, a fairly strong consensus that in the short-term if you give money in the form of, essentially, cash from the government to people, that’s most likely to provoke spending. That’s the view of The Business Council, but it’s also the view of bodies like the International Monetary Fund, and a fairly large number of prominent economists. Not all economists, and not all prominent economists, but that’s the majority view.

Dobbie: The one thing we know is we’re never going to get economists to agree with each other, are we? So what about the notion of tax cuts though? I mean, people have talked about bringing already agreed to tax cuts forward. Barack Obama in the US is pushing hard in his fiscal stimulus package on personal tax cuts. Is there scope for further tax cuts, do you think? Or do you think that the, if there’s cuts in tax it should really be company tax?

Walker: The Business Council has said a couple of things very strongly about tax. Firstly, long-term changes in our tax system should await the findings of what’s called the Henry Review. A review of all tax and transfer policies, so it’s taxes, but also pensions and unemployment benefits, and those sorts of welfare payments that’s being conducted at the moment. And that’ll be ready at the end of this year. So for long-term changes we want to see what Henry says. The discussion that’s going on about tax at the moment is mostly about what should be done in the short-term. And we think there is room to bring forward, if the government chooses to do so, some planned changes to what’s called the low-income tax offset, which would deliver effectively tax cuts to low income earners. And those are currently planned to come in over the next couple of years. We think many could be brought forward. We don’t think that bringing forward the broader tax cuts at the moment would deliver much bang for the buck in the job of short-circuiting this economic downturn.

Dobbie: Now the, you mentioned the Henry investigation looking at all tax, not strictly cuts, looking at all tax apart from GST. And the UK example is been to try and reduce consumption tax to boost spending. Is that a sensible approach on the part of the UK?

Walker: That’s right, Phil. That is what the UK has done. And the Business Council would have preferred to see the Henry Review in Australia looking at GST levels as well. We do believe over time that more tax is going to have to be raised through the GST if we are going to create the most-productive, the fastest-growing economy. And so we think it’s unfortunate that the GST was excluded from the Henry Review. Now in the short-term there are some proposals around, including the UK one, to cut sales taxes, and GSTs, and value-added taxes as the UK tax is called. We don’t think that that would be the best approach for Australia to take. We just don’t think that it will be quite as effective as the sort of spending that the government is suggesting. But it’s not a ridiculous approach to try. And one of the things you’re seeing at the moment all over the world is that different governments are trying different things.

Dobbie: Yeah. It’s going to be interesting. It’s a shame we haven’t got this history beforehand, so we could actually know the best way forward. I guess the thing on the GST is a lot of it will be soaked up in the margins taken from business at the wholesale level. Which is not necessarily a bad thing, is it really? Because the focus on spending is one thing, but a lot of companies are hurting just because they’re being squeezed on margins. Is the government doing enough to help those businesses out with this package, do you think?

Walker: Phil, you’re quite right that so far a lot of the impact with the downturn in Australia has been taken in profits. And that’s why the government is pointing out that there’s going to be a very big reduction in the tax receipts from company tax over the next 3 or 4 years, over $100 billion. And we have been saying for a while that this was a weakness in the system, where the government has become too reliant on company tax. In the short-term over the course of the next year, for instance, we don’t think that a cut in company tax is going to solve the economy’s short-term problems. We have said quite clearly though that over the longer term the best mix of taxes for Australia is going to include a lower corporate tax, because that’s a very powerful way of attracting additional investment, which will create additional jobs in the long term. One of the things we, of course, have in the country at the moment is that we have two quite different problems. We have the short-term problem of getting the economy going again, or keeping it going as fast as possible, stopping it from falling too far, particularly through 2009. But we also have to address a bunch of longer-term problems if we are to have a strong and a high performing, high job creating economy over the next decade.

Dobbie: Now will we ever know the success of any of these packages? I mean, Wayne Swan has said that this latest batch of measures is no silver bullet, but things would be worse without it. Will we ever know that for sure? And do we really have any measure of how successful the pre-Christmas spending splurge was?

Walker: Phil, the honest answer is we will never know for sure. Economists are still arguing, indeed arguing furiously, about what happened in the 1930s Depression. They’re still arguing about what happened in Japan in the 1990s. We never get perfect experiments in economics in the way that we do in, say physics. So you come to the best conclusion that you can based on what data you can see. We will never know, for instance, how much of an effect the December package had. The best we can say at the moment is that it appears to have had some effect. And based on the sort of evidence we’ve got from various places around the world at various times, the $42 billion dollar stimulus package should have some effect as well. And it looks like a mix of measures that will have a better effect than pretty much anything else that you could come up with.

Dobbie: I guess the thing about economics is it’d be a lot easier if we didn’t have human behaviour stuffing it all up. It’d be a much more exact science wouldn’t it in that case? And now we’re going to be landed with a large budget deficit at the end of this. Have you any expectation of how long it’s going to take before we get back to a balanced budget? And don’t you see a danger in that, because we’re working in unknown territory? We’re taking a big risk, aren’t we, with the economy and future generations?

Walker: There is a risk in what’s being done at the moment. And the Business Council is quite concerned that once the worst of the downturn is over, the government will work very hard to get the budget back into surplus as soon as possible. We believe that effectively, wherever possible, the government should be saving for a rainy day. So that when the rain comes the budget can be spent; the budget surplus can be spent. And that’s what’s happening now. But what often happens is that after the worst has passed, governments decide it would just too painful to do what’s needed to bring the budget back to where it needs to be. They don’t run large enough surpluses when they get the budget back into surplus. So we are putting pressure on for that. It needs to be recognised though that we did come into this downturn with governments that are in very good shape. Going into this downturn the government had almost no net debt. That differentiates it very much from most other countries around the world. A lot of countries have very large debt loads, even before they started spending. And so Australia is in better shape than most.

Dobbie: I just hope that what doesn’t happen is that we transfer personal debt to government debt — that’s part of the danger isn’t it? But as you say, we’ll never know. It’s going to be interesting to watch and police of the Business Council is behind the government. And I guess the one thing we can say is that Kevin Rudd’s doing something, and that’s better than doing nothing at all, isn’t it?

Walker: That’s quite right. And we are particularly pleased that he’s been able to act early.

Dobbie: Okay. Thanks so very much for your time today.

Walker: Thank you, Phil.