The Rudd Government’s bribe program… I mean stimulus package

I must admit to having some mixed feelings about the Rudd Labor Government’s $10.4 billion stimulus package, announced today. On the one hand, there is certainly quite a bit to like about the package from a Labor point of view. It specifically targets those who are likely to be hardest hit during the trying economic times we find us in; namely low income earners, pensioners, and people trying in vain to buy their first home. It is courageous and decisive, and in effect has forged a bipartisan approach to the financial crisis. Politically speaking, it will no doubt be a big winner, particularly with Christmas fast approaching.

I also have some concerns about the package. Firstly, it must be noted that the stimulus package is being delivered for the most part in the form of lump sum payments to the electorate. In the past I have been highly critical of the Howard Government when it has delivered “taxation relief” through the bundling out of ad hoc lump sum payments, and thus it is only fair for me to call Federal Labor out accordingly on this occasion. Lump sum payments to targeted interest groups raise some serious questions about political expediency, and also whether or not the government is actively encouraging the electorate to spend the stimulus payments frivolously by delivering them in such a throwaway form. For a lot of people, handouts like these from the government feel like a free, one-off bonus payment, that it is okay to completely splurge away. These sorts of payments do not feel like “earned money” to such people. They feel like obligation free gifts, and effectively serve to distort the normal consumption cycle for taxpayers.

I suppose one rebuttal to this line of argument would note that the world is experiencing a financial crisis right now, and that therefore a program of lump sum payments now is justified. If the stimulus package was spread out as a form of weekly or fortnightly additional allowance payments to pensioners and low income earners, it would likely not produce the desired effect, which is to stimulate the economy now. This rebuttal leads us to a second possible criticism of the stimulus package; is it really necessary now? The Reserve Bank has just cut the cash rate by one percent. The stock market has been a bit up and down over the past couple of weeks, but there are signs just over the last couple of days that the situation is stabilising. Are we really in such a dire situation at the moment that blowing half the budget surplus on a series of handouts is justifiable? I can’t say I am too sure either way, but in the very least, it is questionable.

The third potential negative point that I think is worth considering with the stimulus package relates to our old friend, interest rates. It is fascinating to me how quickly the nation has apparently moved from a mode of economic operation where the government is actively trying to reduce inflation, to one where the government is frantically trying to stimulate growth through arguably inflationary policy measures. It is a point that has been alluded to by Opposition Leader Malcolm Turnbull, who seems to want to have a bob each way by pledging his support for the package but foreshadowing possible repercussions for inflation:

Opposition Leader Malcolm Turnbull backed the strategy and said it would help cash-strapped pensioners but noted it was fiscal concerns, not compassion, that had prompted the government to act.

He also questioned whether existing homeowners might end up bearing the brunt of the bonus for low-income Australians.

“We trust that the government has taken into account advice from Treasury and considered the impact that this stimulus may have on the Reserve Bank’s ability to continue reducing interest rates,” Mr Turnbull said.

So overall, it’s great that these payments look like they are going to go to the right people (for a change!), but it is almost impossible to deny that these lump sum payments have been inspired by a prominent chapter in the Howard/Costello book of economic management. Not to mention a prominent chapter in the Howard/Costello book of election-winning pork barrelling measures. That aspect of this stimulus package, even if it is somewhat unintentional, absolutely galls me.

12 thoughts on “The Rudd Government’s bribe program… I mean stimulus package

  1. I’ve been trying to work out the Interest Rates cut vs. Cash injection too, otherwise why cut interest rates. I’m no economist but I have also read the theory of increasing Interest Rates is what prolonged the Great Depression. As a part of this stimulus package and a Low Income earner, I don’t get anything 😛 but that’s because I’m not part of a family. As Paul Kelly says, the cash injection gels with what the economic text books say and even with what Paul Krugman suggests.

    So I see two possible reasons for what is basically double dipping, the RBA underestimated the global credit crunch & at the 25 basis point cuts, there were some arguing for 50bp, that may have offset the need for the full 1% reduction. However, that doesn’t explain the cash injection as it is an inflationary measure, so only those with money to spend today will put their faith back in the economy which are those that normally would anyway until things looked hard. However, the little people would still be hesitant to inject cash, inflationary measures or no, so that’s where the stimulus package comes in. It goes to mostly the largest demographic in Australia, pensioners, so the little people for wont of a better word save on their mortgage with the original interest rate cut (which they’d hoard rather than spend) and then the stimulus package to encourage that group to spend.

    I don’t understand why these two measures don’t balance out and negate each other but it essentially gets the two major groups spending (investors & everyday people) which in theory keeps the economy healthy.

  2. MORE middle class welfare! 20k for people who build new homes is particularly offensive. If the Gov’t didn’t hand out so much cash to those who don’t really need it–i.e, if you’re dependent on the government giving you an extra 20k to build a house, then you’re either going to build a particularly nasty edifice or you don’t actually need it . . . such money could be ‘given’ to those who really do need it, People with no land or any prospect ever of buying any–i.e, people who don’t have anything. If there was less middle class welfare there could be more actual welfare and those on the lowest incomes in society could have their incomes raised to be a little more than just a mere fraction of everybody elses. All the talk of poor old pensioners living off $250 a week. People on the dole are expected to get by on less and must also suffer the emotional opprobrium from a society who views them as nothing more than worthless non-entities. These policies of the Gov’ts are dreary, lazy and utterly unimaginative.

  3. Caroline – I suppose you’re right in the sense that the kinds of people who really need more assistance from the government are unlikely to be the types of people who are at the tipping point considering whether they should buy a house or not. Presumably the folks who really need it are those without property and struggling to find decent rental properties around the place. One would hope though that if they are greater incentives out there for people to build more houses, more houses will be built, meaning that there is more property available on the market, which means lower housing costs in the long-term?

    I agree the government has certainly missed an opportunity to help out a large section of the population that it seems to have skipped over with these handouts – people on low incomes without children.

    Matthew, not sure quite what you mean by that – do you mean the general focus of welfare in Australia is to get people into the housing market?

  4. Castles, F, The Wage earners welfare state revisited, Australian Journal of Social Issues
    29 (2) 1994 p120-145

  5. Pingback: Must be funny, in the rich man’s world | Guy Beres

  6. From here:

    The five one off cash bonuses includes in today’s plan are the:

    Tax Bonus for Working Australians of up to $950 paid to every eligible Australian worker earning $100,000 or less. This will support up to 8.7 million individuals.
    $950 Single Income Family Bonus to support 1.5 million families with one main income earner.
    $950 Farmers’ Hardship Bonus paid to around 21,500 drought affected farmers and farm dependent small business owners receiving exceptional circumstances related income support.
    $950 per child Back to School Bonus to support 2.8 million children from low- and middle-income families.
    $950 Training and Learning Bonus paid to students and people outside of the workforce returning to study to help with the costs of education and training.

    There are still details to be finalised, and of course the government’s proposals need to pass parliament in order to be implemented. The Opposition is opposing the package.

  7. i hope that those Stimulus Package coming from the government would really kick start the Economy. the economic recession has been very bad on my business. 2.

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