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.