As expected, the government has announced a new round of fiscal stimulus, and the Reserve Bank has cut interest rates by a further 1 per cent, incidentally achieving a further devaluation of the dollar. All of that is likely to stimulate economic activity, but will it be enough and will it be in the right directions.
The magnitude of the package, $42 billion over 2 years, amounts to around 2 per cent of GDP per year, which is pretty modest given the scale of the crisis. But it follows the $10 billion package from late last years, and is virtually certain to be followed by more. I’d be surprised if the deficit is held under 5 per cent of GDP for 2009-10, and deficits are likely to continue for quite a few years. With fiscal stimulus of that magnitude and interest rates near zero, it ought to be possible to keep the inevitable recession to a relatively modest scale, assuming (a big one) that the international financial system is on the road to stabilisation.
The main concern I have with the package is that it continues a heavy focus on construction. That sector has been the first (apart from the finance sector itself) to take a big hit, but it won’t be the last. It’s great building schools, but we need to be hiring teachers, teachers aides and support staff to work in them. As I’ve mentioned before, human services are the most labor-intensive areas of the economy, and also an area that’s been constrained in the era of economic liberalism that is now coming to an end. Hopefully, we’ll see more action on this front, and on direct measures to help the unemployed in the Mark 3 package.
I also have some concerns about the idea of insulating homes. That’s great if it’s additional to the impact of the emissions trading scheme, but not so great if all it does is make it easier for electricity companies to meet their targets.
John Quiggin 
John, it seems like the States are as happy as larry for the expected GST revenue generated from the two stimulus packages will provide them with extra funds next year without raising a sweat. Neat.
Today I saw a coalition senator describe the package as “Keynesian economics”, as if that were some type of insult!
He then recommended an article in ‘The Australian’ entitled “New Deal Prolonged the Great Depression”.
Clearly there’s a hard-Right element of the Liberals that are deeply committed to Herbert Hoover economics.
Ernestine I strongly urge you to cut-back on the economic psychedelics. Keeping your feet firmly on the ground is more difficult than you might believe but it is very worthwhile.
The Debreu-Mantel-Sonneschien theory on the non-transferability of ideas about partial equilibrium excess demand functions into an aggregate macro context is well worth reading as an innocent adolescent economist between hearfelt truth-seeking bouts of Camus, Sartre and the Simpsons.
But to be clear my friend, life is just a bowl of partial equilibrium All Bran – you wake up every morning and it is there. Demand curves slope downwards. It is said.
Clearly there’s a hard-Right element of the Liberals that are deeply committed to Herbert Hoover economics.
Yes, and Herbert Hoover started the New Deal programs that Roosevelt simply expanded. The myth that Herbert Hoover was a free-marketeer is just one of many demolished by Murray Rothbard in his America’s Great Depression.
The reason the Depression is known specifically as a “Great Depression” in America is because other countries pulled out of it quicker. For the most part, politicians in the rest of the industrialized world didn’t take their countries to the brink of fascism by socializing the economy. America did.
By the way, if government stimulus is so great for the economy, I suppose we should have been having a permanent boom. The government has been increasing spending for many years, as the Centre for Independent Studies never tires of pointing out. Every year, we have a stimulus package. It’s called “the Budget”. How do Keynesians account for this, except through intellectual sophistry?
hc none of your replies involve either an argument or evidence to point out where I am wrong @42. Incidentally, the DMS theorem has nothing to do with “non-transferability of ideas”.
Well – what has really ABSOLUTELY made my day is the hard right given to the hard right by Obama with the salary caps!!
I really dont know how the bad boys club is going to live on $U.S. 775,000 a year…(so sad)
Rudd and Dr Henry – keep looking at what we can do here.
observa at #50
“Firstly the cost of devising, specifying and codifying the BCA and then for the few mighty Insulcos of the world that can afford it, the cost of testing and proving their particular deemed to comply solutions.”
You don’t have to go to all that expense observa to get a “deemed to satisfy”. Just lobby.
There’s no way manufacturers of whirlybirds could have come up with the numbers to get their BCA product endorsement.
The BCA is now sneakily de-rating roof space ventilation (from an implied R-2.5 effect in earlier editions) to a much lower figure, but whirlybirds as an option are still in the code.
That they are useless has now (finally) been recognised by the Dept of Climate Change’s online publication, the “Your Home Technical Manual” where they are listed under “Myths”.
BTW, the Building Codes Board also comes under the Dept of Climate Change.
I often wonder how many millions of dollars have been wasted by householders fitting these things because of the BCA’s endorsement of their “effectiveness”.
Let’s hope the same thing doesn’t happen with pink batts (which have their own compliance/testing issues)
Malcom Turnbulls reaction to the stimulus package;
“Kevin Rudd is planning to plunge Australia deep into debt with a poorly considered and ineffective $42 billion “fiscal stimulus” package.
He is proposing to run up $200 billion in debt – $9500 for every man, woman and child in Australia.
It took us ten years to repay Mr Keating’s $96 billion of debt. How long will it take to repay Mr Rudd’s $200 billion?
Why should we mortgage the future of our children and grandchildren to fund gigantic cash handouts today?
Mr Rudd demanded the Parliament approve his plans within 48 hours and has refused to discuss let alone negotiate the package with the Opposition.
Mr Rudd claimed that unless the package was passed by the Parliament this week, his latest $11 billion cash splash would not be able to be paid in March. And only this morning the CEO of Centrelink has told the Senate Committee inquiring into the package “If the parliament passes this legislation as currently presented, we will be able to implement for 11 March.”
So the whole demand for Parliament to approve the package in 48 hours was based on a falsehood.
What else does the Government have to hide?
Now, we believe this stimulus package is too big and it is ineffective.
We have asked Mr Rudd again and again to sit down and discuss the matter with us so we can agree on a package both sides of Parliament can support.
He has refused to do that. As a consequence we have no choice but to vote against it in the House and the Senate.
In a speech in Parliament on Wednesday I set out the reasons for voting against the package and indicated the type of changes to it we would favour. You can also see my opinion pieces in the Daily Telegraph and Sydney Morning Herald here and my Message to the Nation and YouTube message here.
We know this decision will not be popular, but it is the right decision.
We consider that the package is poorly targeted, ill-thought through and irresponsible in today’s economic climate.
At this stage we believe a package of between $15-20 billion would be more affordable and appropriate.
The objective of any package must be to protect and create jobs, support small business and strengthen our economy. This package will not achieve this.
We have said time and again that the most important issue this year is jobs.
We look at this package and we see little evidence that it will underpin the jobs of Australians.
There is no evidence the Government’s $10.4 billion spending package before Christmas created any of the 75,000 jobs Mr Rudd promised.
Almost all economists agree that the downturn has a long way to go. And yet the Rudd Labor Government is panicking, firing all its bullets at the first engagement.
And even with his reckless cash hand-outs and massive, debt-fuelled spending, the Prime Minister’s package predicts unemployment will top 7% in just over a year – another 300,000 Australians out of work.
Mr Rudd’s plan asks the Parliament’s permission to take the nation $200 billion into deficit – $9,500 debt for every Australian.
In offering to negotiate a revised package with Mr Rudd I have indicated the different approach we would take.
It is an approach which clearly outlines the difference between the Coalition and Labor.
It is an approach borne out of a predisposition towards experienced, prudent economic management.
It is an approach which recognises the reality of a Budget deficit but aims to minimise public debt.
We propose that the permanent tax cuts currently scheduled for 1 July 2009 and 1 July 2010 be brought forward, and backdated to 1 January this year.
By the middle of 2010 this would leave a two-income household earning $80,000 approximately $1700 better off.
Perhaps the largest gap in the Government package is the lack of measures that directly and broadly support employment – particularly employment in the small business sector.
While accelerated depreciation has some merit, the Coalition believes measures that more directly, immediately improve the cash flow position of small firms and help them protect and create jobs are preferable.
One proposal the Coalition is seeking to discuss with the Government is the Commonwealth paying a portion of the Superannuation Guarantee Levy on behalf of small employers (those with 20 or fewer staff) for the next two years. This measure will directly improve the cash position of small firms, directly reduce the costs of employment, and so directly contribute to preserving jobs.
These measures are not only fairer. They also represent a better targeted and more effective stimulus for the economy. They better protect jobs.
We support investment in infrastructure if it is well targeted and well managed. We have proposed that $3 billion be committed to school upgrades by reinstating the Coalition’s very successful Investing in our Schools Programme.
Unlike Mr Rudd we do not believe we have all or indeed the only answers. That is why we invite the Government to sit down and discuss alternative stimulus measures which would be responsible and allow sufficient capacity in public finances to meet emerging challenges.
The Coalition is committed to sound economic management and to ensuring that Government spending is of high quality and reduces the burden on Australian taxpayers and their children.”
Tony G
Yes we all heard Malcom the Merchant bankers speech. If they really believed in supporting small business, they would have stopped big business entities bullying everyone with their excessive market concentration.
Im waiting for Malcolm and his ilk to apologise and say “sorry we made a mistake…it hasnt been trickling down like we thought it would”. At least Greenspan was man enough to admit the mistake. The best you can do for small business is precisely what Rudd is trying to do – now the hard right needs to get on board or get out of the way.
The Business Council of Australia supports this stimulus package – what part of that dont the liberal opposition party understand? Or are they just in opposition to oppose everything?. A more painful party in Australian politics I have never come across, with the heckling, derision, unco-operativeness, cat calling, sarcasm and obstruction.
The federal opposition party are seriously in need of some navel gazing and a complete image makeover.
John, many may not agree with me but the Rudd government should increase the $42 billion stimulus package to accommodate both the Greens and Independents needs. The Rudd government should consider Steve Fielding’s request for a further $4 billion for the unemployed as it is long overdue. As for Turnbull I have a lot of respect for the man but sometimes even he can get it wrong.
The problem with the government’s fiscal stimulus packages is that much of the money will be saved or used to pay down debt by the recipients. Yet this delivers no economic benefit.
All it means is that the federal government is reducing its own bottom line to marginally reduce the debts of households. Yet the net level of debt to equity of the nation remains unchanged.
But policies like this actually do more damage, because they send a message to people that taxpayers will bail out those who make bad financial decisions. So they increase moral hazard without even generating much short-term fiscal stimulus. Dumb policy.
Does anyone remember when Kevin Rudd declared that “this sort of reckless spending must stop!”?
Is this the same Rudd who was elected as a fiscal conservative?
It seems Rudd is just a fashion junky who changes his colours to suit the season.
And who would have thought Piers Ackerman would be blasting the fiscal stimulus on the basis that the handouts wont work and “for not spending enough on hospitals roads and infrastructure”…
Brings to mind an Alice in Wonderland quote
“I hardly know, sir, just at present — at least I know who I was when I got up this morning, but I think I must have been changed several times since then”.
Now Xenophophon wants a quarter of the stimulus package to go to South Australia? What an idiot. He lines up with the idiots par extraordinaire in the opposition party. I once thought that party worked for business? Seems they are biting the hand that feeds them by objecting to Australia’s paltry stimulus package. Objection for objections sake only. Rename them the Contrarian Party. As for Julie Bishop, predictably she is in the news today saying unemployment is resilient in Australia.
Trending to 7% and rising…… Xenophon and the Coalition…..get right out the way – you are all totally useless. Have you noticed your polls lately?
Unpopular and getting more so by the day.
Don’t be too harsh on Xenophon – the Murray is a complete mess in SA, and the lakes acidic. The state vs state jockeying is most unfortunate.
65# I wouldnt actually mind Donald if they used some of it to get rid of the Cubbies. Thats a filthy disgrace up there in Qld and the other water thieves on the way down.
You have to tackle acidic lakes in SA at the cause of the problem (likely in QLD and NSW) not throw money at palliatives for the sick end of a river surely?
I worked 3 hours last week and quit, will i get the full $800.00 now.