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 
I’m still pretty disappointed that the stimulus was so small (only $42 billion?), and that the cash rate target is only 3.25 (still so high?). As I mentioned in another thread on this blog, we need much more money to flow from productive citizens to the government – which is why the stimulus should have been at least $10 trillion.
Furthermore, we need the value of the dollar to collapse and we need to ensure that more asset bubbles are created in the future. That’s why I think “near zero” isn’t enough, with regards to interest rates.
All in all, this is a pretty poor effort at converting a recession into a depression, and I fear much more floundering about will be needed if we are to provide an incentive to the average Australian to seek out alternative ideas. Maybe once unemployment edges a bit higher, all the newly created couch potatoes will find some time to read Henry Hazlitt’s Economics in One Lesson?
Peter Costello is talking on ABC. I guess no one else really has an immediate answer so why not him? He should loose the ‘smile’ though!
[…] John Quiggin: 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… 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. […]
My main concern is that they’re wasting our money. And that after they are done wasting our money they will hand us the bill. Now is not the time to be raising the price of government. This is stupidity. We need producer incentives not consumer incentives. Rudd seems to be saying “greed is bad but run along little citizens and do your best to consume more”. A walking talking oxymoron. Or perhaps just a moron.
While I’d certainly like to see the insulation program be on top of the ETS, wouldn’t it still be a good idea if part of it? It looks to me like a good way of stimulating the economy that will, if not additional to the ETS, making carbon even cheaper and thereby bolster the campaign for tougher targets, either at the official review points or when public pressure builds up.
I’m surprised no one has mentioned the cash bonus yet. Is this an effective way of stimulating the economy, compared with other measures such as infrastructure spending?
I think it’s a kind of fatalist approach to policy – give everyone some good luck to balance out the prevailing bad luck. I’ve written about ‘fatalist activism’ at Fourcultures.
I agree the construction part is a bit like promising computers all round. There you go, happy now?
Must admit I smiled wryly at the insulation bit. Again it’s a bit like promising to hand out computers to those who haven’t got them but therein lies a tale. What sort of ceiling insulation? At first glance the uninitiated would assume that’s easy. You’ve either got it or you haven’t, in which case you get it. That’s not so simple in a world of mandatory administrative controls rather than the incentive of price as you’ll quickly appreciate here-
http://www.insulco.com.au/insulation_requirements.htm
and no I have no financial interest in said supplier.
The Building Code of Australia is probably not the intimate preserve of Finance and Treasury number crunchers, which they may find to their regret and that of Cabinet. It’s been significantly upgraded with respect to Energy Efficiency Provisions and it depends on specific regions and particular State adoption codes as to what system is required in a new premises, or indeed the signal for whole of house upgrade should renovation occur. Presumably the number crunchers knew all about that, particularly the fact that much past ceiling insulation falls far short of current standards. Watch for the fallout if they haven’t done their homework on that and much existing insulation needs bringing up to current standard. Which particular type and how much upgrade to allow will be the big question then and that means comprehensive inspections and assessments and that’s expensive admin and frustrating delays, just like solar to the grid I’ll bet. This could well smack of emotionally appealing policy on the run.
I guess it will stimulate some activity but I am still concerned that nothing – or so little – goes toward building productive capacity. It is all very well to finance primary and secondary schools but how about financing at the top end – Uni’s and Research Institutes. These are the institutions that will give us a competitive edge, that actually produce people who might have a novel idea that isn’t related to selling assets. Will we ever have a government that supports intellectual activity?
Actually if you follow the links through the supplier site you’ll get to this ‘interesting’ table with the 8 map zones and ‘The Deemed to Satisfy’ provisions of the BCA and the ultimate selection matrix depending on roof type and cover, etc. Each supplier and system needs to provide that. As you can see such administrative minimum requirements are not for the faint hearted, as is much Building regulation nowadays. http://www.insulco.com.au/INSULCO/INSULCO/RESOURCES/DOCUMENTS/Zones.pdf
Will you need retrospective sarking foil with that sir? It’s not just a matter of chucking in some extra batts and she’ll be right mate these days.
Actually the $A has been rising since the twin announcements. Either the market was expecting a lerger cut in official interest rates from the RBA, or it believes the pump priming might just do some good.
John, 2% of GDP is a huge amount of money. Per job “saved” (estimate is 90,000) it is over $400,000.
Also add the previous $10 billion stimulus plus the $30 billion in loans and transfers to the construction industry and you are not talking about something “pretty modest” at all.
Much of the crisis is externally driven and will be longer-term. Can you address a longer-term terms-of-trade shock with short-term consumption smoothing fiscal actions? You can only if you are going to accumulate vast debt.
I am with Terje. I fear these resources will be largely wasted and that taxpayers will be left with a stream of deficits for a decade and large future tax bills.
Arthur Gnome – I’m pretty sure that the markets were expecting a cut of over 1%, hence the Aussie battler increased after the RBA announced a lower than expected cut. Yesterday morning, most ‘market economists’ were suggesting the RBA should make a cut of 1.25%. I don’t think that the Aussie traded higher because people think Rudd has saved us from recession…
A budget deficit of 2% of GDP is very, very modest compared to the likely size of the US and UK deficits, which will exceed 8% of GDP. Once or twice, I have heard talk that the US is headed towards a deficit of 15% of GDP.
With the US doing so poorly, and Australia doing comparatively well, I would have expected the Aussie to be quite a lot higher.
“but we need to be hiring teachers, teachers aides and support staff to work in them”
.
That’s mainly a state, not federal, responsibility, so it’s not surprising that they didn’t do it (It would also mean they would then appear responsible for some of the mess which the school system is — I’m sure having the mess which the university system is is quite enough for them). In addition, since there arn’t enough teachers in many areas, they simply don’t exist to hire unless you want to change the immigration laws.
In a country with such a lot of sun I might have thought installation of solar panels would provide not only an injection to industry but also an injection to labour for installation as well as a green initiative (plus affordability of bills for homedwellers?). I recently was in Hawaii and passed street after street of houses with solar panels on the roof. It could be happening faster here.
[…] ETS to send those price signals? This brings it all forward, which is possibly a good idea, but as John Quiggin notes, it also relaxes the ETS cap. I also have some concerns about the idea of insulating homes. […]
re insulation – I guess this is indicative of where this government is positioned with respect to technology and innovation.
The familiar line that there are not enough teachers to fill existing vacancies is belied by the advertised teaching vacancies in Victoria this week at the start of the school year
– perhaps 200 ads in The Age last Saturday
– only 66 teacher vacancies in Victorian government schools today
– only 80 jobs advertised online, including multiple ads for teacher agencies
The education sector that employs 100,000 teachers in Victoria.
A letter in today’s The Age says that the correspondents employer, is laying off engineers as clients cancel contracts. The Australians are being retrenched leaving the 457 visa holders in place. In September 1992 Telstra laid off 5000 local hires 6 months after importing 5000 engineers. As the locals had worked for Telstra since graduation, if they were worthless it was because Telstra had made them so, failing to provide worthwhile work.
You have to wonder what the value is of incurring a HECS debt to get a university degree.
So where are the job creation schemes for knowledge workers? Will Kevin just abandon his campaign to slash the number of public servants and employ more public servants and consultants
I didn’t discern any reduction to the now admittedly weak ETS in the insulation inititiave
http://www.pm.gov.au/media/Release/2009/media_release_0783.cfm
It says better insulated homes will be ready for higher energy prices. I agree however if private dwellings are to get green makeovers why stop at insulation? There are solar panels, solar HWS and smart meters. You could spend $30k per house not $1600. However govt buying power could maybe halve current prices of green gadgetry.
I’d call this ‘micro-infrastructure’ which may have longer lasting benefits than new roads given that crude oil output is declining whatever bowser prices indicate. I also think that people are spooked and are wary about reverting to non-essential retail in case it all goes bad again. Green home makeovers help both homeowners and tradies and will at least keep retail ticking over.
(Hermit I thought they did refer to a return to the rebates for solar hot water in the package).
JQ
I was thinking about your comments on the construction spending combined with your comments under Refuted Doctrines 5 that “the financial sector (finance, insurance and real estate) accounted for around 18 per cent of GDP”. The 18% is obviously unsustainable and we are seeing large cuts in finance activity and jobs. That seems unavoidable. So is the decline in finance sector activity enough to trigger a recession even if the rest of the economy (except mining) is fairly stable? Will this be a very sector-specific recession in Australia?
In terms of employment, I presume we will see sustained activity in construction, growth in education (?) and still a decline in finance. So is the main need now for assistance to retrain/ redeploy people from finance to other services? I presume we don’t want to go back to a situation where the finance sector is 18% of GDP.
TerjeP (say tay-a)@ 4 said;
“My main concern is that they’re wasting our money. And that after they are done wasting our money they will hand us the bill.”
NSW residents will have a distinct sense of déjà vu.
“but we need to be hiring teachers, teachers aides and support staff to work in them”
As this would be recurrent funding, it would mean the budget deficit would go on much longer than is the case for one-off spending, such as yesterday’s package. Maybe that weighed on the Gov’ts mind?
Bear with me while I introduce those bright young office jocks in Treasury and Finance to the depths of the estimating problem of retrofitting roof insulation to meet current BCA regs. After all, you’d anticipate no Govt program could easily sidestep its own hallowed standards, or all hell would break loose. No doubt the HIA and MBA would be there in a flash to remind them of their obligations, just as it applies to all their private members. Hold that thought!
Now let me introduce you to an old mate George who rang me up last winter on a rare rainy night to ‘problem solve’ for him. George is one of those old school, Hellenic landlords that collects the rents personally in cash because he doesn’t trust banks and Govts, which makes him a smart fellow by the looks of things at present. George’s perpetual imperative is one of acute cost control, largely due to a plethora of genetic Keynesians that surround him and their need to be kept in the manner to which George made that rod for his own back. Essentially George is a Commodore Austrian in a Mercedes and BMW Keynesian world, much to the regret of his tenants I suspect.(the Mercs and BMWs not the old Commodore)
So when George rings me up I immediately know he’s got a problem on his hands that not one of his cash in hand, assortment of ‘flying zucchini brothers’ can cheaply help him out of. In that respect he has a certain love hate relationship with this ‘no cash please I’m British’ Anglo problem solver. He loves me to get him out of a bind but hates paying full tote odds and he knows I’ll charge him door to door, because I learned a long time ago if you don’t, you’ll waste the best part of a day advising him on various problems for a boot load full of home grown produce. As delicious as that is it doesn’t satiate the more disciplined Keynesians lining up around here.
Essentially George’s problem is a leaking box gutter above a party wall in a pair of old villa maisonettes with two sets of irate tenants at water running through the lath and plaster ceiling, down the wall and onto the adjoining passage carpets. The tenants have been getting more irate to the point of threatening to move out and various flying zucchinis have come and gone to no avail it seems. A quick inspection reveals why they lost interest. This is a U shape pitched iron roof meeting in hidden box gutter through the spine of the building above the party wall and the problem is immediate. The roof has been replaced in white Colorbond iron, perhaps in the last 10 yrs, but unfortunately noone thought to replace the old galv box gutter. That was a shame because now it’s rusted out and furthermore it has perforated the otherwise sound Colorbond where it directly contacts the flanges of the old galv and being near the beach well..? To make matters worse the newish iron has been fixed with galv clouts rather than tek screws and that’s a drama that most roofers will turn their noses up at. No doubt George screwed down the roofing quote and got his cheap roof, but a chain’s as strong as its weakest link or a stitch in time saves nine as they say. Clearly George has already had the bad news on replacing at least half the roof prematurely and that old box gutter, something the O would no longer do in his dotage but don’t you ever let a chance go by old son. A nice flat box gutter to walk in with the comfortable valley either side and the knowledge back home in the shed I’ve got a special nylon block to fit that corro for another special pinch bar to have those clouts out in a jiffy, without damaging the iron. A simple matter to cut the iron back at the penultimate purlin, replace the box gutter and screw in some new metre long Colorbond slippers. All at an appropriate price that can’t be beat, but well you know how it is in the free market with all these young zucchinis flying about.
Which leads me to those young turks in Treasury and Finance and the costs of insulating rooves like George’s, because there was no sisalation under that clouted iron nor any batts on that ceiling to meet current BCA requirements. Lots of Georges with lots of rooves like that, so I presume all those flying zucchinis out there appreciate that, because if they don’t, trust me, the Georges of this world will be on their hammer for their appropriate standard of freebie. Can you believe those guys banging down Colorbond iron with cheap clouts nowadays?
Terje/hr etc., which part of the package exactly do you think will be wasted? Do you have evidence that Austrlian governments have consistenly made economically poor decisions regarding building/maintaining public school infrastructure or public housing? That improving insulation won’t be effective?
A fair whack of the $42 billion is tax rebates – i.e. giving people back money they’ve earned themselves. Presumably you have no complaint about this, although surely that’s the part that does the least to boost Australia’s long-term economic prospects (though the 30% for businesses buying “eligible assets” help here).
Public Housing was one government program which suffered due to neo-liberalism right?
Observa#22
That is a very good point re insulation – how many roofs are fit to insulate? How many have raked ceilings or flat roofs no insulation can fit in..how many are old so that even if you get the insulation in…the roof then needs a repair (could this be part of the plan – enforced roof repair expenditure?). Surely solar panels would be simpler to install leaving your old tight mate George to fix his own gutter problems. Once upon a time they painted the inside of gutters with creosote every so often and they lasted for years (no rust). Can you imagine the shocked look you would get today if you dared ask a roofer to do that? There will be add ons a plenty with insulation jobs that will start with the roofer exclaiming “oh you better come and have a look at this….” What about all those roofs where the junk has been stored and the rats have been nesting…no Id rather have solar panels. Quicker,cleaner, more useful because they go on the oustide even if they do come with a capital contribution cost. Insulation doesnt spell that cheap to me and has the potential to be rorted by the cowboy end of the construction industry.
Observa:
They’ll probably specify a minimum R-value or something that you need to achieve to meet the rebate requirements.
Then your insulation gets paid for you, but is capped at a particular amount ($1600 i think).
So if you already have some insulation, and just install some extra on top or something to meet the minimum R value, maybe it will only cost $300 and that’s all you’ll get. But if you have a difficult job and are starting from scratch and it ends up costing you $4,000, you will get the cap – $1600 back.
So all the government would need to see is a receipt for the work, and signed statements from installer and owner that the set level of insulation has been met, and that the insulation meets relevant standards.
They might try and create a ‘certified installers’ system to assist with this, and there is already a form of ‘certification’ (australian standard) for insulation, so presumably an installer wouldn’t be able to stick old blankets up in the roof and charge $1600, because the blankets wouldn’t meet the standard.
I think its completely doable – a similar scheme (but with a cap of $300) already exists in NSW:
http://www.environment.nsw.gov.au/rebates/ccfcir.htm
Most building energy efficiency regulation covers new buildings, and what to do about existing buildings has always been a big hole in energy efficiency policy, which is why we are seeing measures like this.
I’d say that rather than policy on the fly, the boffins in the greenhouse office, or dept of climate change or whatever it is now would have been working on approaches to energy efficiency in existing homes for perhaps years – the only thing that has been missing is the cash, which is now available.
One obvious thing they will no doubt do is ensure that people can’t get the rebate for insulation for new homes, which is already required by existing regulations.
Hermit @ 18: there are already hefty rebates for solar hot water, energy efficient washing machines, solar electric (photovoltaic) panels, raintanks, etc. In fact, you can get federal rebates and top them up with state rebates.
One thing i noticed though here:
http://www.environment.gov.au/energyefficiency/index.html
is that it is either/or – you can get a rebate of up to $1600 for insulation, OR you can get a rebate for solar hot water, but not both.
This trade off is totally silly in my view.
University education: I suppose universities will receive the ‘return on the education fund in perpetuity’. (Does anybody remember the exact words of the previous Treasurer?)
El mono#25
Neo liberalism shifted the emphas and the possibility of ultimate ownership over time, to public rental housing. In the decade from 1984 to 1992 commonwealth housing assistance to the states fell by 25% in real terms partly reflecting a shift to support for renters. Sub standard housing conditions were imposed on thousands of Australians. This was under the Hawke Keating government and it wasnt improved by Howard. Caravan parks and mobile home parks expanded and now real homelessness in the cities is showing its ugly face in the so called land of plenty during a boom even?. The 1990s so called boom could easily have afforded a turnaround in the long decline in public housing expenditure but the Coalition had no interest in reversing the decline. Neo liberalism again?…of course. I feel very sorry for those that work in the State departments of housing. They see the growing need out there and so do the charities. It was the “Industry Commission” in a report in 1994 that recommended C’wealth governments restrict their activities to “rent subsidies” and states to be left to ensure the availability of low cost housing (ignoring the fact that the States were basically stretched already… back to the vertical fiscal imbalance once more).
But it was up to the states to fight for a bigger share of our taxes and its high time they fought and had it recognised by C’wealth. People actually live in the states and are suffering the decline in public services (although I would be most reluctant to hand money to state labor to continue the Roozendal/Costa/Iemma inspired neo liberal circus that state labor morphed into).
Alanna said
“although I would be most reluctant to hand money to state labor to continue the Roozendal/Costa/Iemma inspired neo liberal circus that state labor morphed into).”
Alanna “Roozendal/Costa/Iemma” are not free marketeers, they are racketeers, thats what a social-democratic labour party generally does.
Terje says “Rudd seems to be saying “greed is bad but run along little citizens and do your best to consume more”. A walking talking oxymoron. Or perhaps just a moron.”
Good point Terje. Rudd is saying greed caused all the problems, but let’s encourage people to be greedy with other people’s money.
Basically, if you receive money you never earned, then spend like a drunken sailor, you will be greeted as a national hero. This is Rudd’s new moral paradigm to replace all that nasty free market greed.
As the old saying goes ‘in politics, greed is when you want to keep your own money, need is when you want someone else’s money, and compassion is when a politician wants to arrange the transfer’.
One of the notable features of this stimulus is the number of people who got nothing from the last package but will be benefitting from this one.
In other words, there were a whole lot of people resentful about getting nothing from the last package. So now the government has to throw money at different groups to placate them as well.
This approach makes no sense from an economic management perspective. If the government believes there is greater economic stimulus from giving money to some groups rather than others, it is not clear why that should have changed dramatically in a few months.
The opportunity cost/benefit of an extra dollar to a pensioner or farmer or student or worker should remain fairly similar over a short time. So unless the government are admitting their last package was overly targetted to the wrong groups, in which case they would be effectively admitting to wasting taxpayers money.
Tony G#
Fortunately your extreme right party politics got voted out before they could complete their scientific experiments on the rest of us. Hmm what were the policies? Lets try deregulation of financial markets. Lets try privatising the body that makes the regulations. Lets deregulate labour markets so they cant complain and lets silence dissent by labelling everyone under the sun “lefties”.
I notice you have changed your tune Tony. Is a “social democrat” a more moderate and polite expression for a “lefty”?
Things are looking up!
Alanna @25
“…no Id rather have solar panels”
So go buy yourself some solar panels. Why are you waiting for someone to pay for your own choices?
hrgh#33
Its a fiscal stimulus on the table (its not a user pays individual self interest free market shove in case you hadnt noticed) and if its a choice (of government) between insulation and solar panels thats my preference…its good for the environment and who gives a damn what the electricity providers want? They lose, solar panel producers win, and so does the consumer.
Quote:
“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”.
How do you know that the first part of this is correct John? Isn’t it just a pure guess? You don’t really know if the implied expansion will fail because it is too weak or if fact be unnecessarily large.
The economy isn’t operating in a range of past sampled experience so that I don’t think anyone (certainly including me) knows.
If the policy might fail then isn’t there a case therefore for being a little more conservative than effectively spending half of Labor’s debt ($42+$10=$56 compared to Labor pre-Howard debt of $96 billion) in one go.
If it is too strong then again delay and caution make sense.
If this move was repeated in a year’s time Labor’s debt would be reestablished in two years. Then what to do? More debt? Then more?
If you are uncertain should you not keep something in reserve. Shooting all guns at once is unhelpful if the enemy survive the first round of blasts.
Turnbull’s plan today offers wage subsidies via subsidised super for small business (a policy you would probably support) and half the implied deficit. The left will rush to reject this for tribal reasons but it makes a lot more sense than Rudd’s moves to me.
Oh and hrgh #33 says of me
““…no Id rather have solar panels”
then hrgh responds
“So go buy yourself some solar panels. Why are you waiting for someone to pay for your own choices?”
The problem I have with the liberal views of the far right is this incessant chatter about individual choice and user pays.
There is one anomaly – oligopilies reduce choice and my ability to shop around because the market isnt a functioning market. Its monopolistic and anti competitive and restricts me to eg two suppliers working in tandem with each other (like Coles and Woolies).
The liberals talk the talk of small business but walk the walk with big business. The hypocrisy in their own party is absolutely galling. Let the large electricity providers go hang (as fast as the government puts in insulation – Energy Australia will jack up prices – blind Freddy could see this coming) and give the fiscal stimulus to the smaller businesses of solar panel producers and installers and do something decent for the environment (use less electricity) and more importantly corrode Energy Australia’s ability to price gouge the Australian market.
But no the hypocrites of the far right want to make an argument over user pays and indiviual choice into an excuse to support dysfunctionally corrupted markets.
Wizofaus – you presume wrong. The way the government relates to us in taking large slabs of our money and then handing it back to us is a major problem. If you assume that taking money from people via taxes and then giving it back to much the same people via handouts is a mostly harmless exercise then yes you probably would miss my point. Try some light reading on the deadweight cost of taxation.
Reading the newspaper about the cash handout i am seem to be eligible for a payment of $950 after MArch 24th due to the fact i am at uni. I am also also eligible to $950 for earning less than $80 000 last financial year. Are both these payments going to be made via the Tax Department and will the nformation come automatically from my uni enrolement and previous tax return?
Dont bank on it El Mono. Turnbull is on the news spouting the last syllable of his name and blocking the stimulus.
Terge, but the tax has been already taken away – you’re saying it’s bad thing to undo it? Sure it would be better not to have taken it away in the first place, but hindsight is always 20/20 – current tax rates were set based more or less on the economic conditions that existed this time last year, rather different to what we have now.
Sure by all means cut the tax rate as soon as possible, but why on earth not give some of tax take back immediately?
Good points above about the practicalities of insulation – got a good laugh about George. I had a Hellenic landlord called George who also collected in cash.
Apart from the practicalities the insulation money worries me a bit from an economist’s perspective. Here you are going to have a huge temporary boom in one industry that will then quickly die. Talk about misallocation of resources and inefficiency. Let’s think about what will happen.
1. The current owners of the business will make a motza – not super fair to everyone else.
2. A whole lot of cowboy businessmen will be drawn into the industry with the sole purpose of short term profit knowing that in the longer term there is no money in it for them. This probably means dodgy work and gaming the system to get the most money for the least impact.
3. A whole lot of new workers will be trained up and employed. To start with they won’t be that good at the job so it’ll be somewhat inefficent and ineffective – later when they have the experience to do a really good job they’ll be sacked as there won’t be enough work for them to do when the subsidy runs out.
4. The insulation industry will collapse to lower than even current levels after the subsidy runs as anyone who was going to get insulation on an existing dwelling will have done it while the money was there. So the businesses that targeted existing buildings and had the workers with the skills and experience to work with these hard buildings will go broke. 5-10 years time down the track when some demand returns for insulating existing dwellings those businesses and their workers won’t be in the industry and we’ll get a worse outcome again from those only used to working on new buildings.
As other have suggested would have made more sense to spread the money around – smaller incentive for insulation, a little more incentive for other areas (solar, efficient appliances etc) even if they already have some subsidy. Spread the work around and reduce the damaging side effects.
hc @35 says: “Turnbull’s plan today offers wage subsidies via subsidised super for small business (…) and half the implied deficit.”
Why?
What exactly is a ‘wage subsidy via subsidised super’?
Superannuation of wage earners (ie other than defined benefit schemes) is an enforced holding of a portfolio of financial securities.
There are many types of financial securities. At present I focus on two types: a) bonds and shares issued by private enterprises. b) bonds issued by governments.
My super fund does not offer a portfolio of type b) only. I don’t know of a super fund (other than private) who offers type b).
With falling prices of securities issued by the private sector, the wage earners would not benefit – not even the ‘long run’, defined relative to their life expectancy. On the contrary, instead of having spending money now, some of which may go to small business, they may lose the ‘wage subsidy’. Small business may believe to be better off and, depending on the speed of implementation, they may be better of in the very short term because their superannuation bill would get a tax payer funded subsidy. But the tax payers include the said wage earners!. So the poposal is a hidden income redistribution. Furthermore, the hidden income redistribution in favour of small business may not materialise even for the small business sector because of declining (effective) demand for their output (ie the tax payer funded cash payments is not available). This scenario would have negative implications for the tax revenue, including GST and for employment.
If, however, superannuation funds would offer pure Australian government bond portfolios, then the wage earners could avoid default risk and face lower price risk. But there is no reason for issuing Australian government bonds unless there is a Government deficit. So, it seems to me that the proposed scheme has the possibly unintended consequence of favouring securities issued by the private sector, including the financial sector which is not stabilised globally. This seems to me to be a very risky policy of allocating tax payer obligations.
hc, please let me know where I am wrong.
Re @41: The current policy proposal includes the choice of solar or insulation.
The policy reduces the extra costs in funding employee superannuation commitments in small firms. According to Turnbull the government will foot this part of the bill for 2 years.
It provides a disincentive to small firms shedding jobs.
hc @44. Thank you for the speedy reply.
You confirm my interpretation of a ‘wage subsidy via subsidised super’ in your first paragraph.
I can’t accept your statment: “It provides a disincentive to small firms shedding jobs” as an argument to show me where I am wrong because:
a) some small firms consist of one individual only.
b) some small firms consist of technological teams (see Christopher Bliss, 1975, Capital Theory and Distribution of Income, for the theoretical concept and some empirical examples).
c) The disincentive works only if the small firm can be characterised by a smooth production function and there is no decline in demand for the output (revenue) which offsets the tax subsidy (ie it is a comparative static partial equilibrium result for a specific production function).
d) How would you justify using a comparative static result for a special case (ie c) as a relevant analytical tool for an empirical environment that may be characterised as a dynamic disequilibrium with severe discontinuities in financial markets?
Ernestine, it relies on the demand for labour sloping down.
Observa at #7
“The Building Code of Australia is probably not the intimate preserve of Finance and Treasury number crunchers, which they may find to their regret and that of Cabinet.”
More worrying however is that the BCA doesn’t have a grip on the subtle science of home insulation either, especially in the warmer parts of the country.
There’s a wealth of indisputable science that says that, north of say Brisbane, fitting bulk insulation in the roofs of houses makes them hotter at night, creating an ever expanding market for air-conditioners. The Insulation Council must just love it.
The best insulation for the warm zones (the boundary of which seems to be marching inexorably south) is simple, cheap, reflective sarking, Which the BCA virtually ignores.
I would charactertise the Australian government’s efforts to this point as being good in the short term but doing a fair bit of damage in the longer term.
E.g.1. Stimulus stops us falling as deeply into recession as other counties but means a need to savagely cut government spending or raise taxes in the future.
E.g.2. Incentives for first home buyers helps reduce falls in prices and falls in building activity but means we face the pain of more falls in prices and building activity later.
E.g.3. Supporting the banks now – decreases disruption in the financial system now but increases likelihood for risky banking practices continuing later.
This short term focus makes sense if the global downturn is going to be relatively short and we can deal with the pain in a time of solid economic growth. However if it’s going to be long (i.e. a global L shaped recession) Australia does face some considerable risks due to the huge level of consumer debt and low private savings rate (and the associated high level of foreign debt and current account deficit). This mean we as a whole country are in real trouble if we become viewed as a risky country to lend to. If we continue with this “spend and borrow ourselves out of trouble mentality” in a global environment where growth is low for years to come and where our commodity price exports will continue to decrease in value then lending to us may dry up. Then we are back to Paul Keating’s “banana republic” comment and sharp cut backs in government spending and reduced credit flows to households (and therefore decreased private spending) and back in another recession in say 4-5 years time but in a much worse situation as fiscal and monetary policy won’t be in a state to do anything productive about it.
So ease up Kev07, recklessly spending, borrowing and lending without worrying about the risk in the medium term got the world into this mess, let’s not mistake the same mistake again. A recession isn’t any big deal – digging ourselves into a hole we can’t get out of without massive pain is a big deal and that’s the risk we’re taking if we continue further down this road.
I wrote some of this under another topic then reaslsied it was a better fit here – apologies.
Steve van Emmerik
Harry,@46, thanks for making explicit the theoretical foundation of the proposal: pre 1950s neo-classical economics. May I suggest that even within the Walrasian G.E. framework (ie no incomplete markets, no fiat money, no banking system, no financial securities issued by private agents but denominated in fiat currency units, but smooth production functions, a minimum wealth condition and a few other assumptions) there is an aggregation problem, known as the Debreu-Mantel-Sonnenschein theorem. The following link provides a concise and relatively non-technical discussion of the Debreu-Mantel-Sonnenschein theorem http://archives.econ.utah.edu/archives/pkt/1995m04/msg00012.htm.
John Armour at #47
‘More worrying however is that the BCA doesn’t have a grip on the subtle science of home insulation either, especially in the warmer parts of the country.’
Actually that’s my point John that under the BCA, roof insulation is not simply a matter of batts in your ceiling if you care to look at Insulco’s specific solution table. You’re right that bulk insulation only covers conduction and convection, whereas radiant heat is best handled by reflective foil laminates.(see Insulco’s ‘Vapa-Chek’ requirement)In fact Lysaght produced roofing iron with foil already bonded to it(Coolclad as I recall)for high altitude sun, tropical regions. That’s not always appreciated by the layman nowadays who think it’s just a matter of chucking up ceiling batts, albeit even that’s problematic in retrofitting many skillion roof situations.
As an aside here you can see why I’m a big fan of carbon and resource taxing in lieu of income taxing more generally. Apart from the millionaire Georges of this world whom I suspect have not paid anywhere near the full intent of that 10000 pages of Income Tax Act, there’s another world of on-costs, admin and barriers to entry behind that Insulco BCA compliance table. Essentially the price of the ‘Quants’. 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. Now the architect/building draftsman can specify say a specific Insulco solution to meet Building Approval and the actual builder can wander off and use any cheap import or inferior(ie untested) substitute he likes. As long as there’s something up there that looks like it’s what’s recommended, nobody really checks. Give everyone the price incentive of carbon taxing and they’ll be interested in better than minimum requirements, without drowning in all the paperwork and admin costs.(as if we aren’t copping the fallout from too much finance admin off the top nowadays)