Coalition Senators' Dissenting
Report
SPENDING SPREE NOT STIMULUS
SUMMARY
Having carefully considered the
Government’s package, and the evidence presented to the Committee, Coalition
Senators believe the package:
- will
not achieve the objectives the Government claims;
- is
too big at this time, leaving little scope for further measures if needed
later;
- is
poorly thought through and a poor quality use of $42 billion of taxpayers’ money;
- lacks
ingredients that should be part of packages of this kind – measures to increase
employment, productivity, efficiency and competitiveness; and
- commits
Australia to record amounts of debt (the Government seeks authority to borrow
$200 billion), endangering the nation’s long-term economic security.
Coalition Senators are not opposed to a
responsible stimulus package.
But nothing Coalition Senators have
heard at the Committee’s hearings gives them confidence that the package has
been subject to the full intellectual rigour and detailed examination that
should be required when committing to spending $42 billion of taxpayers’ money.
Rather, it appears that the development
of the package and its contents have been politically driven not economically
driven.
INTRODUCTION
On Tuesday 3
February 2009, the Government announced a new package of measures totalling
$42 billion and including an Updated Economic and Fiscal Outlook (UEFO).
The new measures bring the total Government stimulus packages announced to date
to $74 billion or 6.4 per cent of GDP (see Table 2).
The legislation
effecting the package was introduced on Wednesday 4 February 2009, with the
Government insisting that both the House of Representatives and the Senate
should pass the legislation unamended by Thursday 5 February 2009. That is,
the Government insisted that Parliament approve the expenditure of $42 billion
of public money in 48 hours.
Because such a
large amount of taxpayers’ money is involved, Coalition and minority Senators
voted that an Inquiry be held into the package of legislation, so it could be
subject to detailed scrutiny.
Despite the need
for careful examination, the Government forced a hurried inquiry, with the
Report due by Tuesday 10 February 2009. The Government has been unable to
articulate a strong reason for the unnecessary haste. It originally claimed
that the Centrelink cash bonuses could not be delivered on time unless the
package was rammed through the Parliament in 48 hours. Yet in evidence to the
Committee, the CEO of Centrelink Mr Finn Pratt said “If the parliament passes
this legislation next week, as currently presented, we will be able to
implement it for 11 March”. (Proof Hansard Friday 6 February 2009, p8).
Further, Coalition Senators expressed their concern that the timetable for
consideration of this huge financial package has been so hasty that Treasury
has been unable to provide answers to many of the Committee’s questions on
notice.
Coalition
Senators note that the unprecedented demand for the passage of a series of
large measures without due scrutiny poses a significant risk to the Public
Account. Not only is there a risk that the size of the package is too great,
but the components of the package might be of poor quality and therefore
achieve less impact than some alternative package. The spending of taxpayers’
money is not costless; there is an opportunity cost in providing public
spending and that includes alternative options foregone such as returning taxes
to the people who paid them.
Coalition
Senators have reached the conclusion that this package does not conform with
best economic theory and evidence, has been insufficiently analysed by the
Departments of Treasury and Finance, is too large, and leaves insufficient
capacity to respond to future needs.
Coalition
Senators are deeply concerned that the Government has failed to consider or
model alternative policies and has committed significant public money to a
range of programmes that will not achieve the Government’s stated objectives.
To
summarise, the package:
- is too large;
- has been introduced too early;
- imposes too much debt on Australian
taxpayers; and
- is poorly targetted to achieve its stated
objective “to support economic growth and jobs in Australia” (UEFO, page 17).
Coalition
Senators therefore recommend that the Senate vote against the package as a
whole. The Government should then present to the Parliament an appropriate
stimulus package that is more modest, better targeted and which contains
components that would genuinely improve productivity, assist in genuine job
creation, and raise the living standards of the Australian people.
ECONOMIC
CIRCUMSTANCES
International
International
economic conditions have weakened, and it is widely accepted that the world is
in recession, with the G7 countries in particular suffering significant
recessions. According to the forecasts in UEFO, Chinese growth has also
dropped significantly, to an estimated 6 ½ per cent in 2009. Forecasts for
growth in the euro area are around minus 2 per cent in 2009. It is
noteworthy that the majority of countries – including the G7 countries and
Brazil, Russian, India and China – have included tax cuts in their stimulus
packages. According to The Economist (31 January 2009, p71),
the average stimulus is estimated at 2.8 per cent. Governments have also taken
on substantial public liabilities, in many cases taking equity in private
banks.
National
Australia’s
economic conditions have weakened, but remain significantly stronger than the
rest of the world. The UEFO forecasts growth in Australia to be 1 per cent in
2008-09 and ¾ of a per cent in 2009-10. It also forecasts that unemployment
will rise to 7 per cent by the June quarter 2010, compared with the present
unemployment rate of 4.5 per cent for the month of December 2008.
There are a
number of reasons for the relative strength of Australia’s economy compared
with overseas. A major reason is a long series of economic reforms, commencing
with the Hawke/Keating Government’s floating of the dollar in 1983 with
bipartisan support from the Coalition which then accelerated under the
Howard/Costello Government. These macroeconomic and microeconomic reforms
included: liberalising trade, opening capital markets, improving the regulation
of the corporate and financial sector, enhancing competition, freeing up the
labour market and a myriad of other measures to make Australia’s economy
stronger, more resilient and more dynamic adding to the living standards of
Australians.
Australia’s
financial sector is the envy of the world – the four major Australian banks now
being in the top 20 of the highest credit ratings of banks in the world. Our
regulation is, as the Deputy Prime Minister said at Davos, “better than world
class”. According to the Australian Prudential Regulation Authority,
Australian banks continue to be in a relatively strong state, a testimony to
the success of the prudential regulation regime established by the former
Coalition Government.
The legacy
inherited by the Rudd Government in November 2007 was one of a very strong
economy, with a dynamic and flexible labour market, sound financial regulation,
and strong economic growth. The unemployment rate was at a 30 year low, with
record high participation rates; public net debt had fallen to minus $41
billion; inflation was in the target range of 2 to 3 per cent; consistent
budget surpluses had been achieved and were forecast over the forward
estimates; a number of significant investment funds were established to address
long-term challenges such as the ageing of Australia’s population (including
the Future Fund and the Higher Education Endowment Fund); and a long series of
sustainable tax cuts have returned the benefits of sound economic management to
the Australian taxpayer.
Professor
McKibbin in evidence to the Committee (Submission) lent his support to the view
that the Australian economy was very strong compared with other countries and
said:
“Up until this point the Australian economy has proven to be a
good model for economic reform combined with careful regulation and an
appropriate role for Government. This reality should be reinforced whenever
possible”.
Government
policy to date
Many of the
Government’s policies to date have been misguided, ad hoc, and hasty. For
example, the Government’s decision to provide an unlimited guarantee for bank
deposits created a substantial distortion which negatively affected – and
continues to affect – the savings of hundreds of thousands of Australians.
Similarly, through much of 2008 the Government overstated the inflation threat
and increased inflation expectations leading to higher interest rates. The
effects of those increases are still feeding through into economic activity.
The Government talked down the economy for political gain, undermining business
and consumer confidence. The Government took decisions to increase taxes and
other revenue in the May Budget after talking of “painful” budget cuts in the
months and weeks beforehand.
Coalition
Senators consider that this pattern of policy mistakes and rushed decision
making in the attempt to appear “decisive” has weakened the Australian economy,
lowered business and consumer confidence, and exposed Australia needlessly to
additional risk from the global financial crisis. Coalition Senators consider
that the present package continues this pattern of rushed decision making and
urge the Government to be more cautious, competent and strategic in its
management of the economy.
The importance of
business and household confidence was emphasised by Professor McKibbin in
evidence to the Committee. He said:
“Therefore, the first requirement of the Nation Building and Jobs
Plan Bills should be to help restore confidence. Ideally this would imply that
all sides of politics would reach a consensus on the way forward and would
quickly pass legislation through the Parliament. It is unfortunate that this
consensus was not reached early through a bipartisan approach” (Submission).
Coalition
Senators agree with this statement and regret that the Coalition’s repeated
offer to work with the Government in a bipartisan manner has been consistently
rejected by the Prime Minister.
THE PACKAGE
The stimulus
package comprises 10 components structured into two key themes: building
prosperity for the future and supporting jobs now, as shown in the table below.
TABLE 1: Key
components of the $42 billion package
Source: Updated Economic and Fiscal Outlook, page 17
The Government
argues that the components in the Building prosperity for the future are
aimed at improving productivity, but Coalition Senators consider that spending
taxpayers’ money on these projects is unlikely to enhance productivity. Programmes
that simply spend taxpayers’ money on social housing or subsidise activities
that are self financing are highly unlikely to improve productivity.
The various
grants under Supporting jobs now are clearly attractive to recipients.
But by focussing on grants rather than tax cuts, the Government has rejected a
more effective measure. And by making the grants so large, the Government has
reduced the scope for future stimulus measures.
Deficits
and Debt
The UEFO shows
that the accumulated deficits between 2008-09 and 2011-12 are projected to be
$118 billion. Of that, policy decisions taken since the May Budget make up the
majority: $67 billion over the forward estimates, including $29 billion in
2008-09. The Government’s own figures show that in the absence of its policy
decisions, the budget would still be in surplus in 2008-09. The Government has
simply run up Commonwealth debt – its amendments to the Commonwealth Inscribed
Stock Act seek authority for borrowing up to $200 billion – an unprecedented
amount for Australia. This amount –$9500 per man, woman and child – is a
burden on Australian taxpayers that will reduce Australia’s growth. Treasury
was unable in the timeframe to provide an estimate of the interest cost of the
debt. However, David Crowe in the Australian Financial Review (10
February 2009) estimates that the interest cost on the proposed debt will rise
to $7 billion a year.
The net
deterioration in the Commonwealth’s Budget position between 2007-08 and 2008-09
is projected to be 3.6 per cent of GDP. This is similar to the deterioration
under the Whitlam Government, which went from a surplus of 1.9 per cent of GDP
in 1973-74 to a deficit of 1.8 per cent of GDP in 1975-76. However, Coalition
Senators note that although the current deterioration is roughly similar to
that previous episode in terms of percentage of GDP, under the current
Government the deterioration is projected to occur over the course of a single
year – twice as fast as the deterioration under the Whitlam Government.
Coalition
Senators further note that the latest stimulus package follows earlier measures
which together now total almost $75 billion. Again, the Government has been
unable to articulate the need for a further stimulus package of such a size and
composition following these earlier packages which have not been assessed for
their efficacy. At 6.4 per cent of GDP (see Table 2), the stimulus measures in
Australia are larger than those in the United Kingdom and United States among
others – countries that are in considerably worse economic health and therefore
require commensurately larger fiscal stimuli.
In evidence
tabled by Treasury to the Committee on 5 February 2009, a comparison of fiscal
stimulus packages around the world in 2008 and 2009 was provided. This
supports the Coalition Senators’ view about the relative size of the Australian
stimulus. Using only the $10.4 billion and $42 billion packages, Treasury
calculates that Australia’s stimulus is 4.9 per cent of GDP. This is four
times the size of the US stimulus as a proportion of GDP (1.2 per cent) as
shown in the Treasury evidence. It also showed that the UK’s stimulus was 1.4
per cent of GDP, Germany was 2.6 per cent of GDP, Japan was 2.6 per cent of GDP
and France at 1.4 per cent of GDP.
Excessive debt
has been a major cause of the global financial crisis. Coalition Senators
therefore are bemused that the Government is unconcerned about the prospect of
a significant increase in public debt. The lessons of the mid-1990s show that
the burden of public debt significantly impaired the economic performance of
Australia.
Coalition
Senators are concerned by the lack of a clear strategy to return the budget to
surplus. The UEFO provides no detail other than allowing tax receipts to
increase and holding growth in real spending to 2%. Worryingly, despite
numerous queries, officials from the Treasury and the Department of Finance and
Deregulation were unable to provide further detail about how these commitments
would be met over the period.
Furthermore,
Coalition Senators are concerned by the UEFO projections outlining $50 billion
in deficits over 2010-2012 despite a projected economic recovery and 3% growth
in real GDP. Treasury officials were unable to project when the community
might expect the budget to return to surplus.
TABLE 2:
GOVERNMENT STIMULUS PACKAGES ANNOUNCED TO DATE
Package
|
$ million
|
Economic Security Strategy
(October 2008)
|
10,400
|
COAG Package
|
15,200
|
Nation Building and Jobs
Plan (February 2008)
|
41,534
|
Ruddbank (Government
contribution)
|
2,000
|
Local Community
Infrastructure
|
300
|
Infrastructure package
|
4,700
|
TOTAL
|
74,134
|
[1]
Coalition
Senators are concerned that the Government is unable to provide evidence on the
success or otherwise of the $10.4 billion package announced on 14 October 2008,
yet it is now asking the Senate to approve a further package of four times the
size. In evidence to the Committee, Dr Henry said “so we are only going to get
by the first week of March a very partial reading of the impact on both
household consumption and household saving of the October package” (Proof
Hansard 5 February 2009, page 9). Further, in evidence given on Monday 9
February, Richard Evans of the Australian Retailers Association stated “it is
too early to determine whether or not the cash has entered the market in any
significant way. Indeed it may take six months before we actually the results
...”. (page 2-3).
When questioned
about the small increase in retail sales in December, Mr Evans noted “retailers
have been discounting since November to stimulate customers. It was very soft
in December” (page 2).
Even more
concerning, when asked about how Australians could judge the success of the
proposed $42 billion package, Dr Henry conceded that we may never know. He
said “... it is going to be difficult for us to be able to provide the Parliament
with precise estimates of the actual fiscal impact of the package”. (Proof
Hansard, Monday 9 February 2009, page 56).
ECONOMIC
PRINCIPLES, THEORY AND EVIDENCE
Many leading
academic economists have spoken publicly of their concerns that fiscal stimulus
of the sort proposed by the Government is ineffective or, worse,
counterproductive. This view reflects a large body of theoretical and empirical
work over the last thirty years (the Appendix contains more detailed
discussion).
In the United
States, three Nobel laureates in economics (James Buchanan, Edward Prescott and
Vernon Smith) and a number of other economists including Deepak Lal, John Cochrane
and Michael Bordo have signed an open letter to the American President stating
that:
“... it is a triumph of hope over experience to believe that more
government spending will help the U.S. today. To improve the economy,
policymakers should focus on reforms that remove impediments to work, saving,
investment and production. Lower tax rates and a reduction in the burden of
government are the best ways of using fiscal policy to boost growth” (Open
letter from 200 economists New York Times/ Washington Post/Wall
Street Journal, January 2009).
Harvard
University economics professors, Robert Barro and Greg Mankiw have provided
clear statements of their concerns.
Barro has
cautioned against “programs that throw money at people” and “massive
public-works programs that do not pass muster” and emphasised the value of
income and corporate tax reductions (Wall Street Journal, 22 January
2009).
Mankiw has
pointed out three home truths as his government rushes to introduce a huge
increase in government spending (New York Times, 11 January 2009).
First, the effect of government spending on the economy is not very large.
Second, public spending on poorly chosen projects will not improve economic
well-being. Third, evidence suggests that the effects of tax cuts are greater
than spending increases, perhaps twice as large.
A number of
leading Australian economists have raised similar concerns about fiscal policy
in general and the Australian government’s approach in particular. Professor
Tony Makin of Griffith University has written:
“The textbook consensus is that for open economies, fiscal
policy is ineffective in stabilising aggregate demand in the short run under
floating exchange rates – especially if it means lifting unproductive
government spending and running up public debt to fund it” (Australian
Financial Review, 15 December 2008).
Australia is an
open economy with floating exchange rates and a high degree of international
capital mobility. Further, “if the extra government spending fails to generate
an economic return sufficient to cover the servicing costs of the foreign
borrowing required to fund it, the seeds are sown for a future currency crisis”
(Australian Financial Review, 4 February 2009). The proposed expenditure
on education and social housing, as well as the transfer payments will not
generate a return to cover debt servicing costs.
In evidence to
this committee, Professor Sinclair Davidson, of RMIT, has argued that spending
multipliers are often overstated. He has advised that the government should
consider tax cuts such as a GST or pay roll tax holiday and bringing forward
the “aspirational” income tax cuts suggested by the Labor Party prior to the
election.
Reserve bank
board member and professor at the Australian National University, Warwick
McKibbin, has stated that the December 2008 stimulus payments did not have much
impact and has called for a halving of the GST for a year (reported in The
Age, 30 January 2009).
The chairman of
Concept Economics, Professor Henry Ergas (Australian, 9 February 2009)
has a number of concerns about the effectiveness of fiscal policy, noting also
that the latest stimulus appears to be “too much, too soon”, a view shared by
the Coalition and discussed further below.
There is no
evidence that the government has requested or considered a detailed examination
of the theoretical and empirical work on this subject before reaching its
policy conclusions. In public it has relied on selective use of opinions
expressed by certain individuals at international bodies such as the IMF while
eschewing the views of the organisation.
Whilst much of
the evidence suggests that tax cuts have a relatively large fiscal multiplier,
Coalition Senators note that the Government effectively raised taxes when the
planned “aspirational” tax cuts were abandoned in the Mid-Year Fiscal and
Economic Outlook. Page 52 of that document states that:
“In the 2008-09 Budget, the Government made a provision for its
aspirational tax goals in 2011-12. The Government said that achieving its
aspirational tax goals ‘will depend on economic conditions and the need to
maintain fiscal responsibility’. Given the dramatic deterioration in the global
economic outlook and associated increased uncertainty, the provision will no
longer be maintained. The Government will reconsider the policy parameters
following an improvement in overall economic conditions.”
Coalition
Senators are puzzled as to why the Government believed back in November 2008
that it was not fiscally responsible to carry out its election commitment of
planned tax cuts and quietly abandoned them, but that less than three months
later it has now decided that it is fiscally responsible to spend $42 billion
and seek authority for borrowing up to $200 billion. No explanation of this
has been provided.
THE
GOVERNMENT’S ANALYSIS
Treasury’s
modelling of the stimulus package is a black box. We have no idea of the
structure of the model, the data used or the results for GDP or employment for
each of the ten policies in the plan. The figures that have been floated are
unsupported by detailed analysis, appear fanciful and are inconsistent. The
Government claimed that the $10.4 billion package will create about 75,000
jobs at an average cost of $139,000 per job; infrastructure package of $4.7
billion will create 32,000 jobs at a cost of $147,000 per job; COAG package of
$15.1 billion will create 133,000 jobs at a cost of $114,000 per job. Yet, the
$41.5 billion package will “support” up to 90,000 jobs over the next two
years at an average cost of $461,000 per job or $230,500 per job per year.
Coalition Senators note the change in language and Treasury’s inability to
account for this.
The $41.5 billion
package has much lower job “support” than the $10.4 billion package. The result
is curious as the second package has large infrastructure spending which
Treasury tells us (Dr Gruen’s evidence, 5 February 2009, p. 11) has a higher
GDP multiplier (closer to 1) than transfer payments (closer to 0.5). No details
have been supplied about exactly what are the estimated GDP and employment
multipliers for each sector of the economy in the model of the ten components
of the package.
It appears that the Nation
Building and Jobs Plan was provided by the government to Treasury for
modelling, rather than prepared by Treasury. And it appears that Treasury was
not asked to model any alternative policies.
The Government has
consistently stated that it wanted open, transparent and accountable government
with evidence based policy. Yet in the case of the present package, the
Government has failed to provide any accountability measures and has not
provided any regulation impact statements to establish that the Bills will
provide a net benefit to Australians and that the proposed measures are
superior to any alternatives. The Government has also failed to provide any
key performance indicators to assess the effectiveness and efficiency of the
package.
SIZE OF
STIMULUS
The Government
has not made available analysis of the size of the stimulus. This appears not
to be readily available despite the Prime Minister’s statement on the
importance of co-ordination across countries.
According to page
71 of the Economist (31 January 2009), the weighted average stimulus of
the G7 countries plus Brazil, Russian, India and China, was 3.6 per cent of GDP
spread over several years. See table for the individual country details.
Australia has a
bigger stimulus than these other countries which are in a significantly worse
financial and economic state than Australia. (Australia’s stimulus is about 6.4
per cent of GDP (and around 4 per cent for the $42 billion package) taking
into account the $10.4 billion package, the $15 billion COAG package, the $4.7
billion infrastructure package and this $42 billion second stimulus package). [2]
A smaller
stimulus today would leave greater room for the future should a further
stimulus be required.
Saul Eslake said
that a large fiscal stimulus leading to high debt would mean higher taxes in
the future. “It may well be that servicing or repaying the debt incurred now
will ultimately require higher taxes” (Proof Hansard Monday 9 February 2009,
page 37).
Dr Henry said in
evidence to the Committee when asked about repaying the debt “it could also be
achieved by asset sales” (Proof Hansard Monday 9 February 2009, page 40).
Professor
McKibbin in evidence to the Committee argued that Australia’s relative economic
strength and the likelihood that the global economic slowdown may be sustained
suggested that:
“The current package is too large at this stage of the global
economic slowdown. Given the circumstances in Australia, the package should be
less than the 2 per cent of GDP average stimulus recommended by the IMF”.
(Submission)
TIMING OF
STIMULUS
In his address to
Treasury staff on 14 March 2007, Dr Henry stated that “for macroeconomic
purposes, it is probably reasonably safe to assume that we are already at full
employment – or, at least, very close to the NAIRU, the non-accelerating
inflation rate of unemployment”. When Dr Henry made this statement, the
unemployment rate was 4.6 per cent (February 2007, seasonally adjusted).
In evidence to
this Committee, Dr Henry has said “we are not in a position of full employment...
this is not a situation in which we are having a fiscal expansion with an
economy already at full employment” (5 February 2009, p. 30). While Coalition
Senators note that unemployment is a lagging indicator, no explanation was
provided for the contradiction in his views nor was evidence provided that the
unemployment rate is significantly higher than the Australian Bureau of
Statistics’ figure of 4.5 per cent.
In evidence to
this committee, Dr Gruen said that in the Treasury’s modelling, “the
unemployment rate will return to the model’s rate at which inflation is neither
rising nor falling sometimes called the NAIRU” (5 February 2009, p. 42).
This is not an
abstract point. If NAIRU is between 4.5 and 5 per cent, then there is a
practical question of why we are undertaking such a massive fiscal policy
intervention now. While the government wishes to pre-empt an increase in
unemployment, on Treasury’s analysis, it would seem prudent to wait. There are
costs of acting precipitately. It will be a large diversion of productive
resources into less productive uses for limited immediate benefit should
conditions not deteriorate as much as some fear. Alternatively, it will leave
the government less able to respond in the future should conditions
dramatically worsen.
Professor
McKibbon, in evidence to this committee noted that an economic downturn may
persist for some time and that the economic and regulatory strengths of the
Australian economy allow Australia to have a smaller response than other
countries. The Coalition considers that there is, therefore, a very real
concern that this stimulus package may be, as Henry Ergas puts it “too much,
too early”.
COMPOSITION OF
STIMULUS
As discussed
above little consideration has been given to alternative policies and no
justification has been provided for why the elements of the package have been
chosen above alternatives.
Tax cuts
Many leading
economists conclude that tax cuts are preferable to spending increases.
The Economist (31 January 2009, page 71) table referred
to above shows that all of the G7 and BRIC countries have tax cuts in their
stimulus packages. The IMF’s World Economic Outlook (October 2008, page
178) concludes that “revenue-based stimulus measures seem to be more effective
in boosting real GDP than expenditure-based measures”, especially in advanced
economies like Australia’s. The six-monthly Outlook is the most important
regular statement of IMF policy and this conclusion is contained in a chapter
examining in detail the evidence on fiscal policy as a countercyclical tool.
The Government has rejected
the possibility of tax cuts which so many other countries consider superior to
a handout only package. It has also rejected the considered advice of the IMF
in favour of tax cuts over transfer payments (IMF, World Economic Outlook,
October 2008).
Tax options raised by
leading Australian economists include permanent measures such as bringing
forward the already announced tax cuts scheduled for 2010 or introducing the
aspirational income tax cuts. Temporary measures include a GST rate cut or
payment holiday and a payroll tax holiday.
Payroll tax and
GST can be changed quickly and implemented as quickly as spending increases, as
can the Coalition’s suggestion of some federal assistance to partially pay for
the superannuation guarantee of small businesses.
Another reason to
favour tax cuts as a significant part of the package is because tax cuts can be
relied upon to increase the productive capacity in the longer-term and
therefore they increase GDP growth. As the Treasurer himself noted in his
Second Reading speech on the Tax Laws Amendment (Personal Income Tax Reduction)
Bill to the House on 14 February 2008:
“Economic modelling undertaken by the Treasury indicates the
personal income tax reforms alone will lift aggregate labour supply by around
65,000 persons in the medium term. This increase in workers, together with the
increase in the effort of existing workers, will make available around 2.5
million additional hours of work to the economy each week. These tax reforms
will also enhance the incentives for taxpayers to upgrade their skills and gain
higher qualifications by allowing workers to keep more of the wage gains that
come with being more highly skilled and productive.”
Professor
McKibbon also noted in his testimony:
“The main problem I see is in the cash payments. I would replace
the intent of these payments by bringing forward the tax cuts that are already
legislated for future years.”
Poorly selected
spending programmes, by contrast, will work in the opposite direction.
Experience suggests that the private allocation of resources generates higher
returns on average over the long-run.
Quality of projects
Many economists
have raised the concern that public spending on poorly chosen projects will not
improve economic well-being.
The announcement
of $21.4 billion in public expenditure on schools and public housing provides
no serious explanation as to why these projects were chosen instead of the many
other alternative public and private projects that could be undertaken.
Of course the
Coalition believes in our schools and in housing, but are these the best
investments to undertake with over $21 billion of public money and debt?
In evidence (5
February 2009, p. 18) Dr Henry states “a project which would make a substantial
enhancement to the future supply capacity of the economy is a project that
should be done anyway. And it should be done on top of these measures.”
However, Coalition Senators
endorse the view taken by many of the world’s leading economists that such an
approach is unnecessary and undesirable. All projects chosen as part of a
stimulus package can and should be worth doing in their own right.
The Coalition finds it
remarkable that the Government has been unable to identify worthwhile projects
given that it says it has been thinking about Australia’s infrastructure needs
since it won office over a year ago.
Coalition Senators are also
surprised that the Government does not appear to have estimates of the
multipliers for individual components. Senator Joyce asked if this meant that
spending $42 billion digging holes and filling them in again would result in
the same stimulus as the 10 components actually chosen. Dr Gruen replied:
“I guess the answer to that is that Keynes
at some point made the point that the effect on aggregate demand would be the
same if you dug holes and filled them in. It is actually a famous example. But
to the extent that you can do something which has the same effect on jobs and
you end up with something that is actually what society wants, that is clearly
preferable to digging holes and filling them in.” (Proof Hansard Monday 9
February 2009, page 57).
Coalition Senators are
concerned about the shortcomings of the Government’s analysis which is unable
to distinguish the effectiveness of different programmes either in their
short-term stimulus effects or their long-term effects on economic growth.
In regard to long-term
effects on economic growth and employment, Treasury has confirmed that “in the
long run we are not talking about saving jobs” (Proof Hansard, Thursday 5
February 2009, page 41). This is in contrast to statements from the Government
which appear to suggest that the job creation effects of the package are both
short and long-term. For example in UEFO (page 17), it states that the Building
prosperity for the future component of the package will not only boost
demand and increase employment over the next couple of years, but will also add
“to the productive capacity of the economy in the longer-term”.
Coalition
Senators also noted that the component to encourage insulation in homes is
inconsistent with the Government’s own Carbon Pollution Reduction Scheme. The Treasurer’s “Energy Efficient Homes Program” released
on 3 February 2009 says:
“Overall, it is estimated that these
new measures could result in the abatement of 4.7 million tonnes of carbon
dioxide equivalent (Mt CO2-e) per year from the end of the program, and total
abatement of 49.4 Mt CO2-e by 2020.”
However, the CPRS White Paper involves a reduction target of 5 per
cent of emissions by 2020. The installation of insulation would reduce the
price of permits to other emitters and not result in any additional carbon
emissions reductions beyond the 5 per cent target. By reducing the permit
price, the insulation scheme is an effective subsidy to high emitters.
CONCLUSION
Australia has
enjoyed a long period of strong economic growth, falling unemployment due in
large measure to a long series of micro and macro-economic reforms. As a
result, Australia is better prepared than other countries to withstand the
economic downturn.
The Government
has panicked and wants to rush through an extremely large fiscal package with
inadequate analysis and scrutiny and without considering alternatives. In
addition the Government has failed to demonstrate the effectiveness of its
previous stimulus measures, especially with regard to its claims that the
October 2008 package would create 75,000 jobs – a claim that has now been
widely discredited.
RECOMMENDATION
Accordingly
Coalition Senators recommend that the Senate reject this package and vote
against the six Bills.
Senator Mitch Fifield
Deputy Chair |
Senator Scott Ryan |
Senator Barnaby Joyce |
|
|
|
Senator Eric Abetz |
Senator Helen Coonan |
|
APPENDIX
Coalition
Senators firmly believe that some basic economic principles should be kept in
mind when examining the efficacy of fiscal stimulus packages. A dollar of
additional Government spending creates both benefits and costs. Weighing up
those costs and benefits should always be done with a great amount of care, in
order to obtain maximum “bang” for taxpayers’ “buck”. This is even more
important when such large amounts of money are at stake and the size of the
debt to be incurred by the public in this instance is so significant.
The basic
economic principle of opportunity cost means that an additional dollar of
Government spending must always draw resources away from alternative economic
uses in the private sector. As Treasury Secretary Dr Ken Henry noted in his
speech of 14 March 2007:
“Expansionary fiscal policy tends to ‘crowd out’ private activity:
it puts upward pressure on prices which, all things being equal, puts upward
pressure on interest rates. Depending upon the size of the interest rate
response, the nominal exchange rate might also appreciate, squeezing further
resources out of the traded goods and services sectors of the economy. As a
rather crude, but nevertheless instructive generalisation, there is no policy
intervention available to Government, in these circumstances, that can generate
higher national income without first expanding the nation’s supply capacity.
Policy actions that expand the nation’s supply capacity target at least one of
the 3Ps — population, participation or productivity – that we have been talking
so much about in recent years.
Now you might be thinking that that’s all pretty obvious. It is,
after all, a tautology. But one of my messages to you today is that if you
understand what I have just been talking about, then you are a member of a
rather small minority group. The political economy hasn’t kept pace with the
real economy.”
The Department of
Finance's Handbook of Cost Benefit Analysis makes a similar point at
page 43:
“(a) Employment multipliers
The existence of unemployment sometimes leads analysts to augment
the benefits from Government projects due to indirect effects of the project on
employment and output. The reason given is that if labour which would otherwise
be unemployed is used on a public project, the expenditures of the newly
employed workers may raise employment and incomes in other sectors of the
economy where labour and other factors of production would otherwise be
involuntarily idle, and so on in a chain reaction.
The problem with this approach is that any such multiplier effect
could also be achieved by alternative uses of the project resources. Instead of
undertaking the project, the Government could reduce taxation or increase
expenditure, either of which could be expected to have an expansionary (though
not necessarily similar) effect on income and employment. It should be
remembered that cost-benefit analysis is always concerned with incremental
costs and benefits, that is, with effects which would not have occurred in the
absence of the project."
And on page 40
the handbook states that:
"To say that a project will create 100 jobs is not to say
that a project will reduce unemployment by 100 people. As a general rule, it is
recommended that analysts assume that labour, as with other resources, is fully
employed. Moreover, unless the project is specifically targetted towards the
goal of reducing unemployment, it can be expected that many of the jobs will be
filled by individuals who are currently employed but who are attracted either
by the pay or by other attributes of the new positions. The research necessary
to justify the use of shadow pricing of labour should include, therefore, the
mix of unemployed and continuously employed persons in the additional
employees."
Professor Kevin
Murphy of the University of Chicago has recently developed these ideas further,
proposing a simple analytical framework for assessing the proposed fiscal
stimulus package in the United States.[3] He notes that a proper assessment of the
benefit of an additional dollar of spending should take account of the extent
to which worthwhile projects will be correctly identified and ranked by the
Government, the extent to which the dollars that are spent will actually employ
idle resources, the opportunity cost of those idle resources, and the
efficiency cost of raising the tax revenue to fund the additional spending.
Professor
Sinclair Davidson in his evidence to the Committee highlighted these concerns
and the evidence from leading international economists. In particular he
concludes “discretionary fiscal policy has a poor track record of success”. In
particular “Keynesian strategies are less likely to work in small open
economies”. Professor Davidson also reminded the Committee of the important role
of independent monetary policy and the automatic stabilisers in fiscal policy.
Coalition
Senators are not convinced that the Government has based its decisions on
credible theoretical arguments or empirical evidence regarding any of these
individual aspects of the fiscal stimulus package.
Coalition
Senators were disappointed at the inability of the Government to precisely
define what is meant by the concept of the “fiscal multiplier” and the complete
lack of convincing empirical evidence regarding the sign and size of fiscal
multipliers for Australia in general and for this set of measures in
particular, both for the package as a whole and for individual policy
proposals. In particular, there appeared to be some confusion as to whether
the multiplier measured the change in aggregate demand brought about by a
change in fiscal policy, or the change in GDP that is brought about (the latter
is the accepted definition).
Coalition
Senators were also disappointed that the Government did not consider the effect
that talking down the economy would have on businesses and consumers, the
reaction of the private sector to deficits and debt, and the role of business
and consumer confidence would play in the economic recovery.
Coalition
Senators were not convinced by the vague theoretical arguments putting forth
the proposition that fiscal multipliers for spending were higher than for tax
cuts, and were not presented with any compelling empirical evidence supporting
this claim.
For their part
Coalition Senators note that the fiscal policy decisions of the Coalition
Government in the 1996-97 Budget – which involved policy decisions to
significantly cut outlays in order to reduce the irresponsible budget deficits
it had inherited, and to repay the previous Government’s $96 billion debt –
appear to have had exactly the opposite effect compared to these vague
theoretical claims.
Table 3 below
shows that in its 1996-97 Budget, the Coalition took policy decisions to reduce
outlays by $12.9bn over three years, when the Australian economy was much
smaller.
What was the
fiscal multiplier associated with this tightening? The Australian economy grew
by 3.9 per cent in the year to June 1997, by 4.5 per cent in the year to June
1998, and by 5.2 per cent in the year to June 1999. Unemployment fell from 8.2
per cent in June 1997 to 6.7 per cent in June 1999.[4] The evidence from this episode seems to
suggest that the fiscal multiplier for spending is negative in Australia and
does not seem to be consistent with the vague theoretical claims that were
presented to the committee.
This kind of
empirical evidence is neither unique nor new. Thirty years ago Professors
Robert Lucas (Nobel Laureate) and Thomas Sargent wrote that:
“In the present decade, the United States has undergone its first
major depression since the 1930s, to the accompaniment of inflation rates in
excess of 10 per cent per annum. These events have been transmitted (by the
consent of the governments involved) to other advanced countries and in many
cases have been amplified. These events did not arise out of some reactionary
reversion to outmoded “classical” principles of tight money and balanced
budgets. On the contrary, they were accompanied by massive government budget
deficits and high rates of monetary expansion, policies which, although bearing
an admitted risk of inflation, promised according to modern Keynesian doctrine
rapid real growth and low rates of unemployment.
That these predictions were wildly incorrect and that the doctrine
on which they were based is fundamentally flawed are now simple matters of
fact, involving no novelties in economic theory. The task now facing
contemporary students of the business cycle is to sort through the wreckage,
determining which features of that remarkable event called the Keynesian
Revolution can be salvaged and put to good use and which others must be
discarded”. [5]
More recent
empirical evidence can also be found. A 2005 empirical study by Professors
Andrew Mountford and Harald Uhlig entitled "What are the Effects of
Fiscal Policy Shocks?" found that:
- “a surprise deficit-financed tax cut is
the best fiscal policy to stimulate the economy
- a deficit-financed government spending
shock weakly stimulates the economy
- Government spending shocks crowd out both
residential and non-residential investment without causing interest rates to
rise.” [6]
Professors
Christina Romer and David Romer of the University of California at Berkeley
find that the fiscal multiplier for a tax cut is 3, a much larger value than
most estimates of spending multipliers.[7]
Navigation: Previous Page | Contents | Next Page