Saturday, 14 February 2009

A tale of two stimulus packages

With Australia having just passed it's A$42 billion (US$26 billion) 'economic stimulus package' and the US$789 billion stimulus pack in the USA close to final approval, it's interesting to see how the two compare.

The first obvious difference is the size of the packages - the Australian effort is around 3.5% of Australia's GDP, while the US package is almost twice the size in terms of GDP, coming in at 5.7% of US GDP. On the one hand this is surprising given Australia was starting from a Federal budget in surplus while the US Federal deficit is already US$10.7 thousand billion (!). On the other hand, the Australian economy is in much better shape than the US (although we will suffer more from the impact of the global recession on our exports) and still has some fiscal stimulus available. Coupled with the problems the US is facing regarding future social security and medicare funding, I think the size of the US Federal deficit will be a drag on long-term growth (due to the need for higher taxes). Even if the US stimulus package is effective in boosting growth in 2009-10, it may just create worse problems down the track.

In some regards it seems that the global economic crisis was due to western consumers bringing forward too much consumption using personal debt, with low interest rates amplifying a feedback loop of inflated asset prices being used to obtain further borrowing at historically low interest rates. Once the private global credit limit had been reached and consumption dropped in order to repay debt and increase savings rates around the world, governments began trying to boost spending by increasing public debt. At some stage public debt will exceed the borrowing capacity of sovereign states (for example Iceland has already gone 'broke', and it seems as if Russia is also getting close to the point of defaulting on debt repayments), and when both private and public borrowing is constrained, the global economy is likely to suffer many years of minimal growth as debt is slowly unwound. It may not happen for quite a while though - the US dollar has remained relatively strong for the past couple of decades despite a huge and growing debt problem.

The second difference I think is very significant is the "quality" of the two packages. Despite considerable debate about how best to stimulate the economy (public spending vs. tax cuts for example), there appears to be a consensus that such a package should satisfy the "three T's" as much as possible - that it should be timely, targeted and temporary. The US package has been reported as delivering around 54% "3T", while only 12 to 20 cents in the dollar of the US package will be timely, temporary and targeted. The graphs below show when the spending is expected to feed into each economy:



It appears that around 75% of the Australian stimulus will be implemented by June 2010, whereas just over half of the US stimulus will be implemented before the end of 2010. Stimulus spending in 2011 is quite likely to fuel inflation and exacerbate the next boom-bust cycle, rather than fix the current crisis.

Overall, I'd give the Australian package a B+ (points off for political ideology and horse trading that has shaped the spending decisions) and the US package a C-, with quantity being substituted for quality in an effort to make the grade.

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4 comments:

CJS said...

I would give the Australian package a -E.

We don't need to spend that much money, let alone on pointless junk like pink bats and schools.

If you want to fix up schools, get rid of the teacher unions, and then start sacking the teachers that can't read. That will fix up education standards quick smart.

This is a typical Labor government whose mentality leads them to borrow heavily and to spend the borrowed money on junk.

The taxpayers are dumb because they are salivating about their $900 without considering the tax hikes that will come later and they will be much bigger than $900.

If they had introduced tax cuts instead it would have boosted confidence and spending. Perhaps their tax revenue would have also been boosted as a result of the long lasting stimulus.

You don't have to publish this if you are a Labor voter. I know that it this package is a disaster waiting to happen.

Think 'Goth Whitlam' type disaster.

enoughwealth@yahoo.com said...

Given the projected economic growth rates for Australia in 2009 and 2010 made by several sources (eg. Treasury, IMF etc) and the modelled impact of the spending package, I don't think the Australian package is too large. The stimulation is likely to only just keep the economy growing at a snails pace in 2009 and 2010, and not prevent unemployment increasing considerably.

Since there isn't any agreement on whether increased spending or tax cuts are the best way to provide economic stimulus during this recession, I'd like to have seen half as much spending and the other half of the package done as tax cuts. That would have been a sensible compromise between the Labor and Liberal ideological biases, and could have got support of both parties if there was a genuine desire for cooperation. However, both the government and opposition are playing politics at the expense of good policy.

Pink batts for all isn't a bad policy per se - it will generate immediate expenditure, I assume the product is Australian made (as it is bulky and therefore long distance transport would be too expensive) and the installation is quick and labour intensive. The flow-on effect to the general economy should therefore be timely. There are other things that could be done just as quickly, but this ties in nicely with the government's desire to be seen to be "green" and will help Australia cut CO2 emissions. It's also progressive in that richer families are more likely to have already spent their own money on installing insulation.

The school spending seems more wasteful. Although there are many public schools that need such expenditure (or more) to bring basic ammenities up to scratch and provide missing resources (halls, science labs etc), giving the same $200,000 to ALL public schools will mean that some money is going to schools who don't really need it for essentials. It will still stimulate the economy via spending on building materials and tradesmen, but could be better targetted.

I'm not too keen on the teacher's unions myself. For example, the recent NSW teachers stop work meeting during school hours to APPROVE a pay rise was beyond the pale. Their pay claims always compare teacher's salary to a full-time professional working 40 hour weeks, 48 weeks per year. If teacher's really all did work after school hours and during school holidays on "teaching" activities, then such meeting should be held after school hours, not at 9am!

However, Australian teachers are pretty well qualified, and I doubt you can give me a single example of an Australian teacher who can't read. Like any other profession, the quality of individual teacher's varies, which is why there needs to be a move towards performance-based pay rises, rather than just collective bargaining.

ps. I often vote Liberal, but I don't think a temporary deficit during a recession is bad economic policy. I'm just glad the spending is all "one-off" and not typical Labor spending increases (think pension rate increases, loosening of dole requirements etc.)

On the other hand, if Labor wins another term in office and the economy starts to pick up, I have no confidence that they will actually start to pay down the deficit. They will probably keep the deficit and just use increased tax revenue to fund all their other "big picture" spending promised during the last election campaign.

CJS said...

When was the last time that treasury got a single forecast correct?

If I recall correctly our dumb treasurer was lifting interest rates and cutting government spending less then one year ago........

Just when he should have been priming the economy!

Now he is taking us into a massive debt when there are still early but encouraging signs across the globe of a recovery.

This government is going repeat the folly of previous Labor governments and they will most likely out do Goth Whitlam.

We'll be paying through the nose with massive tax increases.

CJS said...

A $200 billion deficit is not a 'temporary' deficit as you have described.

It's a long lasting burden that will cripple our economy!

Paul Keating's $96 billion debt will look like a cake walk in comparison.