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$42 billion spend misses the mark

By Andrew Laming - posted Wednesday, 18 February 2009

Masterpieces reflect their creator. In politics, a $42 billion stimulus package is about as good as it gets. Fiscal fantasies where even the wildest dreams can be funded are indeed rare. So to better know our PM, forget the commentary, the forensic dissection, even the encyclical penned by Rudd himself. It’s the stimulus which tells the story. Not so much its size and timing, which are within the OECD mix, but the constituent parts which provide a subtle narrative on Rudd’s prescription for the economy.

First and above all else, it is clear Rudd reveres the intervention of government. Half of his entire package pumps public housing and school construction to offset jobs lost across the rest of the economy. When jobs dry up as most predict, the package’s job creation is strongly skewed towards joining construction teams to build public apartment blocks and multipurpose centres or installing insulation.

Rudd funded some economic infrastructure in 2008, but this package’s focus on social sector construction makes him an outlier among OECD economies. Just a fraction will be spent on roads, while rail, dams, pipelines, ports, clean energy, science and technology miss out completely. Little provision has been made for the infrastructure which actually earns income for Australia and helps us pay loans back. Rapid deployment of light infrastructure through Councils received crumbs late last year and nothing further in this package.


The flip side of Rudd’s faith in government is unease with the role of private enterprise. After all, he blames its greedy extremes for this mess in the first place. He is the only world leader eschewing tax breaks as a recession-busting strategy. Small Business Minister Craig Emerson’s offer in Parliament of accelerated depreciation on coffee machines will achieve little in a job-shedding environment.

Rudd’s motives for cash handouts over tax breaks isn’t entirely clear and he doesn’t appear to have learned from experience. December’s ABS sales figures showed only 10 per cent of pensioner hand-outs made it into the retail sector; almost entirely on imports from low-end department stores like Kmart and Big W or on household goods. Buying imports helped to avert China’s recession but did almost nothing for Australia. The bulk of December’s hand-outs appear to have been saved for a rainy day.

As the next recipients of hand-outs, workers and students are even less predisposed to spend than pensioners. Carrying the highest private debts in the world, this cohort is most likely to pay down credit cards and home loans. Such rational behaviour is just what the economy doesn’t need during recession. If Mr Rudd had provided these $22 billion cash splashes as a debit card to spend at ten separate businesses, our economy may have received the boost it needed.

The political mantle of economic conservative is a treasured one; earned over time rather than via ad campaigns and potentially eroded by debt, big government and cash hand-outs. All will be forgiven of course, if the Prime Minister’s interventions avert a recession, while the Coalition will surge if the economic bad news bleeds long after the cash payments have dried up.

In the end, no one can be everything to everyone. If you are for social infrastructure and bureaucracy, you can’t also be committed to small business. The hideous economics of Rudd’s $4 billion for home insulation are obvious; a million dollars per job created and $100 per ton of emissions averted.

Let’s be frank. Australia had begun to provision for the future, but our modest surpluses and accumulated federal reserves were no match for an economic downturn of this scale. Rudd must run into deficit, but once our surplus and reserves are gone, the only remaining option is to increase Australia’s credit limit. That means borrowing from foreign corporations, funds and economies like Russia, China and the Middle East. Australians may brook that for vital economic infrastructure, but not so willingly for imprudent hand-outs to astonished recipients who merely pay down their personal debts. Rudd truly faces Howard Gleckman’s criticism of “lots of buck, not much bang”.


The final observation is that Rudd has overwhelming faith in fiscal measures, rather than working with monetary policy. Unlike flat-lining low-interest rate economies with only quantitative easing at their disposal, the Reserve Bank still has substantial latitude to jump-start private sector confidence. Rudd’s fiscal fixation may lead to massive public debts where the same economic outcomes could be achieved with more targeted small business measures as interest rates fall in the months ahead.

The three groaning vulnerabilities in the superstructure of Mr Rudd’s package are debts, job losses and the consequent lost perception of economic prudence. They are the squares on the chess board where the Coalition hopes the next election will be decided.

Escaping recession is about rebuilding confidence and re-starting the economy. Australia’s policy choices in 2009 will determine the trajectory of that recovery and in turn, future living standards. Every economy will have different recession-breaking strategies. Nations in debt start that race behind; those servicing interest carry weights and those failing to build critical infrastructure to supports business will be speed-limited in the future.

It is fascinating how far Australia’s package differs from that of the Obama administration. Australia’s package passed almost unscathed, so it more closely reflects its creator. Rudd’s package is timely and on the larger size but its constituent parts contain flaws for Coalition exploitation: a faith in government; massive fiscal transfers to States; debt; little for business; and little to protect jobs in vulnerable sectors like mining, retail, services, small business and hospitality. Cash hand-outs will be popular, but spending ones’ way out of recession is far from proven science. At stake is the Prime Ministers election-winning claim; that of being an “economic conservative”.

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About the Author

Andrew Laming is the Federal Member for Bowman in Queensland and the Shadow Spokesperson Regional Health and Indigenous Health.

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