Thursday, February 25, 2010

Barnaby’s Day Of Reckoning Will Come

Despite repeated calls from the opposition for the Federal Government’s economic stimulus program to be withdrawn, the evidence seems to indicate that any such move would pull the rug out from under the economic recovery. Much of the support has been directed towards the construction industry and the latest figures show that if it wasn’t for government projects the sector would be devastated. The December quarter figures show a significant fall in residential building, both for the quarter itself and compared against the previous year. Meanwhile the non-residential sector grew to $9 billion dollars which only appears healthy until you remember that almost $3 billion of it came from public sector construction. Without the government programs the result would have been a 16% fall instead of an 18% improvement.

Obviously, in terms of the economy and protecting employment, halting the stimulus package now would be a disaster. You only have to look at the impact on the insulation industry when the government was forced to pull the pin on the ceiling insulation program last week with thousands put at risk of unemployment and a $40 million transition package rushed into place yesterday. So, just what is the opposition on about? If they are wrong in their calls to end the economic stimulus, could they also be wrong about other things such as their warnings over budget deficit and government debt?

The short answer is “yes… and no”. Shadow Finance Minister Barnaby Joyce has attracted a considerable amount of criticism for making some apparently outrageous claims along with a couple of embarrassing mistakes. His primary concern seems to be focused on the issue of government debt, and the fear that some day it might become so big that we cannot pay it back. Ongoing budget deficits will only add to that debt, and he is right to point out that at some stage the deficit must be brought under control. If not, Senator Joyce has warned that Australia will eventually face a “day of reckoning”. In basic terms he is absolutely right when he says that “if you do not manage debt, then debt manages you.” Anyone who has ever had a credit card debt get out of hand can readily understand that.

However, the alarmist claims of Senator Joyce are also misleading. Because of the Global Financial Crisis, the federal budget would have swung into deficit no matter what the government did, and no matter who was in government. As the economy slows, tax receipts fall. As the economy recovers they will rise again. The argument against increasing the deficit in order to spend money on stimulating the economy because it would send the country into debt is a flawed one because it fails to recognize the benefits of curtailing recession and supporting the economy as it recovers, delivering growing tax receipts which will reverse the deficit in due course as part of a cyclical process.

The opposition is also guilty of exaggerating the relative size of our debt. Roughly, it’s around 15% of our Gross Domestic Product. That’s like a household with a $100 000 income taking out a $15 000 mortgage. By comparison the United States government debt is around 90% of their GDP, and their budget deficit alone is roughly the size of the entire Australian economy. The truth is that the Australian economy is in good shape, although there is still a considerable risk of being subjected to the ill effects of problems in the rest of the world, and abruptly ending the stimulus package would inflict unnecessary damage with no benefit to anyone.

At the same time, that doesn’t relieve the Government from any responsibility for having poorly managed aspects of the stimulus, such as the roof insulation scheme. It doesn’t protect the Government from criticisms that its school hall building program has been inefficient and poorly targeted. It doesn’t justify the failure of the Government to invest precious taxpayer dollars into long term infrastructure assets which will deliver value for money for generations to come. There can be no doubt that the short term quick fix of the economic stimulus has been highly successful, but the long term legacy may yet turn out to be one of regret at mismanaged programs and missed opportunities.

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