From today’s AFR column.
Go early, go hard, go households.
This slogan, coined by Treasury Secretary Ken Henry in discussions on the fiscal stimulus takes me back. To another time long, long ago. Flashbacks are better suited to the silver screen than newspaper columns, but imagine if you will your paper clouding into soft focus and slowly spinning. As the hypnotic sounds recede, and the colours turn to sepia everythings changed.
Its December 1991.
I report to my new boss, John Dawkins, the new Treasurer in Paul Keatings new Government. Official forecasts indicate a strong rebound from the recession weve just had so officials are wary of additional fiscal stimulus. And after some hefty surpluses the budget has plunged back into deficit and financial markets are fretting about our external deficit.
Official optimism makes a fiscal stimulus pretty unnecessary and the markets pessimism make it risky. So the Governments attention turns towards longer term fiscal measures. Infrastructure projects will take a while to crank up.
And Dr Hewsons Fightback! package gives the Government the kind of political opportunity that doesnt come along every day. His personal tax cuts are predominantly funded from fiscal drag the increasing tax take as peoples incomes rise into new tax brackets. So Keatings crafts a fiscal package that delivers something like Dr Hewsons income tax cuts without Dr Hewsons GST. But thats in two years time.
Were pinning a lot on those forecasts that the economy will recover on its own. But with the evidence mounting that the forecasts are over-optimistic all staffers are recalled one Sunday before the package must be finalised to give it more immediate oomph.
Someone suggests an additional Family Allowance payment though some senior officials regarded it as a frivolous way to stimulate an economy. Wheres the nation building in tossing cash at Australias families? Its the most clear eyed piece of economic policy in the package and feeds directly through to consumption a few weeks later.
But its painfully small at 0.15 percent of GDP. And it leaves Keating a hostage to fortune with delays in cranking up the infrastructure and those L-A-W tax cuts in the out-years looking less and less A-F-F-O-R-D-A-B-L-E.
And now as your paper spins you back blinking into the bright colour of the present you can appreciate Ken Henrys fiscal war cry. Rudds package unloads one percent of GDP, most of it next month. Were going much earlier, faster and harder than last time. And were unapologetic about one off giveaways to families wholl spend most of it quickly.
Having been impressed with this Governments resolution and fleetness of foot, my remaining anxiety is that it will balk at going into deficit. Lets hope its not necessary. But if it is, even if we hadnt racked up seventy odd billion dollars in surpluses in the last decade, we should have no qualms about deficit financing further stimulus.
The US is in a fine mess, with a deficit heading above a trillion dollars! Of course they shouldnt have trashed their budget tuning hefty surpluses in the late 1990s into deficits in the 2000s. Yet, as newly ennobled economist Paul Krugman put it last Thursday The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit.
But back in Australia wouldnt the Opposition give the government hell if it took the Coalitions string of surpluses and started running deficits? Too right it would, just as the ALP would with roles reversed. But, if another fiscal stimulus proves necessary the government will have to decide. Politically theyll need to choose between a faltering economy, rising business failures and unemployment or giving their opponents some ammunition that theyll use. Economically, one way spells misery, the other hope and a better chance of success.
Ill bet some of the Governments political advisers counselled against the bold approach the Government took last week. Couldnt we keep more of the surplus?; Have two bob each way? Now theyre eating their words. Using the economic textbook to manage the economy decisively is a political winner.
Im only an economist. But if I were a Government politician I know which path Id choose. If the economy falters Id fight recession. Id take some nasty hits from the Opposition rather than die the death of a thousand cuts while I waited for recovery to come in its own good time.