Free association economics

Here’s how you do free association economics?  You start writing a piece on the politics of the budget and then you just say pretty much anything that comes into your head.  You use the general riffs that are doing the rounds at the moment and just see how it comes out. You make calls on pretty much everything, the politics, the economics and so on.  For instance you say that because the stimulus will help a bit, we shouldn’t do it and generally bloviate. That’s what people are saying in pubs isn’t it?  

Then you just press ‘send’ and you have a Crikey article.

Rudd’s Package III: Stimulate with a Vengeance

WEDNESDAY 22 APRIL 2009

This might be the most difficult budget in decades but at the moment politically it looks a gimme, because theres no Opposition worthy of the name to pressure the Government. Wayne Swan could comprehensively botch the budget and the Government would still maintain its political dominance. Malcolm Turnbull would still look negative, or thered be another round of infighting within Coalition ranks, or Peter Costello would start his semi-regular efforts to attract attention. He cant let Budgets go past without drawing attention to himself.

Thus were relying on the policy smarts of the Gang of Four, assisted by Treasury, to get the Budget right.

Which brings us, inevitably, to Stimulus Package Mark 3.

Therell be further stimulus in the budget, Wayne Swan said last night (incidentally and perversely, doesnt Swan seem more and more assured the worse things get?). “The Government now faces questions about its budget stimulus package,” ABC Radio and the ever more peculiar ABC Breakfast consequently reported this morning, as if some crime had been perpetrated. It cant be too long til the Government is accused of a cover-up because it is waiting until Budget Night to release its Budget.

Still, its a bit early to complain about the tone of Budget speculation, given were only warming up for another three weeks of it.

Whats the policy case for additional stimulus? There isnt one at this point. We havent had the full effects of the December plasmasnpokies handouts yet. The cheques from Februarys Stimulus II: Stimulate Harder are only now being mailed and the several thousand hectares of sunshades to be erected in schools across the land are yet to be unfurled. I know the Government loves to keep the media cycle going round and round, but making multi-billion dollar announcements is a very expensive approach to media management.

If the recession is prolonged and/or severe — if, say, its a 0.25 on the Steve Keen “Everyone With Debt Is Damned For Eternity” scale of economic destruction — further stimulus would appear to be pointless. As the AFRs Alan Mitchell correctly notes today, the Government cant replace the collapse in private demand, only take the edge off it. The better strategy would be to sit tight, ensure our social safety net is effective and to pursue major economic reforms to make sure we emerge from the recession in 2030, or whenever it ends, in better shape.

If, as most of us hope, we start coming out the other side in 2010, further short-term, handout-style stimulus now would come on top of the existing stimulus or, if of the longer-term variety, hit the economy when it was growing again.

Theres also the small problem that, with a budget deficit already, by common consent, over $50b, further major stimulus packages of the magnitude of Februarys — the only size that will make a difference — will take the deficit into the sort of territory that will ensure it doesnt return to surplus for a decade. At some point, foreign investors will begin to wonder if the tradition of Australian governments becoming less and less fiscally disciplined as they age will create a serious deficit problem.

But dont forget, the Government already has a significant stimulus package programmed into the budget. Like previous packages, it will have two components: therell be a $8.7b cash splash in 2009-10, and more after that, and a $10b infrastructure package.

Thats assuming the Government fulfils its commitment to increase the pension rate for the aged and carers — likely to cost around $6b pa; that it retains the income tax cuts currently legislated, which are an additional $2.7b, and at some point gets around to announcing the projects Infrastructure Australia has determined it should invest its Building Australia Fund in.

Theyre all pretty much certainties, even if there is an issue about delays occasioned by the poor quality of proposals submitted to Infrastructure Australia (by the NSW Government, of course). They will continue the Governments strategy to date of raining money on the big-employing retail and construction sectors.

In traditional Labor style, the Government is likely to package these on Budget Night as part of a “$20 billion jobs package” or suchlike. Only the pension increase would be new money, but for once the re-heated nature of the offerings would be welcome ahead of further debt.

If the Government wanted to spend more money shoring up employment, raining even more money on retail and construction might be less beneficial than taking pressure off businesses, either through a temporary cut in payroll tax (which brings in $13b a year for the states, although some have cut rates recently), or through Malcolm Turnbulls proposal of a temporary tax-loss carry-back scheme for small business, who would not benefit from payroll tax cuts. Either way, the Opposition would support it.

The effect would be diffused across the entire economy, but there must come a point when we cant build stuff any faster and sectors outside construction and retail will start to wonder what they have to do to get some Government support.