The current economic crisis began to manifest itself in mid-2007. The root causes of the crisis can be laid at the feet of government. A series of policies over a long period of time had introduced sufficient inefficiencies in the economy to cause a collapse in private sector confidence. The crisis has been slow in coming to Australia, and for a long time policy makers failed to recognise the signs of it unfolding. The Reserve Bank of Australia (RBA), for example, increased interest rates in November 2007 and twice again in early 2008. It was only in September, when the crisis intensified, that the RBA suddenly realised the full extent of its policy error. It wasn't just caught in public with excessive interest rates; it got caught in public raising interest rates. This policy mistake will cost Australia dearly. As the Australian Bureau of Statistics reports, the local economy had stalled in the September quarter -- before the crisis had intensified.
It is bad enough that Australia was so ill-prepared to deal with the intensified crisis following the RBA's over-zealous monetary policy. But government responses threaten to make it worse. The recession we had to have was caused by monetary policy error and many of the same people who managed that crisis are still around, albeit in more senior roles. Treasury advice to government has been to "Go early, go hard, go households". Government has followed that advice. In just over a year, the federal government has spent the enormous budget surplus that it inherited from its predecessor. Talk now is how large the deficit is going to be. To date it is hard to know where the money has gone and what the government has to show for it. If the idea was to stimulate the economy and preserve jobs, then clearly it has failed. Mind you, government spending for that purpose was always going to fail.
When the $10.4 billion stimulus package was announced the Government had simply panicked. It subsequently transpired that no economic modelling had been undertaken to justify the expenditure. This was made clear at the Senate Estimates hearing on 22 October 2008. It is well-worth reading the exchange between Senator Barnaby Joyce and Dr David Gruen, a Treasury official (at page E52).
Senator Joyce -- I want to go back to the $10.4 billion package. Did you do any modelling on the effect of that package, or did anybody in your department do any modelling on the effect of that package?
Dr Gruen -- No formal modelling was done of that package. Certainly, analysis was done of that package, but it was not formal modelling.
Senator Joyce -- So we have spent half of the nation's surplus without a formal modelling of the package, is that correct? We have spent half of the nation's surplus without a formal modelling of the effects of the package?
...
Dr Gruen -- I can confirm that the package was $10.4 billion and that no formal modelling was done. I can confirm that no formal modelling was done.
Anyone following the news headlines will now fully appreciate that the $10.4 billion package has not staved off increased unemployment nor has it lead to a sustained improvement in the economy. The government simply wasted that money in an act of policy vandalism.
In a leaked speech given in March 2007 Ken Henry was singing a different tune. There he spoke about the 3Ps of population, participation and productivity. In that speech, Ken Henry argued that Treasury had long been interested in efficiency of government spending and the macroeconomic impact of that spending; but had never worried much, or at least worried less, about government crowding out private initiative. Yet the $10.4 billion spending plan didn't address any of these issues. Not the 3Ps, nor did Treasury undertake any modelling; so the impact of the spending was unknown.
We now read in the media that a second package is being prepared. How many policy mistakes do there need to be before the long-suffering taxpayer calls "enough"? The Ken Henry who proposes "go early, go hard, go household" has got it wrong. The Ken Henry who preaches "population, participation and productivity" has got it right. Rather than expanding the welfare system through one-off payments that cannot possibly lead to sustainable increases in spending, the government should institute immediate and sweeping personal and corporate tax cuts. The Commonwealth should also pay out the States' payroll taxes. This tax is simply a tax on employment and everyone knows that to tax something is to get less of it.
Infrastructure spending is simply a waste of money if, as seems likely, it is simply financing negative value-adding schemes like desal plants, wind farms and urban rail lines. Furthermore it is very unlikely to provide much of a stimulus, if any, before the economy recovers anyway. Are we to believe that those individuals who have already lost their jobs are going to get gainful employment building roads and harbours or super-fast rail tracks? No, it simply doesn't pass the guffaw test. Targeted tax cuts such as investment allowances and the like are simply corporate welfare that would most likely be rorted. Rather let people and organisations make their decisions about how best to spend their own money. Government has done more than enough damage already.
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