With an air of triumphalism, Kevin Rudd and Wayne Swan recently declared that signs of a national economic recovery are due to their policy of more government spending.
At first glance, it seems the Government has engineered a great escape for the Australian economy.
Retail sales remain buoyant, as they have been for 15 years, and surveys of business and consumer confidence seem to be on the up. Recent Australian Bureau of Statistics data shows that the expenditure measure of gross domestic product has increased for the past two quarters.
The Government has even received a congratulatory report on its stimulus from the Organisation for Economic Co-operation and Development, a body that includes an Australian government appointee. However, the selected economic indicators and the official plaudits do not reveal much insight into the big question: has the fiscal stimulus had a beneficial impact on economic growth?
There are some grounds for discounting the Rudd Government's irrational exuberance about the economic healing powers of its stimulus strategy.
Let's think of a hypothetical scenario to illuminate some of the key issues at play.
Suppose I walk up to you and forcibly take from your wallet $3636. That is roughly about the amount of the Federal Government's combined stimulus programs per head of population.
I immediately give you back $900 of this for you to spend on anything you want -- cigarettes, clothing, computer games, fridges, handbags, mobile phones, tattoos, anything you care to buy. You could even deposit it straight back into your own bank account.
I then spend $2227 of your money on things that take my fancy.
Some lobbyist told me that throwing some of the money I've taken from you (let's call it what it is, a tax) towards housing insulation batts would somehow save the Earth. Someone else whispered in my ear that spending a fraction of the $2227 tax take on school gyms, at inflated rates, would help kids read, write, add and subtract. In fact, so many people are lobbying me to spend your money that I need more cash from elsewhere. I resolve this by borrowing even more currency, on top of your taxes.
I forgot to mention at the outset that 14 cents out of every dollar I spend is on my own administration costs.
While this scenario is necessarily an abstraction, it does reveal the inherent limitations of a Keynesian-style fiscal stimulus to bolster a market economy.
Because money trees do not exist, and most governments recognise that printing new money simply stokes inflation, each dollar spent by a government must first come from someplace else.
Someone always has to pay, sooner or later. Taxes run the risk of discouraging productive and socially useful activities, such as investing, saving or working. This means a smaller economic pie than would otherwise be the case.
The amount of borrowed funding, which currently stands at more than $300 billion in gross terms at the federal level, also needs to be repaid by current generations later or by unborn future generations. The problem with rampant public sector borrowing, committed simultaneously by most governments across the Western world, is that it will tend to push up the price of borrowing over time, potentially crimping private sector investment plans.
On the spending side, the scenario above illustrates clearly that government is merely in the business of shuffling funds from the private sector into activities it perceives to be beneficial.
Ministers are fond of pointing to the expansion of the insulation industry and other pet causes, claiming them as signals that policy is rescuing an economy otherwise on its knees.
However, what is overlooked is the economy-wide perspective suggesting that economic activity and jobs will be lost in other industries that endured a tax burden instead. More pink batts or school gyms, and less of everything else.
In other cases, the Government's stimulus measures merely push economic activities forward in time with no thought given to what happens next.
How many times have we heard young people in recent months saying that they were intending to buy a house some time in the future, but leapt into the market earlier to take advantage of the trebling of the first-home owner's grant?
Government subsidies pushing forward housing demand, combined with state and local government land supply restrictions, have effectively pushed up house prices and given state and local governments a nice little revenue kickback.
By refusing to withdraw its stimulus, the Rudd Government is looking to portray itself as the economic Pied Piper right up to the next election, but continuation of the stimulus will merely direct scarce resources to less productive uses.
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