Rudd's stimulus package is far from perfect

Kevin Rudd said yesterday that without the government's stimulus package that the unemployment rate would have gone through the roof.

This is good politics as we can never really know what would have happened.  We'll certainly be hearing that line a lot over the next several months -- especially if unemployment does not rise to the forecast 8.5 percent that the government was expecting at the last budget.

Much has been of Treasury minute leaked last week;  especially the view that withdrawing the stimulus package now would lead to greater unemployment.  So not only has the stimulus package prevented an unemployment catastrophe but it continues to do so.  The government can point to the "scoreboard" for confirmation of this story.  In fact Mr Rudd told us yesterday that US unemployment is now 9.7 percent and Canadian unemployment is 8.7 percent.

But what Mr Rudd didn't say yesterday is that the Canadian stimulus package (4.1 percent of 2008 GDP) is almost as large as the Australian package (4.6 percent of 2008 GDP) and the US package is larger at 5.6 percent of 2008 GDP.  In other words the favourable employment outcomes here in Australia cannot only be due to the stimulus package.

An OECD report published last week (3 September) indicates that unemployment has not risen much at all across 29 economies.  Some economies like Spain has seen a massive increase in unemployment as has the US and Canada.  The increase here in Australia is the eleventh highest out of 29 countries.  So we're not quite in the top third but 60 percent of OECD economies have experienced a lower increase in unemployment than did Australia.  To be sure they were starting from a higher base than we were, but many OECD economies routinely experience higher rates of unemployment than do the US, Canada and Australia.

To claim that our low rate of unemployment points to the success of the stimulus package ignores the experience in other OECD economies.  Many of those economies have experienced massive declines in GDP growth and have experienced (so-called) technical recessions, yet the increase in unemployment has not been that large.

In the graph below I have plotted the increase in the unemployment rate (relative to 2007) and the size of the stimulus (as a percentage of 2008 GDP) -- Australia is the large red dot.  The data are all collected from the OECD.

As can be seen the increase in unemployment is much less than the size of the stimulus package would suggest.  If our unemployment rate had grown in line with average OECD expectations, the unemployment rate would be 7.9 percent but still less than the budget forecast of 8.5 percent.

So it is not clear that stimulus spending has saved Australian unemployment from going through the roof.  It is far more likely that our resilient economy has fared well due to 25 years of economic reform beginning with the Hawke government and is not simply due to governmental quick fixes.

To believe that the stimulus has brought about the excellent economic performance Australian is currently enjoying would be to believe that the Rudd government had developed the perfect stimulus package.  We know, however, that the package was put together hurriedly and that the implementation has been poor.

Let's rather give credit where it is due.

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