The Federal Government's fiscal response to last year's global financial crisis reveals the problems posed by adopting outmoded approaches to economic policy. In the teeth of what was described by Prime Minister Kevin Rudd as an "economic cyclone", the Government made a host of decisions in an effort to stimulate economic activity.
In October 2008, an "economic security strategy" was implemented, at a cost of $10.4 billion. This was followed in February 2009 by a "nation building and jobs plan", a $42 billion spending catalogue of shock-and-awe proportions.
A year on from the final component of its stimulus strategy, the Government is now crediting itself with ensuring that Australia avoided a technical recession and securing a lower than expected unemployment rate.
It is clearly impossible to ascertain the economic impact of a more restrained approach, with the Government having made its fiscal choice for substantial spending.
However, detailed analysis of the stimulus packages by a number of Australian economists suggest that the Government's fiscal strategy in its current form may have caused more long-term economic harm than good. It is inconceivable that the stimulus would sustainably boost national income, or that the multiplier effect of Government spending is greater than one, given that the expenditures are financed by taxes or public sector borrowings (implying higher future tax burdens).
In other words, the Government stimulus is merely of a redistributive nature, with a handful of economic activities preferred by policymakers undertaken at the expense of taxed non-beneficiaries spread across the rest of the community.
According to the latest report from the Commonwealth Coordinator-General, the stimulus packages have supported 200,000 jobs. Taking the Government's estimates at face value, this represents an average cost to taxpayers of at least $262,000 a job.
With more than 10 million Australians in employment, there were effectively many who missed out on the Rudd Government's fiscal game of pass the parcel.
The Government recently highlighted the need for improved market productivity to meet the economic challenges of an ageing population. However, it is doubtful that stimulus measures such as subsidies for insulation batts, funds for duplicated school halls or $900 pre-Christmas cash giveaways would rate highly in any self-respecting economist's list of productivity enhancing initiatives. Indeed, it is estimated that only 14 per cent of the $42 billion stimulus is being directed to economic infrastructure, such as road and rail. Even so, no cost-benefit analysis of such projects has been published to facilitate external scrutiny of their economic impact.
The Keynesian stimulus approach adopted by the Government has also bitten off more than it can chew when it comes to fiscal sustainability.
Discretionary spending has played a role in plunging the budget into an expected $54 billion deficit this year, together with a $200 billion net debt that will not be repaid until 2021-22.
Some economists argue that such fiscal outcomes do not matter. We can simply wait for the cavalry of economic growth to arrive, driving up revenue collections to convert a budget deficit back into surplus.
Public debt is immaterial because we owe it to ourselves.
These claims do not stand the test of scrutiny. Budget deficits matter to the extent that they affect the efficient allocation of resources in the real economy. Higher revenues would be collected from some individual or business that may be less inclined to invest, save or work longer.
The higher level of spending facilitated by a budget deficit could be allocated to inefficient ventures, and the size of government also increases with adverse consequences for long-term growth and productivity outcomes.
It is also well known that persistent budget deficits tend to crowd out private sector investment, as the public and private sectors increasingly compete for loanable funds in constrained credit markets.
The consequent higher interest rates would tend to facilitate an exchange rate appreciation, in turn reducing Australia's net exports.
Public sector debt has similar economic consequences to recurrent budget deficits, with the added penalty that future workers who did not politically consent to the borrowings have to shoulder the burden of repaying the principal and interest on the debt.
With the recent assessment by US think tank the Heritage Foundation that Australia is the most economically free nation on earth, aside from the Hong Kong and Singaporean city states, it is appropriate to consider what role supply-side reforms since the early 1980s have had to play in driving current economic outcomes.
For a start, the depreciation of the floating Australian dollar through the second half of 2008 buffeted exporters from the worst of the global economic downturn. However, this beneficial impact did not last as subsequent interest rate increases led to a more subdued export performance in recent months.
There has also been much anecdotal evidence that employees and employers had taken advantage of a more deregulated labour market to revise working conditions in the face of a subdued economy. This allowed more workers to keep their jobs, in turn enabling more businesses to keep their doors open, than would otherwise have been the case.
However, the industrial relations policies of the Rudd Government will increasingly weaken the effectiveness of the labour market to flexibly respond to economic changes, at least without creating fresh inflationary pressures throughout the economy.
Industrial strife afflicting Western Australia's mining industry is a warning signal of the potential pressures ahead.
Twelve months on it remains essential to ask why did the Government pursue Keynesian fiscal policies, a prescription to macro-economic management repudiated by the 1970s stagflationary episode?
The key to answering this question perhaps lies in observations made after the cessation of the Cold War by James Buchanan, founder of the public choice school of economics.
Buchanan pointed out that while the fervour for socialism in the economic realm had faded, there has been an unwillingness to fully embrace alternative market approaches.
According to Buchanan, "politics will not work, but there is no generalised willingness to leave things alone".
To put it simply, reflexive political intervention in economic markets remains alive and well. This provides a breeding ground to implement "go early, go hard and go household" policy exhortations, not only at the expense of taxpayers but the long-term productive fitness of Australia's market-based economy.
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