Join our investing community

Swan gets full marks on the Stimulus package.

Discussion in 'The Economy' started by jeffsyd, 7th Feb, 2009.

  1. jeffsyd

    jeffsyd New Member

    Joined:
    12th Nov, 2007
    Posts:
    4
    Location:
    Sydney, NSW
    I just tried to get my head around how the Rudd & Swan's stimilus package will help cushioning the recession especially the cash handouts. From this article (Ross Gittins) says that Swan got it right. It just changed my previous perspective.

    Any thought?

    Stimulus is Three T's and sympathy

    .....
    The words for this week are "extraordinary" and "exceptional". They're not the sort of emotive words an econocrat normally uses, but they're sprinkled throughout this week's mini-budget papers.

    They describe the breathtaking size of the deterioration in the global economy in the final quarter of last year, the huge downward revision this has prompted in the Federal Government's expected tax collections over the next four years and the consequent need to apply a massive fiscal stimulus to the economy on top of all the Reserve Bank's dramatic slashing of the official interest rate.

    Last May the Government expected a budget surplus for this financial year of $22 billion. As recently as November, it cut that to a surplus of $5 billion. Now it is expecting a deficit of more than $22 billion.

    That $44 billion deterioration is equivalent to about 3.7 per cent of gross domestic product. More than $29 billion of it is explained by the costs of the first stimulus package of cash bonuses in December plus the early costs of the package announced this week.

    That leaves $15 billion of the deterioration explained by the expected decline in tax collections.

    By next financial year, however, the overall deterioration of $55 billion in the expected budget balance, to yield a deficit of more than $35 billion (2.9 per cent of GDP), is explained more by the expected decline in tax collections ($35 billion) than the subsequent costs of this week's package ($20 billion).

    Wayne Swan is now expecting the budget deficit for this financial year and the next three to total $118 billion, leaving the Government with a net debt equivalent to just 5 per cent of GDP in June 2012.

    The fiscal package itself will cost $42 billion, with about a third of that coming this financial year, more than 40 per cent next year and about a quarter in 2010-11, with only minor costs in the fourth year.

    In truth, however, the lion's share of the money is intended to be spent in calendar 2009, when it will be equivalent to about 2 per cent of GDP.

    This shows how huge the package's stimulus to the economy will be. It makes me confident you won't find a bigger package in our history. And it comes on top of the December package that, with a cost of more than $10 billion, was equivalent to about 1 per cent of GDP.

    Of course, just because you spend an extra 2 per cent of GDP doesn't mean you'll increase GDP - the total value of the goods and services the nation produces during a period - by the same amount.

    That's because some of what the Government spends will be saved and some will leak into imports. So the Government's advisers estimate that GDP growth will be about 0.5 per cent higher this financial year and about 0.75 to 1 per cent higher next financial year than it would have been.

    Since the revised forecasts are for real GDP to grow by 1 per cent this financial year and 0.75 per cent next financial year, you can see how much the Government is relying on this package to keep the economy out of recession.

    I doubt we'll escape it but, like most of the economists, I don't doubt the recession would be a lot worse without the various stimulus packages.

    In preparing this week's package, the Government has sought to comply with the Three-Ts rule of fiscal stimulus: measures should be timely, targeted and temporary.

    The timely principle says governments should apply their stimulus as early in the downturn as possible. Because things tend to snowball (economists would say multiply) in a downturn - with my cutback in spending reducing your income and thus prompting you to cut back, so reducing my income - the notion is that the earlier you act, the less things unravel. A stitch in time
    Similarly, the targeted principle says the stimulus should go to those people or on those purposes most likely to get the money spent quickly. This favours governments spending the money themselves so that, at least in the first round of the money's flow around our circular economy, all the money is spent on consumption or investment.

    This explains the support for spending the stimulus on capital works (now grandly named "infrastructure"). Trouble is, major capital works programs such as expressways, bridges and railways can take years to plan and get approvals for.

    Almost 70 per cent ($29 billion) of the $42 billion is going on capital works projects. But Swan has tried to ensure the money is spent quickly by targeting it towards lots of quite small building projects.

    Half the money is going on repairing and adding new facilities to every school in the country. The rest is going on fixing black spots on the roads, building boom gates at level crossings and building 20,000 new social housing and Defence Force homes, with about $3 billion going on a small business investment incentive.

    All these projects are worth doing in their own right, they should be easy to get going and they should give a boost to employment in the small businesses that dominate the building industry.

    The remaining 30 per cent ($13 billion) is going on cash bonuses - transfer payments - of up to $950 to most taxpayers, parents of school children, single-income families, some students and farmers. Many households will get multiple dollops of $950.

    The way to think of this is as a once-only, lump-sum tax cut. Whereas ordinary tax cuts are doled out at a few dollars a week, this one comes in an upfront lump.

    Another difference is that low- and middle-income families will get a lot more (and high-income families a lot less) than had the tax cuts already planned for July this year and next merely been brought forward.

    Clearly, Swan's approach scores well on timeliness and reasonably on targeting, although this time the cash bonuses are going to many middle-income families who'll be more inclined to save them than would poorer people.

    Malcolm Turnbull's argument that people would be more inclined to spend a "permanent" tax cut than a once-off bonus - based on the economists' "permanent income hypothesis" - isn't a strong one empirically.

    Finally, the temporary principle says everything you do must be a once-off (even if spread over a few years) so that it leaves no impediment to getting the budget back into surplus once the economy is well clear of recession. Swan gets full marks on that bit.

    Ross Gittins
     
  2. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Why doesn't Rudd ever talk about "working families" anymore? He drops the "working" to "families"...Which is unusual as "working families" was his war cry for the election...
     
  3. dudek

    dudek Well-Known Member

    Joined:
    10th Sep, 2008
    Posts:
    199
    Location:
    Sydney
    Simply because there are less “working families” around since his election. Family were spouse loses job technically is called just a “family”
     
  4. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    very true...
     
  5. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    This is the truth, the rest is just politics and vote winning!

    Ruddy wants to be seen as a man of action, when in reality there is little anyone can, nor should, do to prevent this recession from happening. It is entirely necessary, and will be deeper than even these conservative estimates.

    Recessions are a great time to weed out all the bad investments and cut the marginal ventures that are not efficient uses of time or resources. This also applies to government. If the government scrapped this $42 stimulus package, then went about cutting $10 - 15 billion in yearly government expenditure on market distorting spending (which can EASILY be done) the budget would be in deficit, but only slightly.

    I don't understand why everyone is trying to avoid recession, Australia should be looking at this as an opportunity to weed out inefficiencies in society.
     
  6. 1300 GET A PLAN

    1300 GET A PLAN Active Member

    Joined:
    2nd Aug, 2008
    Posts:
    37
    Location:
    Gosford, NSW
    Rudd and Swan have it wrong.

    They should be focusing on projects that make it more efficient for businesses to do business.

    If they are more efficient, they are more competitive.

    If they are more competitive, they can export more.

    If they are efficient and competitive, they can create more jobs.

    When a business is competitive and in a position to create more jobs, they can invest in workstations and machinery for industry.

    What the government should be focusing on is more investment and more jobs. The way to get more jobs and investment happening is to make a business more efficient.

    Handing out money does nothing to help business long term or medium term. For a month or a quarter, yes. But no longer.
     
  7. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    I think you are getting Rudd and Swanny's agenda confused with what the liberals would do. Labor is normally focussed on creating inefficiencies that benefit workers, or so they claim (their track record doesn't support this argument though).
     
  8. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    I agree, there are many projects they could take on and create jobs.
    Handing out money will help this quarter but they can't keep on doing this forever
     
  9. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Not that I'm usually into conspiracy theories but how much did the building union contribute and how much did the nurses union contribute?
     
  10. dudek

    dudek Well-Known Member

    Joined:
    10th Sep, 2008
    Posts:
    199
    Location:
    Sydney
  11. busselton

    busselton New Member

    Joined:
    7th Jun, 2006
    Posts:
    3
    Location:
    Perth
    The package should be spent on building Nuclear Power Stations in every state.... It will provide employment, reduce our reliance on Fossil Fuels, Develop new technology and skills in Australia, assist our Mining & Manufacturing industries, address Greenhouse Gas emssions... and a myriad of other flow ons that won't be achieved by 4 million tax payers spending $950 at the local supermarket....
     
  12. dudek

    dudek Well-Known Member

    Joined:
    10th Sep, 2008
    Posts:
    199
    Location:
    Sydney
    There is so many things we could build and improve as a nation. Australia is seriously under developed among “developed” countries.

    But what do we do? give away money - easy political scoring game.
     
  13. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    Contribute to what?


    There is no need to make this part of a "stimulus package" but it definitely should be a part of the yearly budget!

    The only downside would be if we undertook a nuclear programme we'd probably becomg a target of the US propaganda machine claiming that we are involved in uranium enrichment in a bid to create nuclear weapons... oh wait we don't have as much oil as Iran. Scratch that the US would support us in our bid to go nuclear.

    :rolleyes:
     
  14. dudek

    dudek Well-Known Member

    Joined:
    10th Sep, 2008
    Posts:
    199
    Location:
    Sydney
    We already have nuclear facility and we are already enriching uranium (small scale) at Lukas Heights.
     
  15. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Contribute to the political parties coffers...
    I think solar is the way to go, think of all that desert which could have solar panels on it...
    Why would the government want to do anything else than get easy political points? (I may bit slightly cynical on governments...)
     
  16. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    I very much agree, especially while the the industry is small. I think the government should be investing heavily in it, because if the future is going green then being the industry leader in this sort of technology is only going to help our massive trade deficit and Australia in general.


    I hear you, I have every little faith in or time for government or central banks.