Opinion & Commentary
Stimulus is a waste of taxpayer’s dollars
The use of fiscal pump priming - for a long time shelved in favour of using fiscal policy for longer term objectives - has made a spectacular comeback. The clamour for fiscal stimulus packages as a response to the current economic debacle is evident around the world. The Rudd government’s dramatic announcement on Tuesday is the latest example.
But the revival of what is called counter-cyclical fiscal policy glosses over the lessons that were learnt the 1970s and 1980s. Those lessons remain valid today, but are being swept aside in the headlong rush to prop up sagging economies.
All the talk of stimulus and multipliers is straight out of a 1960s economics textbook, as if everything that was subsequently learnt about the limitations of counter-cyclical fiscal policy never happened. There is at least some debate on these issues in the US, but very little in Australia, where the use of fiscal stimulus has gone largely unchallenged.
This situation should change – though in light of Tuesday’s announcement it may be too late. At the very least, too much is being expected of fiscal stimulus. At worst, it will be ineffective in the short-term and damaging in the longer term.
The key issue is not whether the Commonwealth budget will or should be in deficit; we now know that it would have gone into deficit next year (but not this year) even without any of the government’s fiscal stimulus packages.
Rather, the issue is whether the government should push the budget further into deficit through discretionary fiscal policy changes – which, of course, the Rudd government has now done, on a large scale.
The fiscal stimulus is supposed to have a multiplier effect on the economy, but expectations of these multiplier effects are greatly exaggerated. Far from exceeding unity, multipliers will struggle even to come close to unity, and may even be closer to zero. A multiplier of zero means that a policy change fails to achieve any increase in GDP. How can this be?
For a start, policy changes that give a temporary boost to household purchasing power, such as the lump-sum pension hand-outs in December and some of the measures announced this week, are contradicted by evidence that household spending is guided by notions of permanent income and wealth, not by temporary fluctuations, which are likely to affect saving rather than spending.
There is also a large body of evidence that fiscal expansions merely ‘crowd out’ the private sector. Increases in government spending or increases in deficits for whatever reason tend to result in offsetting shrinkage in private sector activity through a variety of mechanisms.
For example, a deficit-financed fiscal stimulus may fail because the private sector is smart enough to figure out that the deficit comes with a future tax burden required to service and repay the increased public sector debt. The private sector will anticipate that future tax burden.
Increased deficits can also be harmful to confidence. The turnaround from four years of surpluses totalling $79 billion projected in the budget last may to four years of deficits totalling $118 billion now was partly unavoidable, but also comes as a shock to confidence in the government’s economic management.
There is also a real risk that the stimulus will continue for too long, because government becomes locked into a course of action or fails to recognise when a recovery has started.
For these and other reasons, any positive short-term impact of the fiscal stimulus is likely to be weak and to raise doubts as to whether such a use of taxpayers’ money is worthwhile or just wasteful.
The strength of commonwealth finances carried over from the boom did provide room for a credible and effective loosening of fiscal policy in the downturn. But what the government has done, with policy decisions costing $29 billion this year and $20 billion next year, go way too far and must raise concerns about the future course of fiscal policy.
The kinds of measures adopted are in many cases wasteful of taxpayers’ money.
There are ways out of the global crisis, but fiscal stimulus isn’t one of them.
Robert Carling is a senior fellow at The Centre for Independent Studies.
