Tuesday, 3 February 2009

Stimulating or Over Excited?

Ladies and Gentlemen it is official: the Howard era of Australian politics is over. The Rudd Government, just fourteen months old has overturned the economic legacy of the Howard Government by announcing its second economic stimulus package in just over five months. The headlines are thus:

  • The total package will cost $41.5 billion
  • It will send the economy into a deficit of $22.5 billion this financial year and over $35 billion the year after (A record)
  • Low and middle income earners who earn below $100,000, single income families, and families with school aged children will get tax cuts worth $11 billion, which will be handed out by the end of next month (This all but replicates the aim of the first stimulus package announced last September).
  • A jobs package with $25 billion over the next two years designed to curb the rising unemployment rate.
  • An infrastructure package targeted towards modernising schools worth $14 billion
  • $6 billion to build new homes

That’s only just the start. Beyond the raw numbers is a theoretical shift that has underlined Australian economic policy for nearly three decades. During the 2007 election campaign both the Howard Government and the Rudd led Opposition tried to play the game of who can generate the highest surplus. In the last Budget, handed down in May the Rudd Government announced a $22 billion surplus. In November, that surplus was revised to $5.4 billion, and now we have a $22 billion deficit. In short, we have lost $44 billion dollars in nine months. The latest economic theory suggests that in order to limit the severity of the ‘Global Economic Crisis’ the world must spend its way out of the hole to generate more money in order to keep the economy in a productive state. I believe there is something wrong here.

In my entire political life, economic stability has been based upon generating huge savings by maintaining a large surplus. Australia had 16 years of continued economic growth largely based upon the country’s economic restructuring of the early 1980s and the resources boom of the early 21st century. Parents tell their kids to save their money for a rainy day, however respective governments throughout the world of both philosophical persuasions chose to spend the money in the form of tax cuts. Governments made hay while the sun shone in order to get re-elected on the back of handing out economic bribes to voters, and now all we’re paying for it.

Former Prime Minister Paul Keating said on Landline last night that this is the worst economic crisis in 60 years. Consequently he’s calling for an economic overhaul that is not within the existing model of spending to end deficits. As the deficit gets bigger, the spending will increase, only increasing the size of the debt never to be repaid. Keating suggests that it will take six or seven years, or two electoral cycles to recover, while the entire financial system, as we know is restructured. Clearly, this is a problem that cannot be solved domestically, but must be solved internationally.

The question is this: When will leaders recognise that economics is always a long term exercise? One must always plan for the future. The transformation in politics towards continual campaigning and generating short term political capital has come at the expense of overarching economic policy. While Hawke, Keating, Howard and Rudd learn this lesson in Australia, our citizens will suffer. No stimulus package will fix that.

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