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The Forum > Article Comments > Fiscal stimulus: handouts v cuts > Comments

Fiscal stimulus: handouts v cuts : Comments

By Saul Eslake, published 3/3/2009

Fiscal policy must play a larger role in dealing with the current economic downturn.

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As interest rates are lowered, the government will have to pay out more to self-funded retirees and part pensioners. In December 2008, 5,000 people per week Ė double the normal Ė were already applying for pensions because of the economic downturn that has hit superannuation and investment funds.

Lowering interest rates is OK for spendthrifts and the 25% of Australians with mortgages, but there are actually a lot more people out there depending on reasonable interests rates to survive and keep themselves free of government handouts (i.e. taxpayer handouts).

The call for and the crowing about lower interest rates when they occur is stupid.

As for using fiscal policy to get us out of trouble, just look what happened when Japan decided on that course: it still hasnít recovered from itís the 1990ís crash, whereas other countries have. And what about the US, drawing out its recovery until after WW2, while Australia and the UK were beating the Depression in 1933, and recovering in 1938, thanks to balanced budgets and cuts in spending.

Government spending and going into deficit as Ruddy Labor intends will not work. Tax cuts to get the market working, a balanced budget and cost cutting, except for some large and needed infrastructure works, is the only way to go.
Posted by Leigh, Tuesday, 3 March 2009 9:31:39 AM
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I must agree with much of what Leigh says. I am sure that the reason that the media cheers at each reduction in interest rates (have you EVER seen the media suggest that rates be raised?) reflects more about the personal attitude of journalists as a group to debt than any intelligent appraisal of the economic situation.

My view is that the lowering of interest rates will not achieve any worthwhile benefit to the economy, as the borrowers will use the drop to reduce their debt, and the retirees who have lost out will cut their spending to the bone. When it is remembered that there are on average 25 savers to each borrower, it is obvious that there will be no stimulation.

I have no problem with government spending at this time, but believe it should be done out of current income, not borrowing. With Pakistan about to fall to the Taliban (who will acquire 16 atomic bombs), and the likelihood that Iran will have their own bomb soon, the prospects for nuclear war in the Middle East have never been greater. The one thing we can say about such a war is that there won't be any oil. The government should respond to this by greatly increasing the tax on petrol and LPG gas, to get us used to using less. Public transport fares could then be trebled, as most people would be unable to afford to drive to work and would have to pay the higher rates, which could then be spent on infrastructure. All this would result in a marked reduction in the standard of living, but that is inevitable anyway.

In case anyone thinks that I am a pessimist, remember that Australia is the only country that has surpluses of food, energy and minerals, and also a sea boundary. It will be an interesting century.
Posted by plerdsus, Tuesday, 3 March 2009 10:09:21 AM
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Saul has provided a useful and balanced summary of the main issues now being debated.
But what intrigues me is the general level of commentary by economists and the implied level of certainty that they have about this "crisis". This should be compared with the recent "miracle on the Hudson", where Capt. Chesley Sully Sullenberger safely landed his aircraft after the "crisis" of hitting a flock of geese that took out all the engines.

I have several friends who are airline pilots, who tell me that much of their work is very boring. Despite this, they have intensive training in dealing with emergencies. The flight simulators are "crisis simulators" and wonks are employed to think up the unthinkable and ensure that the pilots are capable of managing these unthinkable situations.

By analogy, our "neo-classical equilibrium" economists seem to have only been trained to take off and land in mild headwinds, how to mutter inaudibly over the PA about likely flight conditions and ETA and duty free availability and discuss amongst each other their pay, conditions and status. Very few pilots have experienced real emergencies, but all are trained to handle them as the consequences of incompetence for both the particular plane and the airline industry would be dire. In comparison, how many economists have any training in dealing with "economic engine failure"?

I hope that if and when we land after this crisis, more attention will be paid by economists to "thinking the unthinkable" rather than the debating the appropriate balance between first class, business class and cattle class in the global economic jetliner.
Posted by Jedimaster, Tuesday, 3 March 2009 10:48:50 AM
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Jedimaster - your analogy of the economy to an airplane is not applicable unless you assume that the airplane is undergoing continuous re-engineering during the course of a flight.

The Australian economy is a dynamic beast that constantly changes in response to many inputs not least of which is the current political climate. Should the economic emphasis be on job creation/retention or handing out dollars to the poor or unemployed? Should the empahsis be more worker or employer leaning? Is the economy driven by export or internal consumption? Is the political belief towards an eglitarian or a spoils to the victor taxation system.

Answers to these questions will drive different stimulus priorities and since I have yet to see a government hire an economist with a differing political bias the stimulus package will reflect the desires of the powers de jour.

No one solution is always better. The best solution for the time needs to address the short term problems with a sharp eye on implications for longer term repercussions.
Posted by Bruce, Tuesday, 3 March 2009 4:46:32 PM
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Perhaps there should be a review into how we can lessen the burdon on all employers when it comes to employing staff.

You see at the moment it is actually preferable to borrow money to expand ones plant and machinary than it is to employ staff. This is mainly due to the large amount of red tape involved in employing, esspecially if one wishes to employ for a short period or a trial period.

With rising unemployment would it not make sence for the government to subsidise wages rather than pay unemployment benifits, or at least make it just as attracrtive to employ staff as it is to purchase equipment, most of which is imported by the way.

I really think that now is the right time to address this inbalance within business.

I am sure that if pacific clothing comp could gain cheaper labor it may be viable for them to continue thier opperations right here.

Any thoughts?
Posted by rehctub, Tuesday, 3 March 2009 8:43:47 PM
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First things first Saul i am glad you put your initial caveat in re these comments being your own; your comments about my football club the NMFC has really gone pair shaped for you i might add!

Second sorry Saul i cannot agree with you regarding the government throwing at last count $52 billion into the economy through its stimulus package of handouts and gimicks!! Your response that tax cuts would have been simply saved and not had an affect on the economy is well due to you and others thinking tax cuts on a small re micro scale!

What could the government have done with $52 billion if it had put it into tax cuts instead of handouts and gimicks?

for 2 years the government could have implemented the following;

Increase the tax free threshold from $6,000 to $20,000 at $17 billion;
remove the top 2 tax rates for $6 billion.
a total cost of $23 billion per year, or $46 billion over 2 years.

imagine this tax scales;

$0-20,000 tax free
$20,000-35,000 15% tax
>$35,001 30% tax

All taxpayers earning $20,000 or greater would have received at a minimum a $2,100 per year tax cut; if that didn't stimluate the economy i don't know what would!

It could have then used the remaining $6 billion to increase old age pensions.
Posted by 1jasonoz, Wednesday, 4 March 2009 1:09:06 PM
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