The Treasury isn’t adding much by saying that it supports Kevin Rudd’s package and rejects that of Malcolm Turnbull. It would have designed the Rudd package and so, in essence, is saying that it stands by its design. In essence this means supporting a large package rather than a smaller one. The claim by Ken Henry that a dollar spent directly by government has bigger stimulatory power than a dollar in tax cuts given to households is correct – it reflects the balanced budget multiplier idea – because households will save some of the dollar. But this only again relates to a defence of a larger package – tax cuts will just have a smaller expansionary effect.
Ken Henry’s claim that the smaller package runs the risk that the economy might fall into recession is also correct. But it is also the case that, since the Australian economy is operating in unchartered waters with an especially uncertain international economic environment, that the larger stimulus will have its own risks. It will certainly add more to debt and it will reduce the ability of policy makers to make further expansionary moves in the future if this crisis is prolonged. Fiscal actions are available options now basically because public debt was reduced under the Howard Government. Deficits and debt are difficult to control particularly when a populist social democratic party holds the reins of power and when a gaping public deficit adds to the constraints imposed on an economy by an already weak current account. The AFR this morning has it right:
“Right now the government’s financing task looks manageable. But if the worst comes to the worst, it wikll be years before the deficit is brought under control, adding to the burden. If foreign demand for Australian goverrnment debt remains scarce, the government will have to pay higher yields or face a currency depreciation. It – and we – need everything to go right from here”.
Moreover, I am completely unclear on how Henry derives the case for his $42 billion package. Econometric modelling will be useless in the current environment because the economy has deviated significantly from its past sample path. That the Labor Party were hedging a month ago on the issue of whether Australia would run a budget deficit and still hedges on the issue of whether a recession is imminent – views that would be motivated by background briefings from Treasury – suggests policy-maker uncertainty is huge.
Under these circumstances the case for moderation and for avoiding a strident policy defense is clear. Certainly the Turnbull proposals should be put on the table and debated intelligently. The hysterics of Kevin Rudd and his inept Treasurer Swan over the past couple of days have been a disgrace. Rudd’s earlier talk about the case for greater civility in public life is revealled to be hypocrisy given his insistence on uncritical support for this massive package and for the unreasonable dishonest abuse about ripping up school programs and denying handouts to millions with which he has effectively threatened the Coalition without meeting its points. (168)