The fiscal stimulus as ‘experiment’

“Australia is a small, open economy with a flexible exchange rate. There is consequently a real possibility that any increase in demand caused by fiscal easing will merely raise interest rates, induce capital inflow from abroad, appreciate the currency and reduce net exports. With growthin China and Japan slowing significantly, why implement measures that could exacerbate Australia’s expected export downturn?” extract from The Australian

Ergas points out the proposed stimulus is “too much, too soon“. He notes

“Unemployment is projected to remain fairly close to the non-accelerating inflation rate of unemployment (the rate that is sustainable in the long run) in the near term. Given the scale of the proposed spending, there is surely a risk that the Government is depleting its ammunition and accumulating future costs before the case for doing so is well-established”

While the first two criticisms are of the strategy, Ergas’ third, fourth and fifth criticisms are even more strongly tied to the questionable evidence basis for the stimulus

  • “…Even if the package did create jobs, many of these would merely be displaced from more productive activities. As Treasury secretary Ken Henry said in March 2007, when the unemployment rate was the same as it is today, ‘in an economy operating at, or close to, full employment, any government intervention will shift resources, including jobs, from one activity to another and impose a deadweight loss of efficiency on the economy'”
  • “When governments spend money on projects whose costs exceed their benefits, they make us poorer… there seems little reason to expect the spending commitments envisaged in the stimulus package to yield net benefits.There is, for example, ample evidence that the states do as poor a job of allocating maintenance expenditure on existing infrastructure as they do in selecting new infrastructure.” [A point that Gary Banks made forcefully in his recent paper on evidence-based policy&mdashPWG]
  • “Finally, the package lacks a credible strategy for returning to budget balance.”

No Comments

Leave a Reply

Your email is never shared.Required fields are marked *