Friday, July 12, 2013

Damning verdict on stimulus | The Australian

Damning verdict on stimulus | The Australian

Academic authors have delivered damning verdicts on the efficacy of Rudd’s fiscal stimulus, which the government is yet to refute.

Tony Makin, an Australian economics professor at Griffith University, has forensically examined Australia’s national accounts in the critical months during 2008 and 2009, when the global economic free-fall risked dragging Australia down, demonstrating clearly that government spending did little to boost economic activity. The spending on pink batts and school halls came much later.

What kept the economy afloat was the Australian dollar’s collapse - down more than 20c against the US dollar in late 2008 - which prompted an export goldmine at the same time that China’s demand for resources was rapidly growing.

“The federal government’s direct contribution to the change in consumption and investment was minimal, with its major impact arriving several quarters after it was deemed necessary,” Makin writes.

As for the notorious $8 billion worth of cheques that hit Australians’ bank accounts in April or May 2009, a more recent paper by four academics, including a Treasury official, shows Australians on average spent only an extra $1 of their windfall, saving much of the rest.

“The effect of the fiscal transfer on the change in household consumption expenditures is insignificant and quantitatively small - the average household spent less than 0.2 per cent of the income windfall,” the authors write.

These outcomes are not unique. In a 2011 study, Makin and Paresh Narayan, a finance professor at Deakin University, highlight the remarkable off-setting relationship between public and private savings in Australia from 1980 to 2008, suggesting the recent surge in household saving is at least in part a nervous reaction to the Rudd government’s fiscal excess.
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