Right Pulse

Well, apparently he hasn’t learned from the past. In another TV advertisement during the 2007 election Rudd committed to maintaining a surplus over the full budget cycle, i.e. until the next election. While Rudd and Swan both committed to not raising taxes.

By contrast, in the space of 7 months Rudd has announced – in the name of stimulating the economy – around $133 billion (including $43 billion for a broadband network) in un-budgeted policy measures, $1.5 trillion in new contingent liabilities (larger than GDP), a likely upcoming budget deficit upwards of $50 billion and $120 billion over the forward estimates, with the prospect of tax hikes to help pay for it all. This will also put pressure on Rudd’s $200 billion public debt limit, which he raised from $75 billion and with the possibility of it rising again to $300 billion:

UBS interest rate strategist Matthew Johnson said the borrowing requirement was now set to hit $300 billion…Mr Johnson said that while the Treasury has recently managed to issue at a rate of $1.4 billion a week, to sustain this rate over the next two years would probably require higher interest rates.

By the end of Rudd’s first term, the fiscal situation of the Federal government will make a mockery of Rudd’s election claims to being an economic conservative.

The government claims that these new policy measures are needed to boost the economy during a downturn. Yet as I have previously mentioned, by Treasury’s own figures the bulk of the money will not hit the national accounts until just before or well after the next election. Meaning the recession will be over by then. A case of too much too late. Furthermore, according to Treasury the multiplier effect from the $42 billion stimulus package is only around 0.7, meaning for every $1 spent by the government we only get .70 cents back in the economy. We lose .30 cents. So the spend is poor value for money.

Furthermore, in order to to pay for these new spending proposals, Rudd has needed capital, lots of capital. When Rudd began to announce this strategy back in October 2008 the stock market went south. I speculate this mini-crash was due to money funds positioning themselves to take advantage of future Commonwealth bond issues. A classic case of government crowding out private sector investment, magnifying the current shortage of capital within private markets. What bonds local capital are unable to buy will be going to overseas buyers, around half of the issuance. Now one does not need to be a great economic mind to realise the negative effects all of has had and will have on the economy.

Rudd spends billions to stimulate the economy, funded by capital from private markets. Capital that can longer be used to invest in the productive capacity of the economy and new entrepreneurial ventures. What’s left over is funded from overseas. This will mean billions of tax-payer dollars will be leaving the country that could have otherwise been used, to once again, invest in the productive capacity of the economy, etc… This is not a zero sum gain, but a negative return for the economy and it is certainly not the response a fiscal conservative would take in the face of an economic downturn. As Alex Robson at the WSJ has written:

A better stimulus plan would include spending cuts and tax cuts to stimulate investment and entrepreneurship; a timeline to remove banking guarantees to reduce contingent liabilities; and an outline of plans for further liberalization in sectors where the government intervenes most heavily, such as education, health and welfare spending. Such a plan would restore confidence by showing a commitment to fiscal discipline in Canberra, and position Australia to bounce back more quickly than it otherwise would as global conditions improve.

The NZ PM John Key announced an economic conservative approach to the economic downturn around the same time Rudd announced his approach. And look what happened to the stock market. The NZ50 began to outperformed the ASX200 for the first extended period of time on record.

UPDATE I

IMF chief economist Olivier Blanchard had this to say when asked on the 7:30 Report about Rudd’s cash give away:

…if we put money randomly in people’s pockets, they’re going to save most of it, and they may feel good about it, but in terms of what this does to the economy, it’s not very good. At this stage what we need is basically an increase in demand. So you basically want to put the money where it’s going to be spent. So, basically, this is one of the reasons we’re focusing on spending measures rather than tax measures, because spending at least in the first round gets you $1 for $1, and then maybe more after that.

So he is opposed to cash hand-outs but not increased spending on projects, etc… This last point contradicts Treasury advice on the matter. At no point has Treasury indicated that any of the spending measures would exceed a multiplier of 1. Back in February Dr Gruen from Treasury, while being vague, said before the Senate Standing Committee on Finance:

…the fiscal multiplier is somewhere between a half and one…

While Professor Davidson from RMIT at the same Senate Committee said the following:

Overall, all the economic analysis does seem to suggest that tax multipliers are far greater than spending multipliers and that tax cuts are going to have a far greater ‘bang for buck’ in the economy than is the spending proposed in the stimulus package.

So fiscal conservatives say tax-cuts, Rudd the socialist says more government.