Is the Government throwing good money after bad?

ast Friday, after weeks of parliamentary objection and argument, the Federal Government finally passed their $42b economic stimulus package through the Senate. History will tell whether this day was the beginning or end of our country’s solvency but, as a nation that already owes $1trillion in foreign debt, an extra $52b (including last year’s economic stimulus package) is only fuel to the already kindling bushfire that is the Australian economy.

It is certainly true that our economy is faring better in this rocky economic landscape than the economies of our trading partners, but what strength it does have is will certainly be shaken by poor government planning and policy execution.

Basically, Australia is about to spend money we don’t have to resolve an economic situation that we haven’t yet felt the full brunt of. The Government says that, in spending this money, they are following the advice economists, but not all economists agree that we can buy our way of this situation (The US’ Cato Institute of economists, for instance, advise that policy makers should focus on reforms that remove impediments to work, saving, investment and production and avoid such fiscal packages – http://www.cato.org/).

The first $10.4b economic stimulus package of October ’08 failed to produce any lasting ‘stimulus’, although retailers didn’t mind the consumer’s extra spending money in their tills over the Christmas period. A better approach to increasing and maintaining the spending potential of citizens is to increase their earnings by increasing their employer’s capacity to pay them. How? Increase incentives for productivity; the follow-on effect being more jobs and a more stable economy. Strong economies have never been built upon money handouts and undisciplined spending.

This new package, if the last one is any yardstick, is throwing good money after bad.

Hard, hard work and personal financial discipline will get us out of the mire...not the opposite.

Bitter medicine – but worth taking. We cannot buy our way out of an economic crisis when overspending is what got us into this rut to begin with.

The week’s parliamentary proceedings offered some interesting political banter: The Opposition, in particular Malcolm Turnbull, argued that the stimulus package would be a debt worn by future generations – a debt that our country couldn’t afford; while the Government argued that, despite this, the struggling workers of Australia needed the money and that without it, their plight would be much worse.

The Black Saturday bushfires were a timely, if heartbreaking, distraction to the economic discussion. They softened the political stalemate, perhaps enough to see it through even the Opposition’s Senate blockade. Still, the package passed the Senate only by a whisker: 2 votes.

The hard workers and keen businesspeople around the country are going to feel it, too, but in their hip pocket when this debt becomes a national liability.

But, the background to this political battlefield is not necessarily one bogged down in the laws of reality as you and I know them. Rather, they find their roots in the science of Economics. Perhaps, this science finds its first difficulty in application: The economic to-ing and fro-ing is at least an indication that in Canberra, there is no a decisive plan of action to get our country out of the economic mess. Indeed the passing of unproven methods, such as fiscal economic stimuli (that, as said earlier, not all economists even agree with), prove out in fact that the nation’s monetary think tank are certainly groping for solutions.

As well, Labor’s current economic strategy flies in the teeth of its more grounded pre-election economic strategies that were outlined by the Treasurer himself three years ago (see link to the Treasurer's 2006 speech). Spending $50b odd on the economic equivalent of a defibrillator is not exactly encouraging saving which, in that speech, he said he would do. Perhaps the seats of politicians are a little too precious and, however opinion polls may gauge popularity, they will never measure wisdom. For wisdom is measured by results.

In fact, despite the upturn in retail trade, there has been no real growth in the Australian economy since the October package – if so, why follow it up with another five times the original amount?

What we would like to know is: What is wrong with the provision of stimulus to increase productivity and savings, as outlined in the Treasurer’s 2006 speech? Obviously, with Government revenue falling $115b, wouldn’t there be just cause to move this way?

I’ll take a punt and say that most business owners would love a little more reward for high and remunerative productivity. If businesses are making more taxable income and, with lower tax rates prompting them to do so, will it not reduce the $115b revenue hole and, in general, make the country more financially stable?

Maybe this is too simple a solution; but, no simpler pumping billions into an economy to ‘stimulate’ it.

Actually, there is much, much more to be said about this. And, indeed, much more will be said.

In particular, we would love to hear from business owners and economists alike as to your take on the matter and your proposed solutions.