Wednesday, March 11, 2009


In his latest offering, conservative Australian cartoonist ZEG sees Kevin Rudd's outburst of bad language as just a distraction from political failure on both sides of politics.

Follow the Kiwi leader, not Obama

Despite the federal fiscal stimuli we had to have, Australia is almost certain to experience the recession it was not supposed to have. So, with earlier stimulatory measures failing to work as expected, what alternatives would work better? The answer is: those primarily focused on the production rather than the spending side of the economy.

Federal fiscal packages unveiled since October last year have aimed to boost consumption in the short term, in keeping with Treasury advice at the outset that the best fiscal response to the global financial crisis was to "go early, go hard, go households". However, an arguably sounder fiscal response would have been the exact opposite: go later, go easy, go firms.

This does not mean federal policymakers should have ignored the downturn or that all aspects of fiscal stimulus packages have been unworthy. On the contrary, many infrastructure projects scheduled for future years have been overdue, there is some business tax relief and business regulation problems are being addressed.

But too much faith has been put in using fiscal policy to boost consumption on the demand side of the economy in the short run via tens of billions of dollars' worth of bonus payments. A different mix of measures should have recognised that the financial crisis first struck the aggregate supply side of the economy, not the demand side.

For federal fiscal policy to go later would have meant letting monetary policy go further in the first instance to pre-emptively manage the expected downturn in short-run macro-economic activity. The Reserve Bank of Australia has had much greater scope to do this compared with central banks abroad because official interest rates in Australia had been too high for too long before the global financial crisis hit home.

Inflation also had been wrongly diagnosed as an aggregate demand problem rather than a supply side, or cost-push, problem thanks to high oil and other international commodity prices. The lowering of official interest rates by four full percentage points since September and the sharp exchange rate depreciation since then will do more to buffer the economy from the worst of the crisis than any fiscal action in train.

It also would have been advisable for federal fiscal policy to go easy in the light of the whack to budget revenue and the budget bottom line as a result of global commodity price falls and diminishing company and capital gains tax receipts. Moreover, going easy on fiscal policy would have avoided the problem that will soon arise when government borrowing to fund growing state and federal budget deficits puts upward pressure on long-term interest rates, thereby limiting the Reserve Bank's discretion to lower interest rates across the spectrum.

"Go households" has meant channelling scarce federal fiscal outlays to select segments of the economy's household sector. But this has ignored the fact firms were the first victims of the crisis. For many struggling firms, falling sales were initially less of a problem than the unavailability of credit. Paradoxically, the raft of hasty public spending initiatives implemented across the world may hold back recovery if households and markets become increasingly alarmed about higher future taxation, interest rates and inflation.

Unemployment is the scourge of recessions. However, it is the business sector, not households, that ultimately employs most people, creates most of gross domestic product and invests in the economy's future. Hence, it would have been better to assist firms' bottom line directly on the cost side through rapid regulation relief and tax relief, such as payroll tax reduction, than assist indirectly on the revenue side through trickle-down sales. Though the federal fiscal response so far offers some business tax relief, this is dwarfed by the bonus payments aimed at boosting consumption.

Rather than following aggregate demand-oriented approaches adopted by the US, Britain and other countries, federal policymakers should look to New Zealand, which so far has avoided measures aimed directly at inflating consumption spending. Instead, the NZ Government has emphasised supply-side measures that will flatten marginal taxes levied on individuals, improve infrastructure and quickly lower the regulatory burden on business.

This is not the first time NZ has led the world in economic policy innovation. It was a Labour government there that initiated comprehensive economic reform under the direction of treasurer Roger Douglas from the mid-1980s. This change in policy direction occurred following a currency crisis resulting from fiscal excess and included labour market reform, privatisation, public finance reform and trade liberalisation. The breadth and depth of NZ's reforms had no precedent in the Organisation for Economic Co-operation and Development, and the measures were initiated before the Hawke-Keating government commendably followed suit with a similar reform program that delivered the strong productivity gains Australia enjoyed until the turn of the century.

NZ was also the first country to formally legislate for an independent central bank whose sole objective was to keep inflation low. Years later Australia adopted a weaker version of the NZ monetary policy model, as did Britain. It's now time to emulate the spirit of NZ's fiscal response to the crisis.

We all know about NZ's rugby prowess and how often it beats Australia at the game. If we were to score Australia v New Zealand on fiscal responses to the global financial crisis so far, it would be Australia 0, NZ 1. That's not counting penalty tries where one side gets points for being obstructed by the other. Such obstruction will be evident as public sector borrowing resulting from aggregate demand management by the state and federal governments in this country pushes up Australasian interest rates at NZ's expense.


Australian conservatives in luck as White House guru backs carbon delay

The Coalition and business groups have received unexpected backing for their argument that a recession is no time to introduce emissions trading -- from US President Barack Obama's top economics guru. In a previously unreported academic paper posted on the Harvard University website last August, Lawrence Summers argues that "expenditures for climate change will be far easier to make in economies where per-capita income is growing". Mr Summers, a former president of Harvard and treasury secretary under former US president Bill Clinton, is currently head of Mr Obama's National Economic Council and works in the White House.

His argument chimes with the position put by Opposition emissions trading spokesman Andrew Robb and Australian Industry Group chief Heather Ridout. However, it is starkly at odds with the determination of Kevin Rudd and Climate Change Minister Penny Wong to have an emissions trading scheme in place by next year, despite the downturn.

Mr Summers urges policymakers to create "reference points" for the beginning of the economic losses caused by emissions trading, not just for greenhouse levels themselves. He argues that, in an economic expansion, greenhouse abatement measures will be seen as less painful because they will mean the sacrifice of income growth, rather than of real income. "Prime ministers and presidents can't hope to sacrifice GDP for climate control without hearing strong cries of protest from those experiencing loss-aversion on their incomes," Mr Summers writes. "In growth economies, matters will be easier, because the cuts will come against what would have been their incomes, a moving and hence more fuzzy reference point."

Ms Ridout yesterday reiterated her call for the ETS to be delayed until 2012. "We want the delay for reasons such as the impact of the global financial crisis on the preparedness of business to take action and the scale of the administrative task," she said. "The current timetable is too onerous and the global financial crisis is hampering the ability of businesses to prepare and finance the major emissions reduction strategies that are required."

Mr Robb said the Coalition would examine the Government's draft legislation, released yesterday, but said its version of an ETS was flawed. "There are many in the Labor caucus ... who are deeply disturbed about the direction the Government is taking this, especially at a time when we have got the economy under such enormous pressure," he said.


Economists warn about weak effect of Rudd bonus

Retailers hope a massive cash injection for families will prop up spending and keep their stricken businesses afloat. Hundreds of thousands of families will get $900-$950 bonus payments from today - part of a $13 billion government handout. But an Access Economics report, to be released today, suggests consumer caution could last well into next year.

Single-income families who receive Family Tax Benefit B will get $900 one-off payments under the economic stimulus. And families who receive Family Tax Benefit A will get a $950 back-to-school bonus for each child aged 4-18. Carers, disabled pensioners, students and drought-affected farmers will also get $950 cash payments. Taxpayers earning less than $100,000 will receive further one-off bonuses of up to $900 from April.

The Australian National Retailers Association said the cash could save businesses. "This is an unbelievably cautious consumer market," association chief Margy Osmond said. "So packages like the stimulus one are particularly valuable."

But Access Economics said looming job losses and a worsening housing market meant relief would be short lived. "That means a big loss of labour income, and will serve to keep consumers ultra-cautious," he said.

Opposition Leader Malcolm Turnbull said figures showed stimulus payments to families in December had boosted savings, not spending. But Prime Minister Kevin Rudd said that the spending had marginally improved spending.


More gross incompetence from Queensland Health

Anna Bligh has abandoned Health Minister Stephen Robertson after revelations he had failed to fix dangerous health staff accommodation. The Premier today repeatedly refused to support Mr Robertson after The Courier-Mail revealed public servants were still living in 60 hazardous dwellings of the original 101 residences identified across the state. Mr Robertson had promised last May to fix the problems within a few months following the completion of a statewide audit in the wake of the sexual assault of a Torres Strait nurse in her rundown living quarters.

Campaigning in Mackay today, Ms Bligh said she was "absolutely not' happy at the failures, saying she would seek a "please explain" from Mr Robertson and his director-general Mick Reid later today. "I'm very disappointed to hear progress I thought was happening has not happened," Ms Bligh said. "I will be asking serious questions ... when I return to Brisbane. I want to know why this was the case." Ms Bligh was unable to say when the residences would be fixed but has promised to provide details later today. Asked if Mr Robertson still had her support as she had previously indicated, Ms Bligh said: "I will be asking questions about this issue when I get back to Brisbane."

Her comments came after The Courier-Mail reported the failures with five of the "extreme" dwellings still being fixed. The substandard conditions were discovered after a statewide audit - launched after a Torres Strait nurse was sexually assaulted in her rundown accommodation - found broken or missing locks, security screens, lighting and smoke alarms. Asked about the progress a fortnight ago, Mr Reid was clueless and said: "I would presume all 100 have been done."

However, Mr Robertson yesterday admitted to the failure but insisted some "improvements" had been made to the five unfinished, inhabited "extreme" dwellings. He blamed the delays on the vagueness of his own audit, bad weather and re-tendering of contracts after a poor industry response. "In May last year, I had the expectation that these renovations would, indeed, be completed within months," he said. "While work is progressing well on this rectification work, there have been a number of issues which have led to the work taking longer than I was first advised."

But Opposition Leader Lawrence Springborg said the failure showed Labor had learnt nothing as the initial assault in the Torres Strait came after damning security reports were ignored. "If they spent as much time fixing things as they do spin-doctoring and making excuses, then things would be done," he said. Mr Robertson had initially lauded his response to the housing audit, fast-tracking $10 million in funding and promising completion within "weeks and months". "This should never ever be repeated (and) I am determined to ensure that," he had said. But the money spent on the work only totals $4.06 million.

The revelations come only a fortnight after Mr Robertson refused to apologise for attacking a public servant involved in the Torres Strait case, despite being unable to produce any evidence to justify the attack.


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