The feeling among most economists and voters is that the Rudd Government’s stimulus has been a roaring success, rescuing the economy from certain malaise and deep recession. In one sense, the stimulus has worked — Australia has been one of the few major economies to avoid recession (at least in a technical sense). However, there is a very big difference between avoiding a recession and successful economic policy.
AAP yesterday reported that “motor vehicle sales data showed a seasonally adjusted 6.9% fall in July, the worst monthly fall in eight years”. With Westpac senior economist Matthew Hassan [stating] the data is a critical bellwether of consumer demand, usually falling early in a downturn as consumers worry about losing their job.
There is a simple explanation for the record drop in vehicle demand — that is the tax break offered to business for purchasing a new vehicle before June 30 simply caused demand to be pushed forward. No fresh investment was made, rather, people who would have bought a vehicle in July or November or next year purchased it before June 30.
An insider from a major Australian vehicle manufacturer told Crikey that orders for June were well above expectations, with businesses buying multiple vehicles to take advantage of the lucrative tax breaks on offer. In some cases, business owners were able to get upwards of $15,000 off the purchase of a new vehicle (when the tax investment allowance and GST refunds are considered). No matter whether the vehicle was a ute or a luxury European sports coupe.
Rarely is a government’s decision proven so foolhardy, so quickly. While economic growth ostensibly strengthened as a result of the various stimulus measures, that growth came at a steep cost — specifically, the repayment of borrowings for decades to come. Measures such as the $900 stimulus payment (which led to a record month for pokies operator Tabcorp) and the vehicle allowance (which gave business owners a tidy discount on their new Mercedes SLK) was paid for by taxpayers. And now with the stimulus over, car sales have promptly plummeted by a record amount. It appears that the Rudd Government’s stimulus is reminiscent of a school student who receives an extension on their project due — the project still has to be finished, just a little bit later.
The Government’s stimulus measures (and the measures taken by the Bush and Obama administrations in the United States) have delayed the inevitable and propped up unsustainable businesses with taxpayers’ money (and borrowed funds). No better example is that of the ham-fisted vehicle allowance, which placed taxpayer monies in the pockets of car dealers and compelled businesses to simply bring forward their capital investment in what is usually a non-income producing asset.
Bravo Adam, I am worried that people seem to think the worst is over yet in this country we haven’t had a credit crunch or housing slump. I disagreed that the stimulus was the way to go, I thought that saving for infrastructure spending on necessary projects was better.
Nothing has been decided yet.
Time will tell
No need to congratulate or condemn anybody yet but its good to see an opposing view to the pro stimulus economic stories in the press.
I read somewhere that in 1928 they had a fall that the governments of the daythought they had handled but was followed by a much larger crash. Is this accurate?
Bringing forward capital investment seems like a perfectly valid action by government faced with step-sized reductions in demand after investment risk incurred a step-sized increase last year. This smoothing would have suppressed some of the recent instability in demand for product from factories producing vehicles and related components, with flow-on effects to employee earnings (and their spending) which naturally spread further out into the economy. The fact that these fixed term incentive rules were kept simple and didn’t involve vehicle type suggests that the main government focus was on stimulating demand in a certain way within a definite time frame i.e. it was the timing that was important.
Is it just me but why is it that so much commentary on economics in recent times seems to completely ignore the dynamics of the systems involved? What I’d give to the first economics commentator to stick a couple of block diagrams up and talk about inputs and outputs, shocks going in at various points at certain times, what we might do to suppress nasty effects coming out somewhere else at some set of lag times, etc.
By the way, one of those nasty output effects being suppressed is presumably reduced shifts (or layoffs) in some of the car industry related manufacturers. In a country with a social security net that supports unemployed people, the government makes savings by keeping a few more people in work (full time or part time!). If the industries involved tend to have older workers (and I don’t claim to know the age distribution in car production line work), then certainly for older workers it is a good idea to smooth out these bumps and have fewer lose their jobs as they might never get back on board … the tax paying wagon.
A bunch of ham-fisted assertions without a shred of evidence, except for one month’s stats on motor vehicle sales. So far as “the repayment of borrowings for decades to come” is concerned, Treasury does not agree with this at all. Nor does the IMF on effects of the stimulus package. From this piece, one gets the impression that people like Adam can’t accept the clear success of the stimulus package and pounce gleefully upon any opportunity to portray it in a negative light.
Well bugger me its Humpty Hockey writing in the shadows. You summed it up Frank, this is sour grapes from a fly by nighter who is hoping and praying the economy will still come crashing down around him and his Liberal mates so they can poke their tongue out and sing ‘told you so’. Fat chance Adam, fat chance.
Frank and Raymond – agree completely. This is not the first article from Adam mindlessly bashing the Rudd Government. My favourite line “Measures such as the $900 stimulus payment (which led to a record month for pokies operator Tabcorp) and the vehicle allowance (which gave business owners a tidy discount on their new Mercedes SLK) was paid for by taxpayers”.
Yep, the money went to pokies (no plasmas Adam?) and the rich bought Mercedes on your money. No stats. No proof. Not even subtle. Could have been straight out of the mouth of Joe Hockey.