Thursday, June 03, 2010

Removing stimulus now would "stall the economy"

The latest national accounts show that despite talk of a mining boom and Australia leading the developed world, if it weren't for government stimulus spending we would be going backwards.

The economy grew 0.5 per cent in the March quarter, a result driven by a further 11.6 per cent jump in government construction spending which by itself accounted for more than all of the economic growth offsetting slides in business investment, private housing investment and exports.

Treasurer Wayne Swan seized on the result to attack Coalition calls for the stimulus to be withdrawn more quickly. "It is keeping tradies in employment, it is keeping the doors of small business open and they voted against it," he told parliament just before leaving for Korea and the G20 of Treasurers and Finance Ministers from the world's leading economies.

Appearing before a Senate estimates committee Treasury official David Gruen said if the stimulus was stopped it could "stall the economy"...

Coalition frontbencher Barnaby Joyce had asked why stimulus programs were continuing even though the financial crisis was over.

Dr Gruen replied that they were being withdrawn after keeping the economy afloat by creating almost all of last year's economic growth.

The phased withdrawal should subtract 1 percentage point from economic growth this year.

"You could argue that you would like to see an even bigger turnaround. I think if you make it big enough you will stall the economy," he told Senator Joyce.

"That's the reason for wanting to do this at a measured pace."

Business investment slipped 2.9 per cent in the quarter in part because of the withdrawal of the investment tax break that expired in December. Private housing investment slid 1 per cent in part because of the First Home Owners Boost. Without the remaining stimulus spending on construction at schools and public housing and health facilities the economy would have shrunk 0.2 per cent.

"In this limited arithmetic sense increased government spending has accounted for more than all of the growth in GDP," said BT Group economist Chris Caton. "It underscores the point that stimulus has kept the economy afloat."

In an encouraging sign that the economy will soon be able to wean itself off stimulus the Accounts show that higher export prices pushed up Australia's terms of trade 4.2 per cent in the quarter, with more expected as much higher iron ore and coal prices come into play.

"There is a very strong pipeline of private investment coming down the track which is going to kick in later in the year," the Treasurer said. "The Building the Education Revolution program is an essential bridge in the middle of that."

On the lawns in front of Parliament House Opposition leader Tony Abbott told a protest rally that its buildings were "rip-offs" that had left parents crying with "rage and shame and embarrassment at what is happening at their schools".

"If we come to government what is left of this money will go to school communities for them to spend," he said. "It will not be handed to the bureaucrats to waste."

New South Wales and Victoria are among the fastest growing economies as measured by state final demand, advancing 0.6 and 0.4 per cent. Queensland and Western Australia each contracted 0.5 per cent.

Australia's annual rate of economic growth is little changed at 2.7 per cent.

Published in today's SMH and Age

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