Monday, January 23, 2012

Stimulus programs work. We need them ready - Access

Australia needs to be ready with a new economic stimulus program the moment Europe “blows” a leading economist says.

Deloitte Access director Chris Richardson uses this morning’s quarterly Business Outlook to implore political leaders not to let “talkback radio swamp smart policy,” should Europe take a turn for the worst.

“Australia’s fiscal stimulus last time was a striking success,” he writes. “It simply wasn't seen as that in the court of public opinion. That gap between reality and perception threatens a poor reaction by the punters if a new stimulus is needed in 2012.”

Access says its central scenario is that Europe's leaders “muddle through in a way that doesn’t stop Europe having a recession, but does avoid a deep recession and bank failures.”

But it says the risk is “almost as high” that Europe could ‘blow’ sparking bank busts and a new global financial crisis.

If that happens Australia should abandon its commitment to a small budget surplus in 2012-13 and instead embrace a “huge” budget deficit.

“We should be willing to do what worked last time,” he told The Age. “We shouldn’t let talkback radio decide what worked and what did not.”

The cash handouts worked very well... The school building programs worked less well, but not for the reason many people think.

“The problem wasn’t waste. The real waste occurs in a recession when people lose their jobs. Someone who is out of work for two years might not ever return to the workforce. That’s waste. The problem with the Building the Education Revolution program was it took too long. It was stimulating the economy beyond the point it was needed. Speed is essential.”

If Mr Richardson had his way interest rates would play a bigger role in fighting the next financial crisis and fiscal stimulus a smaller role. “But that doesn’t mean fiscal programs should have no role,” he said. Infrastructure projects should be “shovel ready.”

While the $15,000 First Home Owner Bonus was effective, Mr Richardson would be cautious about offering it again.

“First home owner programs are the crack cocaine of fiscal stimulus. They usually work a treat. But they make young couples spend too much on their first home, making their lives miserable down the track.”

Should the world avoid a new crisis Deloitte Access forecasts improved Australian economic growth of 3.2 per cent this financial year concentrated in the mining states. Victoria’s economy would grow 2.1 per cent, the NSW economy 2.3 per cent. A separate Commonwealth Securities State of the Statesreport released this morning puts Victoria in the second rung of economic performers along with the Australian Capital Territory. Western Australia is on the top rung, and all the other states in third place.

Published in today's Age

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