Wednesday, January 28, 2009

Not so fast with the stimulus

That's the prevailing wisdom among the public policy economists surveyed by The Age

The government has been urged not to panic as close to 80,000 workers lose their jobs worldwide in one of the darkest days since the start of the credit crisis.

In the United States more than 10 leading companies began the week announcing job cuts exceeding 75,000, among them Sprint Nextel, Home Depot, and the world's largest mining machinery maker Caterpillar. In Europe the electronics giant Philips cut 6,000 jobs and Britain's largest steelmaker Corus 2,500 jobs.

In Australia the NAB business survey pointed to further job losses with the employment index stuck at its lowest point since the 1990's recession. The bank expects the job losses to be concentrated in finance, mining, manufacturing and construction and expects an unemployment rate of 7 per cent next year, implying a jump in unemployment of more than 250,000.

Business confidence improved in the December survey, rebounding 10 points from a level below that in the last recession to one close to it.

Wholesale and retail sales rebounded somewhat in December, possibly in response to the government's stimulus payments.

Speaking from Papua New Guinea which he visited with the Prime Minister in order to discuss the economy Treasurer Wayne Swan said that while he would not get carried away with one set of data, it was "heartening" to see that the payments seemed to have helped...

Inflation figures due out this morning and International Monetary Fund forecasts out tonight will pull put further pressure on the government to announce an additional stimulus package. Inflation is expected to have turned negative during the three months to December, raising the spectre of deflation. The annual inflation rate is expected to collapse from 5 per cent to less than 4 per cent. The IMF is expected to slash its forecast for world growth to between 1 and 1.5 per cent and its forecast for Australian growth to close to zero.

As the Prime Minister and Treasurer consider their options, many of the experts surveyed by the Age have cautioned against another big spending package, with one, Melbourne University's Professor John Freebairn, saying that a recession was needed in order to fix Australia's problems.

"Our houses are too expensive, our balance sheets are in poor shape, and over 15 years we accumulated some pretty sloppy business practices. Almost as Paul Keating said, sometimes we need recessions to get over our bad behaviour," he said.

Professor Allan Fels of the Australia and New Zealand School of Government said it made sense to plan as if the recession would last for three years. "Don't use up all your ammunition at once," he counseled. "Keep some shots in the locker".

"If I was designing a stimulus package" Advice to government

Gerry Harvey, Harvey Norman

"First, find out what happened to the last $10.4 billion. We look back on it now and wonder where it went"

. Don't boost unemployment benefits, it won't create jobs

. Cut taxes to help workers

. Cut compulsory super contributions to help employers

. Consider giving money to entrepreneurs who'll create something

Allan Fels, Australia NZ School of Government

"Plan as if the recession will last 3 years. Don't use up all your ammunition at once."

. Don't hand out money on the basis of who asks first

. Give priority to the disadvantaged

. Plan to get your money back, for example through equity investments

. Don't do anything that harms competition

Nicholas Gruen, Lateral Economics

"Instead of being Captain Fix-it they should come out with a provisional plan, invite comments and lay it on the table for two weeks."

. Never offer a guarantee without charging for it

. Ask banks to automatically cut mortgage repayments as soon as they cut rates

. Consider cutting taxes for firms that expand investment or jobs by more than a certain amount

. Fast track approvals for firms that expand

Guay Lim, Melbourne Institute

"I am not convinced that the government should be rush in with
short-term assistance to industries that are likely to cut jobs. It creates a climate of dependence."

. Long-term measures, not quick fixes

. Bring forward infrastructure spending

. Cut employers super contributions to improve their financial health and help them keep workers

Stephen King, Monash University

"Don't be afraid to spend but don't drop money from a helicopter. Target spending to those sectors that will have a future when the good times return."

. Boost spending on ports to be ready when China's demand returns

. Fix Australia's water problems

. Invest in sustainable long-term transport projects

. Remove welfare traps that stop low-income Australians working

Saul Eslake, ANZ Bank

"First, be honest about the state of the budget. There's nothing wrong with going into deficit so long so long as there's a plan to get back into surplus"

. No across the board tax cuts - they will be saved

. Investment allowances for firms that undertake capital expenditure before June 2010

. Tax credits for making homes more energy efficient

. Worthwhile infrastructure spending including the repair of existing infrastructure

John Freebairn, Melbourne University

"We got into this trouble by spending more than was coming in. Part of the solution is to get those balances under control even if it means accepting a recession."

. We have had a real drop in our income and we have to adjust

. We won't spend more until our balance sheets are in better shape

. Don't push interest rates to zero - it'll create the next bubble

. Government spending needs to make sense in its own terms