Thursday, September 24, 2009

Treasury on stimulus: "Look, but don't touch"

Treasury boss Ken Henry has weighed into the debate over the future of the economic stimulus programs, declaring that cutting them - as proposed by the Coalition leader Malcolm Turnbull - risked stalling the economic recovery and pushing workers out of jobs.

Speaking in Brisbane ahead of his appearance before the Senate inquiry into the programs Monday Dr Henry said a sustained recovery was "reliant on the continued implementation of existing stimulus commitments".

Coalition and Green Senators forced the inquiry because of concern that much of the $16 billion to be spent on school buildings will be wasted. Mr Turnbull told a forum in London Wednesday that in Australia the buildings had become known as Julia Gillard Memorial Assembly Halls.

Dr Henry acknowledged "significant public discussion around the recent strength of the economy and the need for the next phase of fiscal stimulus measures", but said he would "caution against the conclusion that the success of the stimulus to date is an argument for winding back that which is still in the pipeline"...

"The fiscal stimulus has been designed so that it withdraws gradually," he said.

"Considerable thought was given to its structure, based on the well-accepted tenets that it be timely, temporary and targeted.

"The first phase was designed to provide immediate support to growth – largely through transfer payments. As the impact of the transfers wanes, the investment-related phases will continue to support growth, giving a recovery in the private sector time to take hold."

Dr Henry said that the outlook for business investment remained weaker than commonly realised.

"In aggregate it is expected to remain very weak in the near term, with investment-related stimulus measures providing some degree of offset."

"Withdrawing the stimulus more quickly would risk stalling the economy and causing a steeper rise in the unemployment rate."

Shown a copy of Dr Henry's remarks Coalition Treasury Spokesman Joe Hockey said he continued to "disagree with the government in regard to their level of spending".

"There has been waste and mismanagement which will lead to higher taxes and higher interests rates, which will ultimately cost Australians and cost jobs."

He declined to comment on the Treasury head's decision to intervene in what has become a political debate.

Dr Henry confirmed that the Treasury has abandoned its earlier forecast of an unemployment rate of 8.5 per cent, but said it still expected jobs to be lost through until early 2010 and did not expect the unemployment rate to peak until late 2010.

Although many employers had responded to the downturn by cutting hours worked rather than jobs, the combined effect of the reduced hours was equivalent to the loss of 230,000 jobs.

Without the stimulus measures Australia would been in recession in the December, March and June quarters with the economy sliding backwards 1.3 per cent.

New Zealand learnt that it had emerged from recession yesterday after hearing that its economy grew in the June quarter for the first time since late 2007. But the paper-thin growth of 0.1 per cent is understood not to have changed authorities' views that the economy remains very weak.

Published in today's SMH and Age