Thursday, August 19, 2010

Let's see, those stimulus measures, did they work?

A private economic consultancy has entered the debate between the Coalition and 50 leading economists over stimulus, releasing a study saying much of the spending would have paid for itself.

Melbourne research firm Lateral Economics says around 22.5 cents out of every dollar spent would have flowed back to the government in extra tax, leaving just 77.5 cents in debt.

Lateral chief Nicholas Gruen said his study was "borne of frustration" rather than being paid for or inspired by the the Labor party.

It says the stimulus cheques delivered to households appear to have been 70 per cent spent. Around 15 per cent of that was on imports, leaving 59.5 cents in each dollar boosting the economy. Extra spending induced by that boost would have brought the total effect to "somewhere between 70 and 80 cents in the dollar".

At typical tax rates the 70 to 80 per cent boost would have raised 22.5 cents in the dollar extra federal tax and 3.73 cents in the dollar state tax...

"Thus for each dollar Australians received from cash payments, they only increased the Australian governments' debt by around 77.5 cents with the other 22.5 cents being a tax windfall from extra employment," the study says.

"Australians received nearly $30 billion in one-off transfers but will need to service around $23.2 billion in resulting debt".

The study says the tax payoff from infrastructure spending was even bigger.

"For each dollar spent on infrastructure the debt incurred was of the order of 64 cents with the remaining 36 cents representing additional tax revenue from labour and capital resources that would otherwise be lying idle," the study says.

"Of course, being rushed, there were inefficiencies in building infrastructure," said Dr Gruen yesterday. "The interim report of the Orgill Taskforce estimated those inefficiencies
at around 5 to 6 cents per dollar spent. They cost around $1.5billion compared with the tax windfall of $9.5 billion from people who would not otherwise have been employed. The net result leaves Australians better off by around $8 billion."

Another open letter from University of Western Sydney economist Steve Keen released yesterday rubbished Coalition claims that China rather than stimulus saved Australia from recession.

"If it were true that the rest of the world saved us rather than ourselves, then Western Australia and Queensland would have dragged us out of the slump. That is the exact opposite of what you find. The State that dragged Australia out of the slump was Victoria, and the industries that did it were the most direct beneficiaries of the stimulus," the letter says.


Here's Nick in debate today, here.

Keen Bird Rejoinder

Related Posts

. Reserve backs just about everyone else - stimulus stimulates

. That open letter. Labor had so little to do with it...

. Fifty leading economists say the obvious - stimulus stimulates