Malcolm Turnbull came up with a good line when he described the Rudd Government’s $10.4 billion stimulus package last October as amounting to little more than a "sugar hit". After letting that package through parliament, however, the Opposition leader is having a harder time explaining why he wants to block the government’s latest effort to keep the economy from sliding into a deep recession.
True, last Tuesday’s plan will cost $42 billion over the next four years. But many components are better crafted than in the October package. It also has widespread support from the business community and mainstream economic commentators.
Turnbull has not being helped by the shadow Treasurer Julie Bishop, who recently advocated “broad and sweeping tax cuts that will increase tax revenues”. Not surprisingly, Turnbull struggled to explain how a big cut in tax rates would generate more revenue.
Officially, the Opposition wants to bring forward the government’s next lot of tax cuts, due to start in July this year and next year. Although these changes hardly fit Bishop’s description of “sweeping” cuts, they will reduce revenue by more than $20 billion over four years — not increase it. Middle-income earners will only gain $450 a year. Low-income earners will get $300. But Turnbull presents his proposal to bring forward these cuts as a substitute for the one–off “bonuses” of $950 that the government’s stimulus plan will also deliver.
Naturally, the Treasurer Wayne Swan has attacked Turnbull for denying low and middle earners the $950 bonuses. While politically risky, Turnbull has a reasonable case that these $950 “sugar pills” are the plan’s weakest aspect economically. Leaving aside the plan’s content, he is having more trouble explaining why the government is wrong to spend $42 billion, particularly as this reflects the advice of Treasury officials who are not usually wild spenders. However, Turnbull says the stimulus should be less than half this, although he could spend more later if needed.
Many business leaders have applauded the size of the package. So have normally cautious economists. Olivier Blanchard, a senior economist with the highly conservative International Monetary Fund, says, “Act decisively. Do too much rather than too little. Delays have cost a lot already.”
Once again, Bishop did not help Turnbull in a radio interview last Thursday when she said it was best to spend less now and “wait to see how this global recession pans out and how it affects Australia. You don’t shoot all your ammunition in the first round. You sit and wait to see”. Although exaggerating, Swan promptly accused Bishop of wanting to do nothing to tackle the crisis.
Although $42 billion is not chickenfeed, it is at the bottom of the international scale. Treasury estimates Australia's budget deficit will be 2.9 percent of gross national product in 2009-10, compared to an average 7 percent across the advanced economies. Australia’s net government debt is estimated at 5.2 percent of gdp in 2011-12, versus an average of over 45 percent in the developed economies.
The Australian figure does not include the potential $26 billion increase in government borrowing promised by the Prime Minister Kevin Rudd if there is a financial shortfall in commercial property. Nor does it include any borrowing needed for infrastructure projects, other than the preliminary funding already allocated. Turnbull will have good grounds to object if Rudd’s spending on one-off hand outs for consumption spending takes money away from transport and other projects designed to enhance the productive base of the economy.
The October and February stimulus packages have allocated around $20 billion for cash handouts to individuals, the great majority of whom still have a regular income. This is the spending Turnbull describes as a “cash splash” to produce “sugar hits” of no lasting value. Turnbull is less convincing in his criticism of the $21 billion allocated for new and renovated school buildings and affordable housing. Perhaps this money could be spread more widely, but the nation should end up with education and housing assets of long-term value.
Rudd and Swan justify the cash handouts as propping up the economy in the short term until infrastructure spending and interest rate cuts take effect. They argue that this spending is only temporary, so it won't create a permanent burden on a budget that eventually needs to return to surplus.
There is nothing inconsistent about wanting the costs to be temporary, but the gains to be longer lasting. Turnbull could point to a big backlog of maintenance work and small capital programs at the state and local government level. Although Rudd has allocated relatively minor amounts to these areas, there is no obvious reason why a bigger effort could not start quickly.
Commonwealth subsidies could overcome staffing shortfalls caused by previous cutbacks on universities and hospitals. Small businesses could gain from further increases in one-off investment allowances and subsidies to employ more workers. Temporary relief could be provided from payroll tax. As Turnbull recently argued, the government should stop ignoring the need to spend on low emissions technologies to tackle global warming.
Despite being savaged at present for not backing the government all the way, Turnbull won't be looking so silly, if the $20 billion sugar hit fails.