Government Hand Outs… Good or Bad?
The recent announcement of the Rudd government’s plan to stimulate our economy has many of my friends bouncing off the walls with excitement and that’s fine. However I’m honestly very concerned where it will leave Australia (financially) in the future.
In summary the government’s plan to stimulate the economy is as follows:
Each person who earns less than $80,000 a year, pays tax and completed a tax return last year will receive $950 each to encourage spending.
While $950 would be extremely helpful, it will not help the economy.
To give out these hand outs the ALP is borrowing money…
These hand outs are going to shift us from a $20 billion surplus to a $200 billion deficit. Granted it’s a recession, but $200 BILLION in debt? That’s a lot of money! We’ll be trying to get out of that debt over the next few years screwing us even further.
Yes it is our money (as it’s taken from the taxes we’ve already paid) but taxes are already high enough. I don’t want to have to pay another $10-$20 a week (on top of what I’m already being taxed) in the future, which is exactly what will happen. Because the Liberal government sold so many Gov owned assets, it will fall back on us (the tax payer… every tax payer! Not just those who got the handouts, which personally I believe is very unfair) when it comes to getting out budget back into a surplus.
I personally don’t believe there’s a great deal we can do to fix our countries financial problems, well I don’t believe there’s a quick fix at least. It will just take some good ol’ time and patience.
To those saying the money would be better spent on funding for schools, hospitals, railways etc…
It won’t “stimulate” our economy. I agree 100% that money should be put into fixing our country’s infrastructure but it will not fix the current financial crisis at all.
Even though I’m the minority I really believe that these hand outs will hurt every Australian in the future. I won’t be turning up my nose at the money if this plan is passed by the government as money is always useful but I will be genuinely concerned about our financial future.
End rant.
posted by Brodie @ 11:41 AM
4 Comments:
I'm not comfortable with these schemes to borrow and spend our way out of economic trouble. The idea is that if money keeps pouring in, jobs will stay, but realistically that just delays the pain until later. We cannot keep spending beyond our means, and governments and consumers alike just don't seem to get this.
Yes, the economy is shitty at the moment. But markets are cyclical: they go up, down and back again. In good times it's easy to hire more, spend more and aim for big profits and growth. In bad times? Businesses have to trim the excess from their books or else they'll tank. The bad times basically force people to re-evaluate their spending habits. It's a form of self-correction.
There is no way to avoid this. We should take the nasty tasting medicine and move on. Attempts to fix things can often prove disastrous, such as the US monetary policy that turned the 1929 depression into the Great Depression. Our government hasn't gone that nutty, but making moves designed to "instill confidence" are unlikely to achieve that goal. These are hopeful and symbolic actions - and a government that can't keep its fingers out of pies makes me more nervous than ever. Unpredictability only brings more risk.
As for future tax increases, yes, this move could prompt some to cover the interest on the debt. The real elephant in the room is our aging population, that will soon demand mammoth increases in pensions and health care spending. Our generation will be taxed more than any other, and our generation's kids will cop it even worse. The Liberals tried with efforts in superannuation and private health care, but "everyday Australians" just don't seem to be able to take care of themselves financially. They'll just vote themselves governments that give more taxpayer funds to what they need - and there'll be fuck all that folks like you and me will be able to do about it, because we'll never have a big enough voting bloc.
Personal responsibility just doesn't sell. It's too easy to blindly spend and spend until there's nothing left, and then cry to big government to give you some of other people's money. I know some honest people are doing it tough, but I don't have much sympathy for people who have kids they can't afford to care for. I guess most people don't have the same phobia of debt and risk that I do.
I won't be spending my cheque willy-nilly. I'll be hanging onto it in case I lose my job. After all, that's enough to keep me off the dole for a month.
Forgot to mention that tax cuts would have been a more effective way to spend. Handouts are just lazy and temporary.
Brodie, you know I love you, but I facepalm'd so many times when I read this post.
As Pat said, the economy is cyclical. When times are good, unemployment is low and people have a lot of money to spend, the Government increases taxes and interest rates and builds a surplus as a way to reign in spending - because if people just kept spending and spending the economy would melt. They need to be forced to stop spending by having to give more money to the Government.
When times are bad and there is less money going around, the Government reduces taxes and interest rates go down to ensure there is enough economic activity to keep everything running nicely. But if that doesn't help things, like if times are really bad (i.e. now), going into deficit is actually a pretty well accepted economic tactic. In tough times people tend to hold onto their money in case things get worse, but that just exacerbates the problem. So the Government goes into deficit to fund massive infrastructure projects or give out money, which is a way to make sure that some money is going back into the economy, the whole world keeps turning, and people are able to keep their jobs.
In the early 90s we had a (much less dire) version of what we have right now. There was a recession, the Government didn't do enough to stimulate spending, jobs were lost, and everything went to shit. But we got through it eventually and over the next few years were able to build a $20 billion surplus to help out the next time. And when we get out of this one, we'll build another surplus for the next time it happens again. This has been going on for decades.
"I personally don’t believe there’s a great deal we can do to fix our countries financial problems, well I don’t believe there’s a quick fix at least. It will just take some good ol’ time and patience."
How are you supposed to fix something by doing nothing? (See my reponse to Pat's comment below too)
"To those saying the money would be better spent on funding for schools, hospitals, railways etc…
It won’t “stimulate” our economy. I agree 100% that money should be put into fixing our country’s infrastructure but it will not fix the current financial crisis at all."
As I said before, if people stop spending money, businesses will shut down and people will lose their jobs, which means less people will be spending money, which means more business will shut down, which means even more people will lose their jobs, etc.
A way to combat this is for the Government to start splashing some cash around. If a school gets redeveloped or a road gets built, that means some builders/architects/engineers get hired to do the work. These are the same builders/architects/engineers who may have lost their jobs otherwise, because people can't afford to pay for home renovations at a time like this. The Government picks up the slack, and there's an upside in that our infrastructure improves and at the end of it all we're left with a valuable asset.
The cash handouts are a way to keep retail spending high, because the Government really has no way to spend $1 million at JB Hi-Fi. That's why you hear Kevin Rudd say that saving the handout in a bank account for a rainy day is a bad idea - because if it's in savings, it's not being put back into the economy.
"The idea is that if money keeps pouring in, jobs will stay, but realistically that just delays the pain until later. We cannot keep spending beyond our means, and governments and consumers alike just don't seem to get this."
You make a good point about spending beyond our means (and I'd argue that borrowing beyond our means is worse), but we're not delaying the pain until later. We're going through the pain right now, what the stimulus package does is ensure the market doesn't crash entirely, so that it can continue to grow over the next few years.
"There is no way to avoid this. We should take the nasty tasting medicine and move on."
But the point is that doing nothing will make things worse, not better. If people start to save money instead of spending it (because they fear that they'll lose their job in the next year, or whatever reason), less money is being spent in retail stores, to service providers, etc. Those stores and service providers lose money and have to lay off staff. Those staff then stop spending money (because they're not making any), and the same thing happens again, only much worse. If those people in the first place had kept spending money instead of saving it, they wouldn't have had a reason to save. It has the complete opposite effect to what they expect.
I'm no economics professor, but I have enough faith in our country's economic advisers that they know how to get us out of this. There are some very smart people making these decisions.
You may also find this column from The Age interesting: http://www.theage.com.au/opinion/no-need-to-hit-panic-button-yet-20090203-7wr3.html?page=-1
Your argument has one problem: you seem to think that money only goes into the economy if you spend it. Saving money by depositing it in a bank is still contributing to the economy. That bank uses my deposited capital to fund investments (be they infrastructure projects, business expansion/startup etc) and I'm paid interest for loaning out my money, using the bank as a middleman. My saved money is helping to create and keep jobs too.
The problems in our economy aren't caused by a lack of consumer spending. We're doing that just fine as it is. It's all the uncertainty and risk aversion from larger companies who employ so many people that's making companies anticipate lower profits or growth, and thus, are cutting costs frantically.
My point is that while governments continue to play around with multiple stimulus packages, there's a greater climate of uncertainty for businesses, shareholders and potential investors. This package is great if you're JB Hi-Fi or Woolworths, but it's not particularly beneficial to small businesses who can't absorb bad financial results as well as bigger chains. You never know who the next big winner could be. It doesn't build confidence for anyone holding lots of money, only those in the lower- and middle-class who are generally happy enough to spend anyway.
I don't know heaps about the late 80s/early 90s recession, but I think Australia copped it pretty well, had "the recession we had to have" and moved on with some decent reform out of it. Other countries like Japan went the way of aggressive spending, subsidies, bailouts and riding a housing bubble, which resulted in 1993-2003 being known as the "Lost Decade" for their economy. (I sure hope our house prices aren't inflated, because the interest rates can't go much lower to encourage housing investment should house prices start dropping.)
As for your "faith in our country's economic advisers", these splash-and-spend policies are part of Keynesian economics, which has been popular with politicians for over 50 years. Why? Because they allow governments to take visible action, and because handing out taxpayer funds is immensely popular with the electorate. Intervening with markets always has unintended consequences, and judging by the speed that Labor are trying to pass this, I doubt whether this has received much consideration.
This gamble could work if enough people buy it, but the last $10-$11 billion package in November has already run its course. I think it's likely to simply delay the effects of a recession/depression by 9 months, which is just 9 more months of fear of losing jobs and thus limited consumer spending. Oh, and we'd have a big deficit so we couldn't try pulling a rabbit out of the hat again as easily.
Doing something feels like the right thing to do, but is a short-term giveaway the wisest move? A more permanent and immediate improvement would be removing payroll tax to encourage employers to hire staff, plus bringing forward planned income and corporate tax cuts. Some necessary infrastructure projects are fine too. Lowering or removing the minimum wage would help employment rise too, but that's not going to happen.
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