Wednesday, October 22, 2008
Please follow the following link if you wish to read more: 'Handouts are no substitute for innovation to generate wealth'.
Tuesday, October 21, 2008
Thursday, October 16, 2008
The Australian's online comments editor eventually published the clarification of my letter. I reproduce it in full below. It is similar in substance to the previous post.
I should clarify my position for the benefit of my critics. My biggest criticism of the Rudd plan is the First Home Owners Grant (FHOG). It is a flawed policy that does not increase the accessibility of housing and largely goes to the middle class. My other issue with the FHOG, as with other cash handouts, is that once they are in place it is very difficult to take them away.
As to the cash handouts for pensioners and carers, I have no problem with these groups being given additional assistance. However, I am deeply uncomfortable with that being in the form of cash. Why not increase their fortnightly allowances significantly over the next year? This increase will quickly flow into the economy as they begin to spend on the basis of their anticipated income. However, I do concede that cash to pensioners and carers is a relatively effective way to provide a big boost to consumption in the lead up to Christmas/New Year which will boost consumer confidence.
Also, I would note that the largest investment component of the package was the $157 million for skills development. In the context of a $10 billion package, surely a larger component could have been directed towards such strategic investments?
As I say, my letter was largely targeted at the increased FHOG. I would also stress that I am uncomfortable about Australians paying tax that is then given out as cash lump sums to other Australians rather than being delivered through ongoing Government transfer payments and investments in hard and soft infrastructure.
Wednesday, October 15, 2008
My criticism of middle class welfare in the previous post/letter was primarily targeted at Rudd's increase of the First Home Owners Grant (FHOG). There is virtually no doubt that the FHOG increases the price of housing and the demand for credit. A large proportion of the taxes that fund the FHOG go directly into the pockets of property owners with little evidence that housing accessibility/affordability is improved. The increase in the FHOG will serve to maintain/increase house prices. It is not the government's role to artificially prop up prices with tax dollars in a manner that only benefits property owners. Moreover, having increased the level of the FHOG, it is much harder to reduce it to its former level or remove it completely. Cash handouts breed a culture of expectation of government assistance where no such expectation should exist.
I agree that pensioners and carers in Australia get a raw deal. I would find it nigh on impossible to live of the Australian pension at its current level. My criticism of the Rudd policy is that pension/carer's allowance reform was needed rather than a cash handout. Why not increase the fortnightly pension/carer's payments permanently rather than giving a cash handout with no guarantee that the actual level of the pension/carer's payment will increase in the future? Providing a permanent boost to the level of these welfare payments would boost consumption from these groups as a result of their anticipated higher incomes in the future. Such an increase in these payments should have occurred at the time of the last budget.
However, I concede that if you want to give provide a big kick to pre-Christmas consumption in an economic downturn, five billion dollars to carers and pensioners will be highly effective. This is because these groups already spend a high proportion of their income on consumer products and, in all likelihood, the cash that they receive will be used directly for consumption rather than being put to other uses or savings. This should provide an important boost to consumer confidence. I am more comfortable with this part of the Rudd package than the FHOG increase. Having said this, I remain deeply uncomfortable about taxes being collected only to be given away in cash rather than being spent on infrastructure, government services or ongoing welfare payments.
Finally, I was disappointed by by the fact that, in the context of a $10 billion package, the largest component not being disbursed in cash was $157 million for skills development. Surely, in a package as large as this, the Government could have done a little better on human capital and infrastructure development. Some large and much needed infrastructure projects coupled with spending on education and skills in the billions would have been good additions to the overall package.
I hope this explains my views more clearly. I should also note that economic policy at a time of economic downturn is a highly contestable area. I understand and welcome differences of opinion on the subject.
I find it troubling that successive Australian governments are happy to squander budget surpluses on middle-class welfare. In the midst of the global financial crisis, the Rudd Government is extremely fortunate to have a forecast $21 billion surplus that can be used, if it is needed, to mitigate the impact of the downturn. Rather than using this money for strategic, well-targeted pump-priming investments, the Government has decided the best policy is to maintain the previous government’s flawed approach of providing cash handouts to particular sections of the community.
Take Rudd’s decision to triple the First Home Owner’s Grant from $7000 to $21,000 for newly constructed homes and to double it to $14,000 for all other properties. There is widespread agreement among the economically literate that the First Home Owner’s Grant merely serves to increase the price of property rather than make property ownership more accessible. If a large proportion of property purchasers are all given a sum of money by the government, it follows that demand/prices will increase. Not only does it increase prices, but it stimulates demand for credit in a global credit market that is already constrained. Is this well targeted policy in the midst of the crisis?
Although injecting any money into an economy will boost GDP, it’s better to inject money in such a way that boosts GDP by the maximum amount possible. Cash handouts are rarely the best way to achieve this. I had hoped that the financial crisis would spur Kevin Rudd to accelerate the economic reform agenda and make necessary investments in Australia’s overstretched infrastructure. I have been disappointed by our Prime Minister once more.