Cash handouts are rarely the best way to boost GDP

The following letter was published in The Australian on 15 October 2008. I reproduce it here for your enjoyment.

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.