Operation Stimulus: A Legacy of Debt

In the immediate wake of the Global Financial Crisis the vast majority of developed countries around the world rapidly deployed stimulus spending in an effort to replace falling private sector spending with government spending. The USA led the way with multi-billion dollar packages and tax payer bailouts of private banks, other countries throughout the Eurozone followed suit and Australia was no exception. Now the dust has barely settled and a new round of troubles has been stirred by the raising of the US debt ceiling and the downgrade from a triple A credit rating.

At Home

In Australia our government emptied the surplus of the previous government then borrowed additional billions to engage in a range of spending programs in order to stave off recession. The country did manage to just avoid a technical recession and the Rudd Labor government got free press to claim an economic point. Unfortunately for the government and more importantly the tax payer, all policy measures, especially those that require billions of government borrowings have consequences that can be hidden for years and sometimes decades.

It is impossible to prove or disprove whether the governments spending worked to stave of the GFC recession gripping most advanced economies. Certainly we had incredible terms of trade and a high dollar to keep us economically firing; stimulated greatly from the Chinese whose extensive savings meant they kept paying historically high prices for our resources. During these extraordinary market conditions the government poured borrowed money into a range of stimulus measures which have proven to have been highly wasteful and not too impressive in job creation.

Enough commentary has been made on the waste of the BER and Pink Batts program. The consequence is we have little to show for the destruction of the future fund designed to cover government liabilities going forward and to top it off we have an estimated government debt peak of 190 billion dollars estimated to occur in 2013.

The Consequence

Debts have to be paid, especially government debts. If governments postpone repaying what they owe you get the basket case economies of Europe floundering in low to zero growth and jobs vanishing to the suffering of your citizens. The US is facing the ever looming reality that its debt will diminish its place in the world as super power. Unemployment is around 9% and economic growth is nowhere in sight. Japan has been pump priming for generations much like the US and Europe and has nothing but economic decline to show for it. Stimulus does not work in every historical example I have encountered. In fact the more a country stimulated with borrowed money the worse and more prolonged the economic effects tend to be. So did Australia's stimulus really work or was it to small to hurt us much and was it masked by strong terms of trade due to our unique tie to the Chinese economy?

My Answer is the stimulus in Australia was masked and the debt legacy is about to face a real economic test.

GFC round two

A fresh wave of economic uncertainty is making its way around the economies of the world. The real issue of our current government debt is going to be tested in the second round of financial issues gripping the world. If stimulus did work the first time the option to use it again is off the table for the government, they cannot risk the debt issue already sour in the public spoiling completely. They must return to surplus and they have a plan, this plan is you and i, the tax payer.

While Australians face uncertain times going forward the government is going to make us directly or indirectly pay for the debt with a raft of new taxation policies.

The Mining Tax singles out a high performing industry to help refill the coffers. It is sending a message to the world that if you do well in Australia the government will take notice, attempt to turn the public against you, then take by force an even higher share of your profits. It troubles foreign investors and it scares companies at home, not to mention the workers who no doubt enjoy their salaries which compete and even out strip many of their professional counterparts in the city. Many Australians love a strong mining industry and the Mining tax threatens to reduce the strength of it going forward into now very uncertain times.

The Carbon (Dioxide) Tax is much the same issue in regards to damaging our stable business reputation abroad. Instead of just singling out high performers it targets any business or individual who consumes or produces products which create Carbon Dioxide emissions. In short everybody will pay for this tax, directly or indirectly. The governments compensation is smoke and mirrors to grab votes early before the real effects are felt when the price signal ripples through the economy driving up prices and setting our international competitiveness up for a big governmental hit, a government own goal.

The government has a plan to return to surplus. It involves robbing the productive sections of the economy for wealth redistribution and setting our economy at a severe competitive disadvantage in economically uncertain times. The legacy of debt has been bigger government spending and now game changing levels of government interference which only spell danger going forward into the aftermath of the GFC.

When governments over react and rely on defunct pump priming spendathons whilst ignoring the evidence of failing Europe, Japan and tragically the United States, it is the tax payers who bear the price. All debts must be paid, you cannot fix debt with more debt, and it is very worrying that we will face higher business and consumer costs as we head down an ever darkening economic future; our global competitiveness severly hampered.