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Saturday, August 31, 2013

Stimulus: The best of times during the worst of times

Australia's government debt has been demonised and criticised, but, there is a time for debt and deficit and a time for savings and surplus. It's basic economics: don't slam the brakes on a sluggish economy.

According to the polls, the biggest issue for most voters in Australia's 2013 federal election is the economy. Press the voters for why and it seems they are specifically concerned with the level of debt.

As a percentage of GDP, Australia's government debt is around 21% (1).

GDP doesn't represent direct Government earnings, but it does represent a source of government revenue. Put this into perspective. That is the equivalent of someone earning $100,000 per annum and holding a $21,000 mortgage. Would you panic if you were in this position?

Following the election of the Labor Party in 2007, Australia embarked on a program of spending, which obviously increased debt. But this should be kept in context. A large portion of the spending was the stimulus program during the Global Financial Crisis in order to avoid recession. It was basic Keynesian economics: increase spending during economic downturns to avoid recession, conversely, reduce spending during upturns.

So here's a few questions.

What did you do in the GFC?

Did you curb your spending? A lot of people did.

The impact of this was a nation-wide economic slow-down. When people reduced spending, business revenue fell, leading some businesses to down-size or collapse, increasing unemployment. This also meant a reduction in government revenue from a reduction in the taxable earnings.

During economic downturns, businesses and individuals have the 'luxury' of being able to curb expenditure. Government doesn't.

During the GFC, the Australian economy had slowed and jobs were cut. The Government could have done nothing and revelled in the surplus left by Howard, however, the economy was on the brink of recession and as John Maynard Keynes had identified, this was the time for stimulus not austerity.

The Rudd government responded correctly and the stimulus ensured that money continued flowing through the economy, avoiding recession and unemployment. The OECD estimated that the stimulus saved around 200,000 jobs (2). Australia was one of the few OECD nations that did not go into recession. The stimulus included cash payments, which fortified the retail sector. It also included funding for building projects across the country, which assisted the building sector.

Coupled with the GFC, was the reduction in mining investment from China as it attempted to slow-down its over-heated economy. This hit Australia's mining industry hard, costing jobs.

The Reserve Bank of Australia recognised the need for stimulating the economy and reduced interest rates, which also assisted in protecting Australia's economy from the worst of the GFC. But this would not have been enough on its own.

The Australian economy needed direct government intervention and Rudd's stimulus plan gave Australia the best of times during the worst of times.

So my question to the Liberal Party is: what would you have done to avoid recession?

If they were good economic managers, a Liberal government would also have increased spending and implemented a stimulus program.


1. 'Australia government debt to GDP', Trading Economics. Accessed 31 August 2013.

2. 'Rudd stimulus protected jobs: OECD', Sydney Morning Herald. Accessed 31 August 2013.

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