Working Papers

Boondoggle Nation

RBA Board member Warwick McKibbin, on the effectiveness of activist fiscal policy:

“Most fiscal policy doesn’t do anything except switch spending from one period to another,” the RBA director said.

“When you change fiscal policy, all you do is stimulate the economy today out of future possible growth.”

Stimulus spending had to be paid for either with higher future taxes or reduced opportunities for the private sector so that the public sector could be financed.

“The only exceptions are infrastructure and similar spending, which raises the return to private activities,” Professor McKibbin said.

“The most sustainable way of reducing a fiscal deficit is through strong productivity growth in the private sector.”

He said that in mature economies, it was hard to engineer productivity growth.

Whether public infrastructure spending increases private sector productivity is a case-by-case judgement.  As the rest of the story makes clear, much of the government’s stimulus spending consists of little more than electoral boondoggles such as swimming pools and sports stands.


posted on 26 May 2009 by skirchner in Economics, Fiscal Policy

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