Working Papers

A $42 Billion Future Tax Increase: Immiseration Not Stimulation

I have an op-ed in The Australian, arguing that the government has just announced a $42 billion future tax increase.  In reality, it’s worse than that because of the interest bill on the $42 billion in unfunded spending, plus the future welfare costs associated with an increased tax burden and the government’s diversion of resources away from potentially more highly valued uses.  The package will immiserate rather than stimulate.

In the statement accompanying yesterday’s 100 basis point cut in the official cash rate, the Reserve Bank said that ‘the Board took into account the package of measures announced by the Government earlier today.’  If the RBA shares the Treasury’s Keynesian assumptions about the implications of the package for short-term economic growth, then it is entirely possible that yesterday’s rate cut was smaller than it might have been in the absence of the latest fiscal stimulus package.  While fiscal policy has been irrelevant to monetary policy in recent years due to a steady fiscal impulse, it is less likely the RBA will ignore the massive turnaround in the budget balance we have seen since May last year.  Those ‘free’ pink batts are likely to have come at the cost of a higher mortgage interest rate.

posted on 04 February 2009 by skirchner in Economics, Fiscal Policy, Monetary Policy

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I actually agree with most of your op-ed (should you be worried?)

I’m very skeptical of these preemptive fiscal measures.  I reckon Kev should have saved his pennies and let the “automatic stabilisers” kick in.  There will be a lot of unemployment benefits to pay out over the next few years.

Unfortunately you spoiled a sensible piece with more Ricardian nuttiness:

To the extent that households and businesses anticipate a higher future tax burden, they will respond by reducing spending today

Well judging by the December retail sales numbers, households didn’t reduce spending.  They went “Woo hoo!  Thanks Kev!” and headed down to the mall, with not a moment’s thought to future tax burdens.  This reflects a (misplaced) confidence in the Australian economy to ride out the GFC more than anything.  I doubt you could find single soul that held back spending because they were worried about higher taxes in the future.

How about you do a survey?  You could even ask a leading question: “Did you save some of the government’s stimulus measures because you are worried about higher taxes in the future?”.  I still reckon you couldn’t get a single person to answer yes.

The correct focus for fiscal policy is the structural and supply-side measures that will deliver sustainable gains in future prosperity

Well ok, please provide some concrete examples.  Imagine you’re PM for the day, name three policies you would announce if you were in Kevin’s shoes.

Posted by .(JavaScript must be enabled to view this email address)  on  02/04  at  05:47 PM

David, forget the survey, look at your own behaviour.  Did you spend more in December?  Are you indifferent to future tax increases?

Posted by skirchner  on  02/04  at  08:23 PM

My spending has been curtailed since mid 2007 when my business was hit with the killer combo of a slowing US economy and a rising Australian dollar.

I don’t pretend my situation is typical.

The crash in the AUD has given us a fair bit of breathing space, but I haven’t loosened the purse strings yet because I reckon we’ll need plenty of cash to trade through this downturn.

I’m certainly not putting cash away because I’m worried about the government clawing back tax revenue when the recovery comes in the (distant?) future.  My concerns are far more immediate.

Do the survey.  I dare you!

Posted by .(JavaScript must be enabled to view this email address)  on  02/04  at  08:45 PM

The stimulus package was around $8bn, and it was preceded by 2.75pp cuts in interest rates, including a 1pp reduction in December. (I wonder, how much additional spending does a 1pp interest rate cut represent?)

Yet retail sales increased by *only* $700m (seasonally adjusted).  While it is likely that some expenditures will be deferred to January, the Govt has clearly over-stated the impact of the ‘cash splash.’

We will get a clearer picture with the release of the December Quarter National Accounts.

Posted by .(JavaScript must be enabled to view this email address)  on  02/06  at  10:02 AM

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