How to get big stimulus spending right, quickly

Will the government’s $200 billion stimulus package make or break the economy?

Stimulus spending to make or break

Richard Denniss, Crawford School of Public Policy, Australian National University

Responding to COVID-19 required governments to make hard choices with enormous consequences. The biggest were whether to let the disease rip, lock it down, or strike out in search of a middle ground that delivered the best of both worlds.

Different leaders made different decisions and will ultimately be judged by their citizens and historians. But it’s not just in health that COVID-19 requires choices with enormous consequences – it’s also in spending.

Two months ago the government announced a $A17.6 billion coronavirus stimulus package. Remember when that was a lot of money?

Since then it has committed to spend an extra $200 billion.

$200 billion has become base camp
Should we just let the government rip through hundreds of billions more in an attempt to quickly stimulate the economy? Should we put all proposed spending through lengthy cost benefit analyses and parliamentary inquiries?

Or is there some sort of middle path?

In a new paper by The Australia Institute, Design Principles for Fiscal Policy in a Pandemic, Matt Grudnoff, David Richardson and I set out eight criteria on which to judge spending proposals in order to expedite public and parliamentary scrutiny.

While not all voters will be able to agree on what the most pressing problems are, presumably all voters agree that when it comes to spending vast amounts of public money it is important to have some clear criteria against which voters can subsequently judge the necessarily rapid decisions that are made.

The first two are for stimulus spending to be large in size and speedy in implementation.

The other six use economic theory to help maximise benefit for bucks.

Target households with high marginal propensity to consume

Low income households have a higher ‘propensity to consume’ than wealthier families who can afford to save some of what they receive. Saved stimulus does nothing to increase demand and employment in the short term.

Direct government spending on goods and services is another way to ensure that money is spent quickly.

Target domestic production

Money spent on imported cars, imported electronics or imported capital equipment will diminish the local benefits of stimulus spending.

Target activities with high employment intensities

Some industries create more direct and indirect jobs per billion dollars of spending than others. Capital intensive mining and construction projects, for example, create far fewer jobs per billion dollars spent than spending on health and community services.

Target those most hurt by the crisis

When considering stimulus spending the government should focus on projects that provide employment opportunities to individuals in industries most affected. Two of these are tourism and hospitality. While such an approach is equitable, it is also efficient as it helps ensure that the skills of the newly unemployed match those needed by needed by new projects.

Target regions that are most disadvantaged

Building new train lines in NSW might be a good long run investment for the country, but it will do little to create jobs for tourism workers who have lost their jobs in Queensland. Stimulus spending targeted at the regions most effected will be the most likely to soak up unemployment.

Target useful projects that deliver benefits

When considering stimulus spending the government should think about what we want more of after the crisis has ended. An example from an earlier stimulus program is the ocean baths that dot the NSW coastline.

Many were built in order to generate employment during the Great Depression, yet almost 90 years later we are still enjoying the additional secondary benefits.

Most good projects will meet most of the criteria
While not all good projects will meet all of the criteria spelt out above, most good stimulus projects will meet most of them.

The enormity of the discretionary spending that the Morrison government is about to undertake on our behalf is almost impossible to fathom.

In a normal year the Commonwealth spends $500 billion on all of its services.

In the past two months alone it has committed to spend an additional $200 billion, and it hasn’t even started on the extra spending that will be needed to restore economic health as restrictions unwind.

The enormity of the spending that will be needed means that, more than ever before, the decisions it makes over the next few months will determine our economic success for decades to come.

For all our sakes it is important it gets these decisions right.

Using principles we have set out for assessing the myriad of potential projects it will consider will give it the best chance to make the biggest difference, and give us some confidence that even though decisions are being made quickly, they are being made well.


Matt Grudnoff, Senior Economist at The Australia Institute, contributed to this piece.The Conversation

Richard Denniss, Adjunct Professor, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons licence. Read the original article.

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    COMMENTS

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    Horace Cope
    19th May 2020
    4:08pm
    The federal government has, by any measure, done a great job keeping Australians safe from the pandemic. The media suggested that between 50,000 and 150,000 people would die from the virus but as at time of writing the death toll is less than 100. The method used to combat the pandemic was to gather medical experts both federally and from each state as well as the premiers and chief ministers to form a group with ideas. The suggestions from the medical experts has mostly been followed and this has been a huge part of Australia's success.

    It is presumed that given the enormity of the debt that financial experts will be used to advise the government and if the previous model is followed that premiers, chief ministers and treasurers will have a part to play in the economic recovery. I note that NSW has a package for pensioners where a credit card loaded with $250 is available to buy fuel or some transport. The card has to be used within 12 months or it is cancelled. I mention this because I feel a similar system could be used federally for those eligible for the $750 stimulus package. The stimulus is designed for money to be spent, not put away in savings, and having a time limit as well as a limit on where it can be used would mean that the funds must be used to stimulate the economy or be withdrawn as the funds are not used for purpose.
    Youngagain
    19th May 2020
    5:13pm
    I agree, Horace Cope. I think the government should focus on heavy infrastructure spending in areas that will create jobs, and on increasing welfare payments. Increasing the OAP and Newstart, for example, would both address ongoing problems of increasing poverty and generate additional spending because the recipients are people who will spend any extra they receive - as they are currently not receiving enough. If the government prefers not to increase cash handouts, it could take the sensible approach NSW Govt took with the Seniors Transport Card and issue pre-loaded debit cards for specific types of spending in a specific time frame. State Governments should look at the concessions they offer - as Qld, for example, offers way less pensioner concessions than NSW, and there would appear to be no valid reason for the difference.
    Eddy
    19th May 2020
    5:49pm
    I find this proposal stimulating, spending must be directed where it will do most good economically rather than politically (as happened with the so called 'sports rorts'). I hope the PM and Treasurer have learned that trying to bolster political gain can cause more political harm and, seeing the difference in leadership by the PM between the bushfire crisis and the Covid-19 crisis, gives me hope. The PM has the opportunity to put the damage done to his leadership credentials during the bushfire crisis behind him, an opportunity that will not come again should he stuff it up. Am I being hard on the PM, yes, he had a lot of ground to make up, I still wish him well because if he does well then so will Australia.
    As for the stimulus $750, we have not yet spent it, we have not had the opportunity to do so. When restrictions are relaxed we will most likely spend it on domestic travel, our daily living needs are well taken care of by our regular income.
    Heskwith
    19th May 2020
    6:12pm
    I agree with Richard Dennis; people who need money most, will spend it fast, straight into the basic economy; they will buy goods and services from our own workers, and pay bills to our own suppliers. That is the direct and active Economy.
    It's far less effective to throw it away on 'business', where it might easily be saved, or used to buy foreign goods, rather than keeping people in work with adequate pay.
    Sundays
    19th May 2020
    6:45pm
    There could be an increase in developing Public Housing. As people continue to work from home, there will be many centrally located office blocks that could be converted to low income housing for singles


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