MEDIA RELEASE: Critique of fiscal stimulus highlights ineffectiveness and costs

 

A Treasury-released paper critiquing Australia’s fiscal stimulus during the global financial crisis of 2008-09 shows the flaws in the stimulus model, according to the Centre for Independent Studies (CIS).

“The paper by budget expert Professor Tony Makin highlights the limited effectiveness and longer term costs of Australia’s unnecessarily large stimulus in 2008 and 2009,” CIS Senior Fellow Robert Carling said.

“Professor Makin argues that Australia escaped the worst of the Global Financial Crisis because of our robust banking system, reduced interest rates, a lower exchange rate, demand for minerals, and a flexible economy, not because of the stimulus.

“In addition, Professor Makin argues the stimulus caused problems by preventing interest rates and the exchange rate from falling by more.

“This supports the arguments that CIS has been running for many years about the limitations of activist fiscal policy.

“While the views in Professor Makin’s paper are not necessarily those of the Treasury, the willingness of Treasury to publish this paper represents a welcome openness to different views.

“Professor Makin’s views are in stark contrast to past statements by senior Treasury officials that painted fiscal stimulus in a very favourable light.

“Professor Makin’s report also emphasises the importance and urgency of Australia reducing its budget deficits. The report points out that Australia’s public debt is rising at a rapid rate and that budget repair efforts to date have been weaker than in many other countries.

“The paper bolsters the CIS arguments that Parliament needs to take faster action to reduce the budget deficit, and that this action should focus on reducing government spending rather than increasing taxes.

“We commend the Treasury for taking the initiative to publish this report. It is an important addition to the public debate over the budget,” Mr Carling said.

Robert Carling is a Senior Fellow in the Economics Program at the Centre for Independent Studies and author of Are we all Keynesians Again? and a chapter in Fiscal Fallacies: The Failure of Activist Fiscal Policy, both published in 2009.

Media contact: Karla Pincott kpincott@cis.org.au 0407716752