Feeling fiscally stimulated?

Luke Malpass
Insights Newsletter
2 November, 2012

Even so, New Zealand has its share of proponents of fiscal stimulus in the form of $900 cheques that former Australian Prime Minister Kevin Rudd posted to 75% of working-age Australians in 2009. Australian Treasury Secretary Ken Henry said the stimulus of A$10 billion was all about ‘go hard, go early, go households’.

The effects of the stimulus are still being debated, but it's a difficult debate to have when the effects cannot be measured. It is difficult to argue against stimulus policies. Proponents can never lose – if the economy picks up, it is due to stimulus; if it doesn’t, imagine how much worse it would have been!

The success of stimulus handouts relies on people spending the money and boosting demand. A new paper on the stimulus, published by the Australian National University and the Australian Treasury, quantifies the consumption effects of the Rudd package.

Authors Emma Aisbett, Markus Brueckner, Ralf Steinhauser and Rhett Wilcox measured the effect of the stimulus announcement (i.e. the effect of knowing it was coming) and the actual payments (having the cash in hand to spend). Because of the sheer number of payments, they were made in several tranches, by postcode – allowing measurement of the consumption levels.

While some effect on consumption was to be expected, it is the magnitude that is of interest to economists and devotees of Keynesian economics. Aisbett, et al. found that while there was a significant reaction to the cash handout announcement, consumption increased by only 1% and the arrival of the cheques had an ‘insignificant, and quantitatively small’ effect. People rather saved the money or paid down debt.

Australian stimulus payments had virtually no effect on demand. In policy terms, it was an abject failure.

Remember this the next time a New Zealand politician sings the virtues of fiscal stimulus. Free cash is great if you get it, but it doesn’t ‘help the economy’ and leaves the government saddled with debt.Does fiscal stimulus work? Economists and treasurers around the world have been asking this question since the global financial crisis began in 2008.

New Zealand avoided the fiscal stimulus approach adopted by Australia in the wake of the global financial crisis – mainly because of the prolonged stimulus since 2005. This was created by the then government massively increasing spending, while the non-tradables sector went into recession.

Even so, New Zealand has its share of proponents of fiscal stimulus in the form of $900 cheques that former Australian Prime Minister Kevin Rudd posted to 75% of working-age Australians in 2009. Australian Treasury Secretary Ken Henry said the stimulus of A$10 billion was all about ‘go hard, go early, go households’.

The effects of the stimulus are still being debated, but it's a difficult debate to have when the effects cannot be measured. It is difficult to argue against stimulus policies. Proponents can never lose – if the economy picks up, it is due to stimulus; if it doesn’t, imagine how much worse it would have been!

The success of stimulus handouts relies on people spending the money and boosting demand. A new paper on the stimulus, published by the Australian National University and the Australian Treasury, quantifies the consumption effects of the Rudd package.

Authors Emma Aisbett, Markus Brueckner, Ralf Steinhauser and Rhett Wilcox measured the effect of the stimulus announcement (i.e. the effect of knowing it was coming) and the actual payments (having the cash in hand to spend). Because of the sheer number of payments, they were made in several tranches, by postcode – allowing measurement of the consumption levels.

While some effect on consumption was to be expected, it is the magnitude that is of interest to economists and devotees of Keynesian economics. Aisbett, et al. found that while there was a significant reaction to the cash handout announcement, consumption increased by only 1% and the arrival of the cheques had an ‘insignificant, and quantitatively small’ effect. People rather saved the money or paid down debt.

Australian stimulus payments had virtually no effect on demand. In policy terms, it was an abject failure.

Remember this the next time a New Zealand politician sings the virtues of fiscal stimulus. Free cash is great if you get it, but it doesn’t ‘help the economy’ and leaves the government saddled with debt.

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