First Fiscal Stimulus Package By The Australian Government In Response To The Escalation Of The Gfc 2

First Fiscal Stimulus Package By The Australian Government In Response To The Escalation Of The Gfc

First Fiscal Stimulus Package By The Australian Government In Response To The Escalation Of The GFC

EXECUTIVE SUMMARY

The global financial crisis brought pressure on the financial markets of Australia, creating a crisis like situation, where recession looked evident. The escalating problem of recession with financial institutions failing and suffering rampant losses forced the Australian government to act hard. The government in that situation had to take effective measures that could mitigate the recession. Under this circumstance, Australia brought its first stimulus measure. The study highlights the positive and negatives of the stimulus. The paper critically analyzes the Australian stimulus and focuses on the action plan of the government followed by a conclusion.

INTRODUCTION

The global financial crisis and the great recession in 2008-2009 spread the wings in Australia as well. The economic growth of the advanced economies like Australia took a backseat. The developments of the economic situation across the globe and crisis paved way for a plan from the Australian government that included the assistance through the bank guarantees and financial assistance worth $ 10.4 billion. This was the strategy to strengthen the fundamentals of the Australian economy (Australian Gov, n.d). It has been noted by the International Monetary Fund (IMF) that the Australian economy did not face the recession actually and in fact was the most resilient compared to other advanced economies (IMF, 2010) The paper intends to find the impact of the fiscal stimulus introduced in the month of October 2008. The idea is to find the effectiveness of the stimulus measures in Australia and the counter arguments that state that the measures were a failure. The elements in regards to the packages and their worthiness have formed part of this analysis (Adam & Vines, 2010). The questions have been asked whether the stimulus measure was effective and not introducing the same would have lent Australia into a crisis like situation.

A sharp reduction in the revenues caused a dent on the fiscal situation of Australia. Estimated tax receipts during the period of 2008-09 were revised downwards. These were due to declining in the forecasts of the Capital Gains Taxes and Corporate Taxes. The government during the period formulated measures like achieving the surplus budget, improvement in the financial situation of the government. The budget policies of 2008-09 were based on to create a budget surplus of at least 1.5 percent of the GDP (Australian Gov, nd). The growth trajectory of Australia as per the Australian Bureau of Statistics report has been taken into consideration. The analysis considers the stimulus measures as they were actually spent by the government. This gives the idea of the cash flows of the Australian government. These cash outflows by various agencies were for the purposes of bonuses on taxes, or expenditure on infrastructure, and acting as a catalyst for the investment cycles. The idea behind analyzing such payments is to track the impact of these on the growth of the region. The period of 2008-2009 saw an investment spending of $ 14 billion, out of which was spread in June, September and December quarterly periods in the year 2009 (Commonwealth Co-ordinator General, 2009). Then there were payments made in the form of cash that was worth $ 8.7 billion made in the month of December 2008 (RBA, 2009). There were payments made for the infrastructure for the homeowners worth $ 830 million in the period of 2008-2009. The payment and the outlays between the periods of September 2008 to December 2009 have been shown in Table 1. The table indicates had the stimulus was not given on time, there would have been periods where the GDP growth would have suffered.

POLICY MEASURES

The government fiscal policy was made to cater to the help of stabilization, which helped the spending of the country and the revenues to come in line with each other. Apart from that discretionary surplus of 1% of the GDP was considered so that the demand declines in the domestic segments were targeted. These segments were household consumption and investments in the dwelling. The citizens suffering from inflation in fuel, food, and housing were given relief by $ 10.4 billion packages in October 2008. The package was being segregated in various parts as shown in Table 2

ARGUMENTS IN FAVOR OF STIMULUS

The studies of Maikin (2010) argue that the critical element that benefitted the Australian economy and saved it from recession was the decline in the exchange rates of the Australian Dollar coupled with the increase in the exports. The benefits to the Australian economy were provided by the demand for commodities that kept coming from the trading partners of Australia, i.e China. Makin (2010) points out that this especially held true during the December and March quarters. However, the stimulus plan helped in boosting the consumption, a lump sum was provided to the pensioners and first-time homeowners. The plan was developed to create additional investments and maintain a surplus situation.

The architecture to implement the fiscal measures was in place that created the benefit for the economy. Studies from Aizenman & Pasricha (2010) states that the payment was channelized to the local and state authorities in a timely manner. The financial regulators ensured that the budget is utilized in a proper manner. Before the crisis, the position of Australia was quite sound, therefore the impact was not as severe. Australian case of fiscal consolidation was more efficient compared to some of the other countries like Canada that announced the stimulus measures in January 2009. Therefore the timing of the stimulus benefitted the economy (OECD, nd). A criticism of the stimulus measure was the size. Critics believed that the size of the stimulus should have been lower but the argument given against this is the growth rates. Australian economy expanded by 1.7% from the period of September 2008 to December 2009. Had the financial assistance would have been lower the impact on the economic growth would have been harsher (Swan, 2008). Unemployment rates would have been higher had the stimulus was not provided on time, the same is shown in table 3.

Stimulus measures in Australia were far more effective because the financial system in the country was strong and therefore the measures like creating demand from buyers and homeowners and boosting investments had a far greater assistance to the economy compared to some of the other countries in the world where the financial system was weak (Stevens, 2009). The effects of stimulus on the Australian economy were higher as the finances were utilized due to good regulation. The Australian Dollar being flexible, faced the shocks in a better way compared to more regulated currency markets of other countries.

ARGUMENTS AGAINST STIMULUS

The first important criticism that was given for the stimulus was the size of the package. Mckibbin & Stoeckel (2009) stated that the stimulus measure should have been given in accordance with the recommendations of the International Monetary Fund. In regards to the testimony made by Mckibbin & Stoeckel (2009), another paper was released using the global economy as a model to state that the stimulus measure required should have been lower. Mckibbin (2009) stated in his testimony that the finances of the Australian government should have been saved rather than spending the same.

Another argument given against the stimulus comes from Makin (2009) that states that rather than providing assistance to the Australian economy through the demand side measures, it would have been ideal had the government used a measure adopted by the New Zealand policymakers. New Zealand followed the supply side measured to counter the recession. The measures like reducing the taxes and improvement in infrastructure were adopted (Reserve Bank of Australia, nd). However, it is clear from chart 1, that the GDP of Australia was in a much better shape compared to other advanced economies of the world in the year 2008. The other factor being put in place was the rise of the interest rates after the stimulus measures. This will make the stimulus self-diminishing as the interest rates extension will decline the investment cycle in the country. However, the researches against this argument were given by Gruen et al.,(2002) that mention that the role of the policy measure in the time of recession is limited. Therefore the movements of interest rates will not be as frequent after the stimulus is announced. There are a genuine credit crisis and lower confidence among customers, therefore, to say that stimulus would cause an effect on the investment is not justifiable.

CONCLUSION

The arguments in favor of fiscal stimulus and the arguments against the same were discussed. Some of the important points that emerged from the research paper were the Australian economy resilience to absorb the shocks of the recession. The economy was in good shape before the recession and better financial system mitigated the impact. The other thing to note was the flexible exchange rate system. The stimulus measure was also given at the right time and right quantity that helped the economy to recover. However, among all this, it has been noted that Australia could have adopted a different technique like that of New Zealand to counter the recession. This would have boosted the economy through supply-side measures and risks of inflation could have been taken care off.

REFERENCES

  1. Adam, C, and Vines, D 2010, Remaking macroeconomic policy after the global financial crisis: a balance-sheet approach, Oxford Review of Economic Policy, 25(4), pp: 524.
  1. Aizenman, J and Pasricha, GK 2010, On the ease of overstating the fiscal stimulus in the US, 2008-9, NBER Working Paper No. 15784.
  1. Australian Bureau of Statistics, 2009, Australian Economic Indicators [Online], Accessed on 18 August 2014.
  1. Australian Government and, The Government Response to Global Financial Crisis [Online]Accessed on 18 August 2014.
  1. Commonwealth Co-ordinator General, 2009, Nation Building Plan Progress Report [Online], Accessed on 18 August 2014.
  1. Gruen, D, Romalis, J and Chandra, N 2002, The Lags of Monetary Policy, RBA Research Discussion Paper.
  1. IMF 2010, World Economic Outlook Database [Online],  Accessed on 18 August 2014.
  1. Makin, T 2010, Did Australia’s Fiscal Stimulus Counter Recession?: Evidence from the National Accounts Agenda, A Journal of Policy Analysis and Reform, 17 (2).
  1. Makin, T 2009, Submission to Senate Committee on Finance and Public Administration, September, Vol. 21.
  1. McKibbin, W, and Stoeckel, 2009, Modelling the global financial crisis, Paper for VII Colloquium on Financial Collapse: how are the biggest nations and organizations managing the crisis? Ravenna.
  1. OECD nd, Quarterly Growth Rates of real GDP [Online], Accessed on 18 August 2014.
  1. RBA, 2009, The RBA Role in Processing Fiscal Stimulus Payments [Online], Accessed on 18 August 2014.
  1. Reserve Bank of Australia nd, Measures of Consumer Price Inflation [Online], Accessed on 18 August 2014.
  1. Stevens, G 2009, Testimony to Senate Economics References Committee, E15.
  1. Swan, W 2008, Government initiative to support competition in the mortgage market, Press Release, 105.

APPENDICES

Table 1:

  September 2008 December 2008 March 2009 June 2009 September 2009
Paid in Cash 0.0 0.7 2 4.6 3.1
For Investments 0 0.1 1.5 4.2 4.5
Impact on Growth 0 0.8 3.5 8.8 7.6

Table 1, Australian Bureau of Statistics, Australian $ billion

 

Table 2:

Pension Reforms $ 4.9 billion
Family Benefits $ 3.9 billion
First Homebuyers $ 1.5 billion
Productivity Program $ 187 million

Table 2, Economic Strategy, Budget.gov

Table 3:

The unemployment rate, By sex and age group(a)
Males, looking for – full-time work Females, looking for – full-time work Persons, looking for – full-time work
Period Males, Aged 15-19 years Aged 20 years and over Total Females, Aged Aged 20 years and over Total Persons, Aged 15-19 years Aged 20 years and over Total
looking looking 15-19 years looking
for –  for –  for – 
part- part- part-
time time time
work work work
2007-2008
October 6.2 16.5 3 3.6 4.6 20.4 4.2 4.8 5 17.9 3.4 4
November 6.1 16.2 3 3.5 4.6 20.3 4.1 4.7 5 17.7 3.4 4
December 6 15.7 3 3.5 4.5 20.3 4 4.7 4.9 17.3 3.4 3.9
January 5.8 15.1 3 3.5 4.4 20.4 3.9 4.6 4.8 17 3.3 3.9
February 5.6 14.6 3.1 3.5 4.3 20.7 3.9 4.6 4.7 16.8 3.4 3.9
March 5.6 14.3 3.1 3.5 4.3 21.2 3.9 4.6 4.6 16.8 3.4 3.9
April 5.6 14.2 3.2 3.6 4.3 21.8 3.9 4.7 4.7 16.9 3.4 4
May 5.7 14.4 3.2 3.6 4.3 22.4 4 4.7 4.7 17.2 3.5 4
June 5.8 14.4 3.2 3.6 4.3 23 4.1 4.8 4.7 17.4 3.5 4
2008-2009
July 5.9 14.3 3.2 3.6 4.3 23.1 4.2 4.9 4.7 17.4 3.5 4.1
August 5.9 14.2 3.2 3.6 4.2 22.9 4.3 5 4.7 17.2 3.6 4.1
September 5.9 14.1 3.2 3.7 4.2 22.5 4.4 5.1 4.7 17 3.6 4.1
October 6 14.3 3.3 3.7 4.1 21.9 4.5 5.1 4.7 16.9 3.7 4.2
November 6 14.5 3.4 3.8 4.1 21.2 4.5 5.1 4.6 16.8 3.8 4.3
December 6 14.8 3.5 3.9 4.1 20.5 4.6 5.1 4.7 16.8 3.9 4.3

Table 3: Unemployment Situation, Australian Bureau of Statistics

Chart 1

 

Chart 1: Comparative GDP, Australia Government

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