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Economic boosts must target our neglected people

By Richard Denniss - posted Thursday, 30 October 2008

The recent announcement that the aged pension, the disability pension and a range of other benefits will be increased in order to stimulate the economy is a remarkable turnaround in Australian policy and politics.

After two decades of being told, by major parties, that in order to help the economy the poor would have to make sacrifices, the debate has finally shifted.

The argument that increasing payments to low-income earners is a good way to stimulate spending in a slowing economy is now accepted by the Government, the Opposition and the Greens. It is hard to imagine a macroeconomic argument with broader support.


The change of mind, and change of heart, came suddenly. In the week leading up to announcement the Government was busy lowering expectations. Government ministers were actively pointing out that, as the financial crisis had the potential to reduce government revenues, then the chances of an increase in the pension were falling, not rising.

And then the argument changed. Rather than being a drain on the government's finances, some of the poorest members of our society became the ideal vehicle through which money could be injected into the economy. So what is so good about spending money on the poor?

The first thing about low-income earners is that they don't spend much on imported cars and overseas holidays, which means less of the government's injection ''leaks out'' of the domestic economy.

The second advantage is that low-income earners have what economists called a ''low propensity to save''. That is, because their incomes are so low, they are more likely to spend any increased revenue rather than save it for a rainy day. The final advantage of relying on the disadvantaged is that they are spread out across the economy and have a tendency to live in lower income suburbs.

This means that, unlike big one-off expenditures on ports and freeways, the government's injection of funds into the economy will be felt across all communities rather than confined to selected marginal seats.

After 16 years of continuous economic growth we were all still waiting for the wealth to ''trickle down'' to the poor. Ten years ago we weren't rich enough to help them yet, and ten months ago it would have been inflationary to help them, but finally the drought has started to break. After a decade-long torrential downpour on the wealthiest members of society, a little bit of rain has started to finally fall on some of the most disadvantaged.


But it wasn't the market that began to redirect the money. It was the government. Most free-marketeers are currently in retreat or in hiding at the moment but, as with the collapse of the financial system, it is good government and good regulation that has protected Australian consumers, not good bankers and good markets.

I am yet to hear the head of one large bank stand up and attempt to reassure their customers by pointing out how well paid and capable their CEO is. I am yet to hear one market analyst state that the thing that makes the Australian banking system different to the American system is the intelligence and diligence of our bankers.

Just as it was government, not the market, which finally got around to directing some money at the disadvantaged, it was government, not the market, which has protected Australia's economy from the excess confidence of bankers.

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First published in The Canberra Times on October 24, 2008.

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About the Author

Dr Richard Denniss is Executive Director of The Australia Institute and an adjunct associate professor at the Crawford School of Economics and Government, Australian National University.

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