Defining a recession

Similarly, it is time to stop pretending that the Budget will remain in surplus, and instead focus on the specific measures by which the budget can be used to support economic activity and employment in the short term whilst also addressing longer-term challenges.

The best possible measures are those which will simultaneously induce an immediate increase in (or prevent declines in) spending and employment, and which will also assist in meeting longer-term goals and challenges.

One-off cash grants such as those which comprised the bulk of last year’s Economic Security Strategy meet the first test but not the second.

Across-the-board personal or business income tax cuts don’t meet either. In the short-term, they are likely to be saved (as were the tax cuts that took effect last July); while unless part of a broader tax reform program will do little if anything to strengthen Australia’s resilience or capacity for growth.

However tax breaks which are conditional on particular types of expenditure - such as a temporary investment allowance for businesses (for example, for capital expenditures undertaken before June 30, 2011), and tax deductions (or cash grants) for household or business expenditures designed to reduce energy or water consumption - will pass both tests.

And if the recession now under way is going to be an extended one, then the usual objections to infrastructure spending (that they do little to alleviate the downturn, but instead put upward pressure on interest rates during the subsequent recovery) lose much of their relevance - especially when there are such obvious and pressing deficiencies in Australia’s infrastructure. In the current climate, increased and accelerated spending on rigorously evaluated infrastructure projects also meet both tests for good policy.