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The Rudd Government is getting it about right

By Bill Richmond - posted Wednesday, 18 March 2009

What does the Rudd Government need to be doing to restore the Australian economy back to full health? What do economists have to say?

The first point to make on this subject is (the not very original one) that the Rudd Government is severely circumscribed in respect of what it can do in response to the direct, and indirect, effects of the global financial crisis.

The GFC (the acronym now widely used as a way of describing the complexities of the phenomenon in a shorthand way) has its origins in other parts of the world. But such is the magnitude of the problem that has been created, and the degree of integration of the Australian economy with the international economy - vastly greater than it was in the early 1930s when the effects of the Great Depression were still transmitted very sharply to Australia - that domestic economic activity has been fundamentally and unavoidably affected.


Virtually every element of aggregate expenditure has fallen.

In some respects - for example, expenditure on Australian produced commodities on the part of overseas buyers (i.e. exports) - any Australian government is virtually powerless. If China doesn’t want as much coal as it has demanded in the last few years then there’s not much we can do about it.

In other respects what the government can do is also limited. If someone employed by a mining company is made unemployed and their income suddenly falls then they simply haven’t got the income to spend on consumer goods. And business enterprises won’t undertake investment in new equipment or factories if they don’t think they’ll be able sell the products they produce.

The question is, however: can the government do anything first, to ameliorate the consequences of the GFC and second, to compensate for the fall in aggregate expenditure that will inevitably occur?

The answer to both questions - as the Rudd Government itself more or less explicitly concedes - is: “something, but only something”. Inevitably in 2008-09 and for the next one or two years at least the rate of increase in GDP in Australia will fall to very low and probably, for at least part of that time, negative levels.

The critical question then becomes: “is the government doing as much as it can, and is it doing the right things, to ameliorate, and compensate for, the effects of the fall in expenditure that has been a consequence of the GFC?”


The answer to this question brings out all the stories about economists disagreeing with each other. But most would argue: “yes”; or at least “probably yes”.

The Rudd Government’s measures have sought to stimulate aggregate expenditure by two principal means. The first is increased expenditure by governments directly on a range of “infrastructure” (such as school buildings). The second is one-off cash handouts (i.e. a simple transfer of government revenue) to individuals on the assumption that they will spend at least a large part of this revenue and boost consumption and investment expenditure over and above the levels they would have been in the absence of the transfers. Among other measures is a grant to homeowners to compensate them for expenditure on home insulation.

There has been relatively little criticism of “infrastructure spending”, aside from some questioning about the priorities, and (particularly in respect of encouraging private expenditure on home insulation) in respect of the extent such expenditure will flow out of Australia to foreign-owned enterprises rather than create employment within Australia. Any debate there has been has been focused on the temporal issue: how quickly will this policy translate into actual (employment and income-creating) expenditure given the lead times typically involved? Concern has been expressed that relatively few of the proposed infrastructure projects are “shovel ready” in that they can be started immediately; some have unavoidable lead times of up to several years.

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About the Author

Dr Bill Richmond lectures in Economics at the University of Queensland.

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