The stupidity of government handouts

The stupidity of government handouts

It’s official.

The tax cuts made it through parliament.[1]

A large number of Aussies will find themselves $1,080 richer this financial year.

So why the sudden four-figure windfall?

Why is the government in such a hurry to give us some of our taxes back?

Well, vote buying in the lead-up to the election is one thing.

Nothing sways people’s political leanings like money.

While I’m sure the tax refund was a sweetener for some, I suspect there is a little more behind the idea than holding on to power.

Scott Morrison and co. campaigned with slogans like ‘Strong economy’.

But the reality is very different.

The tax cut is less about a generous government and more about a desperate one…

Admitting it’s broken

He wouldn’t say it before the election…but now he’s secured the seat and an extended stay at Kirribilli, Prime Minister Scott Morrison has actually admitted that things aren’t as rosy as he once wanted us to believe.

In fact, he’s admitted that times are tough:

 Our economy is going into a very challenging time, so now’s not the time to engage in high-axing, high-spending agendas.[2]

So the first stage of three income tax cuts is now in the bag.

Stage one was a lump sum handout.

The second stage, which also passed overnight, is aiming to reduce ‘bracket creep’. That’s where gradual pay increases move people into a higher tax bracket.[3]

The yet-to-be confirmed stage three is flattening out the income tax to three levels only.

Of course, while stage one and two tax cuts will be made law today, the government is using its rubbery statistics to predict the reduction in taxation it’ll receive.

Although, frankly, anything that reduces the taxes you have to pay to the government is a good thing.

Yet, the government didn’t do it out of the goodness of its heart.

It didn’t suddenly decide that it wanted less of your money…

No.

On the contrary, it’s a desperate attempt to prevent Australia from sinking into its first recession in 28 years.

Never let the facts ruin the story

The Coalition government is in a mad scramble to get people spending again.

You see, it’s of great importance to the Aussie economy that we start throwing our dollars around. Consumption accounts for more than half of Australia’s national income.

So when people stop spending, our economic growth falls.

The question is: Will it work? Will a cool thousand bucks in your account spur consumption?

Are we all about to rush to the shops and spend, spend, spend?

Luckily, we have hard data on this.

Thanks to former Prime Minister Kevin Rudd, we have actual academic research — rather than political guesswork — to fall back on.

During the financial crisis, Rudd and his minions gifted Australians with $900.

And we were asked to do one thing: Spend it.

But did it actually save us from a recession?

Nope.

But it didn’t stop the government in charge claiming that it did.

The hero of Australia’s economic boom was steel-hungry China. But you should never let the facts get in the way of a good story…

The good news is that, today, I can show you just how useless this cash refund will be for the Aussie economy.

The anticipation effect

There is a research paper titled ‘Fiscal Stimulus and Households’ Non-Durable Consumption Expenditures: Evidence from the 2009 Australian Nation Building and Jobs Plan’. It was written in 2012, three years after Rudd put some coin in our pockets.

And this paper overwhelmingly proved that Rudd’s handout, had very little effect on the Australian economy.

In fact, the research paper called it ‘statistically insignificant’, writing:

The paper’s main finding is that household consumption expenditures on non-durables did not react significantly during or after the one-time, pre-announced transfer. The estimated effects are also quantitatively small.

They imply that upon receipt of the transfer, the average household spent less than 0.2 percent of the income windfall.[4]

Did you see that?

The total increase in consumer spending jumped by only 0.2%.

That’s it.

Oh, but the paper gets better.

Of the few that did spend, they pretty much spent dollar for dollar.

In other words, people only spent the money they received, rather than spending more.

And here’s the kicker.

They mostly bought ‘non-durables’, which are short-life items like food.

Yep, that’s right. It wasn’t a boon for retailers. We filled our fridges and had friends around for backyard barbecues.

To top all of this off, the majority of single-person households saved their money. It was pretty much just families that spent money on the basics.

However, there is something that’s worth noting.

And that is the anticipation effect.

As the paper explains, the ‘fiscal policy literature on anticipation’ means we actually increased our spending before we even received the money:

When fiscal policy is pre-announced (i.e. there is a time-gap between the actual fiscal stimulus and the period in which the news of fiscal stimulus is made available to the public) the response of economic variables to the actual fiscal stimulus may not be the same as the response to the fiscal stimulus announcement.

In particular, the response of economic variables to the actual fiscal stimulus may be insignificant and the reason for this is that, with fiscal anticipation, economic variables already respond at the time of the announcement.

Once we knew that we were getting money back from the government, this boosted spending by 1%.

Yet, there is one crucial detail in all of this.

How long did the effects of the government handout last?

Sixty days.

That’s it.

60 days before a recession?

Does that mean we have just two months left before the Australian economy hits the skids?

Perhaps.

The boost in spending — if any — won’t last for long.

And once that happens, the Aussie government will resort back to harebrained schemes in a bid to prevent the Aussie economy from going backwards.

It’s getting hard for the government to prevent this.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia