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Don't stop the stimulus

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by Peter Switzer

Joe Hockey is a mate and I used to be Malcolm Turnbull’s patrol captain at North Bondi Surf Club and I reckon one day he could be a great Prime Minister, but they’re both wrong on pulling back on the stimulus package, just after we look like we have not dodged a bullet, but an economic nuclear bomb.

Speaking on CNBC television in the US, America’s Secretary of the Treasury Timothy Geithner said he was keen to sell down their ownership in US financial institutions. He didn’t say this but the US Government is likely to make a stock market profit as they bought in at rock bottom, very low share prices! And since then there’s been a roaring rebound.

Hold the brakes

But Geithner made an important point that our Treasury boss, Ken Henry, has learnt at the coalface.

"The classic mistake that countries make in crises is they put the brakes on too early, they reignite the recession ultimately at much greater fiscal costs and much greater damage to the economy,” he insisted. “That's the balance we've got to get right.”

Right now, the Reserve Bank is scaring potential homebuyers and business owners with talk of soon raising interest rates. I don’t think they will raise this year unless some really big boom statistics come through but talk of it is spooking Aussies — I know I get asked the “when will rates rise?” question everywhere I go.

Also the rising dollar is actually tightening monetary policy and fighting inflation. That’s why a too early rise in interest rates might not be essential.

Similarly, the direct stimulus of cash handouts has petered out and you might have noticed that retail sales fell in July after slipping in June, which has to be related.

Debt projections

When the Treasurer put out the forecast of how high our public debt to GDP would grow by in the next three years, it was around 13 per cent of GDP. Most other Western countries were heading to over 50 to 70 per cent of GDP and Japan was to be closer to 200 per cent of GDP!

But as we have done better, economic growth-wise and unemployment-wise, these debt projections should prove to be bigger than what they will turn out to be.

China rebound

Meanwhile the unbelievable rebound of China augurs well for our mining companies, their profits and the taxes the Federal Government will collect from them.

That’s why stimulus spending can be afforded now but next year as the economy heads off to 2.5 per cent growth or thereabouts, that’s when the Rudd Government will have to start playing hardball. The May Budget will be a chance for the Rudd team to stand up and be counted as economically responsible managers but this could mean disappointing some voters in an election year.

Double dissolution

That’s when Messrs Turnbull and Hockey should come into their own in parliamentary debate and that’s why this health bill blue over the rebate has special significance.

This could be a trigger for a double dissolution election which could mean that Mr Rudd could go to the polls before the May Budget, giving him a chance to be a ‘real bastard’ after the election by coming up with a classic horror budget. He then would have three years to get us back onside before has to go to the polls again.

Politicians are smart bastards, aren’t they? (Excuse the French!)

For advice you can trust contact Switzer Financial Services.

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Published on: Monday, September 14, 2009