Over Stimulated

08 September 2009

With the reserve bank all but confirming that interest rates are on the way up as we emerge from the financial crises, the need for continued economic stimulus needs to be questioned. Is it necessary or is it simply an excuse for bigger government?

As they say never waste a good crises and no one can accuse any democratic government of having wasted this opportunity. Trillions have been spent in stimulating economies and whilst their economic value will be debated, it is impossible to escape the fact that the money needs to come from somewhere.

I have a relative who is heavily involved in the union movement and she was telling me years ago that for every public service job 3 more are created in the private sector. I struggled to understand how this is the case for government is funded by mainly business and income taxes. Most of the population works in the private sector so their income taxes are derived from the private sector, so therefore government revenue is ultimately generated by private companies.

It has been disconcerting to hear our Treasurer Wayne Swan state that the stimulus will continue to avoid “pulling the rug out from underneath the recovery.” He has told us that his government has a long-term plan to get the economy back into the black and yet he cannot tell us when the stimulus will end? Surely that would be detailed in any plan as it involves such huge levels of spending.

Currently most western government are left of centre and the only truly right of centre government is New Zealand’s. New Zealand have not gone down the path of greater government spending during the financial crises, instead the government has bought forward initiatives which get rid of road blocks to growth such as cutting red tape and freeing up the industrial relations system. Their Prime Minister John Key is an ex high powered banker for Merryl Lynch and knows a few things about economics.

Left of centre governments naturally favour a larger role for government within society and whilst they can no doubt provide sound economic arguments to justify their positions, they have failed to detail when it will all stop.

For at some point the bonds need to be repaid and considering we have avoided a recession would it not now be time to allow the economy to stand on its own two feet?

The more debt government has the harder they make it for the private sector to compete for funds. Naturally this pushes up interest rates and inflation. That is over stimulation and it does not take a treasurer to work out that high inflation and interest rates are the death knell to economic progress.