Economy Still Reliant on Stimulus Spending

Economy Still Reliant on Stimulus Spending

Australia’s economy is still on life support. The latest national accounts show that despite talk of a mining boom and Australia leading the developed world, we would be going backwards but for the government’s stimulus spending.

The economy grew 0.5 per cent in the March quarter, a result driven by a further 11.6 per cent jump in government construction spending. By itself, it accounted for more than all the economic growth, offsetting slides in business investment, private housing investment and exports.

The Treasurer, Wayne Swan, seized on the result to attack Coalition calls for the stimulus to be withdrawn more quickly. ”It is keeping tradies in employment, it is keeping the doors of small business open and they voted against it,” he told Parliament just before leaving for South Korea and the G20 meeting of treasurers and finance ministers from the world’s leading economies.

Appearing before a Senate estimates committee, a Treasury official, David Gruen, said if the stimulus was stopped it could ”stall the economy”.

The Coalition frontbencher Barnaby Joyce had asked why stimulus programs were continuing even though the financial crisis was over.

Dr Gruen replied that they were being withdrawn after keeping the economy afloat by creating almost all of last year’s economic growth.

The phased withdrawal of them should subtract one percentage point from economic growth this year.

”You could argue that you would like to see an even bigger turnaround. I think if you make it big enough you will stall the economy,” he told Senator Joyce. ”That’s the reason for wanting to do this at a measured pace.”

Business investment slipped 2.9 per cent in the quarter, in part because of the withdrawal of the investment tax break that expired in December.

Private housing investment slid 1 per cent, in part because of the expiry of the first home owners’ grant boost.

Without the remaining stimulus spending on construction at schools and public housing and health facilities the economy would have shrunk 0.2 per cent.

”In this limited arithmetic sense, increased government spending has accounted for more than all of the growth in GDP,” the BT Group economist Chris Caton said. ”It underscores the point that stimulus has kept the economy afloat.”

In an encouraging sign that the economy will soon be able to wean itself off the public stimulus the national accounts show that higher export prices pushed up Australia’s terms of trade 4.2 per cent in the quarter, and more is expected as much higher iron ore and coal prices come into play. ”There is a very strong pipeline of private investment coming down the track which is going to kick in later in the year,” the Treasurer said. ”The Building the Education Revolution (BER) program is an essential bridge in the middle of that.”

NSW and Victoria are among the fastest growing state economies as measured by state final demand, advancing 0.6 and 0.4 per cent respectively. Queensland and Western Australia each contracted 0.5 per cent.

Australia’s annual rate of economic growth is little changed at 2.7 per cent.

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