Sunday Mail Column - Cash splash a fizzer

Do you ever get the feeling that Kevin Rudd and his Government might not be entirely sure what they're doing? Consider this...

When they came into office the Rudd Government inherited a debt free balance sheet with billions of dollars in the bank and more than $20 billion surplus in the budget.

Having campaigned accusing the Howard Government of profligate spending, when elected Labor talked up inflation and interest rates. Prime Minister Kevin Rudd said the 'inflation genie had escaped the bottle', and only by slashing spending and a tightening of monetary policy could this issue be managed.

Treasurer Wayne Swan egged on the Reserve Bank to put up interest rates, to put the brakes on the economy - an utterly disastrous move in retrospect.

Half a year later, all of this changed.

Facing the economic tsunami that the Coalition predicted in 2007, Labor realised they had talked up interest rates, and slowed our economy, at the exact moment they should have been encouraging growth.

In a panic the Labor Party guaranteed some financial institutions, without considering the implications for those people whose savings were in non-guaranteed institutions. They spent $10 billion, which represented what was left of the Budget surplus, in a pre Christmas cash splash. They urged people to 'spend spend spend'.

Now at the time the Opposition advocated for a general increase in the aged pension, giving certainty to recipients that the increased funds would keep coming in reliably every week. This would have had the double benefit of providing an overdue pension increase, as well as encouraging more economic activity. Instead the Government opted for the immediate larger payments.

The Prime Minister Kevin Rudd and Treasurer Wayne Swan assured the Australian people that this would keep the economy growing, and create 75,000 jobs.

This week we have discovered that this policy has failed spectacularly.

The first problem was that people didn't spend the money. Not unsurprisingly given Kevin Rudd's rhetoric (about a global financial cyclone destroying everything in its path) people saved it, or paid off debts on credit cards and loans. Unlike tax cuts or pension increases, people knew this was a once off, and put it aside for later.

Only 20% of this stimulus package was reinjected into the economy - very poor 'bang for the buck' as far as stimulus goes.

We also now know for the last quarter of 2008 the economy contracted, that is, we had negative economic growth of 0.5%.  What it means for us is that people are spending less, buying less, and as a result businesses can't expand, they're not taking on new staff, and might in fact need to lay off people, which compounds the problem.

In the last month we have seen the Government do it all again, except on an even bigger scale! 

Rather than waiting to see whether their original package worked in the way it was intended, the Government brazenly mortgaged the futures of our future generations in their record-breaking ham-fisted spendathon. Their second stimulus package amounted to $42 billion in new spending, of which $12 billion is another cash splash.

This money is being borrowed through selling Treasury bonds - this mechanism is effectively the Government's credit card. Part of the new legislation was to extend the nation's credit card limit from $75 billion to $200 billion, pointing to the distressing suggestion that this Government is only getting started when it comes to burdening our children with unprecedented debt.

Labor has form when it comes to short term spending without a thought for the consequences. I well remember the Keating Government running up $96 billion of debt in Australia - and I was proud to be part of the Government that made the tough decisions to enable us to pay off that debt after ten long years.

Paul Keating is an expert in running up debt. Interestingly he made some comments this week in London's Financial Times on the effectiveness of the government's approach. According to Paul Keating, ""the recent series of government packages, notwithstanding their scale and speed, has had little demonstrable effect on the level of confidence or the outlook for ongoing activity.""

When Paul Keating says that rampant government spending is pointless, you have to seriously question whether Kevin Rudd has any economic credibility at all.

But then again this is a man who started by describing himself as a ""Christian Democrat"" before he won the Labor Party leadership, as an ""economic conservative"" before the general election, and who now parades as the social democratic enemy of neo-liberalism. To that we can add a new title: the only Prime Minister in Australian history who could make Paul Keating look thrifty.