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Fiscal prudence still important

A VERY substantial and worrying difference is opening up between the state and federal governments' responses to the global economic slowdown.

Colin Barnett's state government has been very cautious, reviewing its capital spending plans (to the frustration of many business people) and cutting recurrent spending to ensure the state retains its triple-A credit rating.

In contrast, caution is the last word that could be applied to Kevin Rudd's federal government, which in six months has initiated spending plans that sit in the tens of billions of dollars.

The scale of Mr Rudd's spending plans may have been obscured by the extraordinary numbers that characterise the global financial crisis.

Earlier this month, the Group of 20 summit agreed to commit an extra $1.4 trillion for international bodies, including the International Monetary Fund.

It has been estimated the G20 nations will have spent $US5 trillion by the end of next year battling the global slowdown.

It's a bit hard to comprehend numbers that large.

A review by the International Monetary Fund has found that Australia is one of the biggest spenders, relative to the size of its economy.

Australia's discretionary fiscal response (ie the increased government spending) equates to 2.1 per cent of 2009 GDP and 1.7 per cent of 2010 GDP.

That is an enormous shift in fiscal policy and is only possible because of the large budget surpluses that prevailed for most of the past decade.

It is also an extraordinarily big response for a country that is performing far better than most others.

Among major industrial countries, it is rivalled only by the US, which is at the epicentre of the global slowdown and is unambiguously in dire economic circumstances.

Federal opposition leader Malcolm Turnbull argues correctly that the government's response is not only very large, but more worryingly it is poorly targeted.

The government's handouts, worth a total of $23 billion, have proved to be a very imprecise way of boosting economic activity.

It appears that many families have kept the handouts to reduce their debt, which is great for family budgets but not much help for current economic activity.

Liberal treasury spokesman Joe Hockey coined a nice turn of phrase to characterise the federal government's fiscal response to the economic slowdown: "Kevin Rudd's solution to a drought was to create a flash flood and it did not work".

The legacy of the increased spending will, of course, be increased debt. If the spending was measured and carefully targeted, it would be hard to criticise, but the sheer scale of the extra spending makes it difficult to ensure quality.

As well as the increased spending, the federal government has become guarantor for the nation's banks and, most recently, the states.

The banks are making proverbial hay while the federal government continues to guarantee their wholesale fund raising. Whether the guarantee was needed for more than a short period at the height of the financial crisis last year, if at all, is questionable.

Australia's banks - particularly the ANZ, Commonwealth, National and Westpac - are in remarkably good health compared to most of their peers around the world.

They continue to report solid profits and are among a small group of international banks with AA or higher credit ratings.

It is ironic that credit ratings are still seen as a measure of financial health, in light of the merciless bagging that ratings agencies like Moody's and Standard & Poor's have copped over the past six months, but they are a fact of life in international finance.

The guarantee on banks' wholesale borrowing has recently forced the federal government to extend its guarantee to the states, which were worried they were being squeezed out of wholesale funding markets.

A deeper concern is the cynical manner in which the Rudd government has milked the financial crisis.

Opinion polls suggest Mr Rudd's 'strong leader in a crisis' tactics are winning him popular support, but the way in which he exploits the crisis does him no credit.

Australia's prosperity over the past two decades was built on market-based economic reforms yet all we hear about is cowboy capitalism.

A measured and nuanced response is needed, not reckless spending and wild generalisations about the underlying causes of the current economic problems.

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Fremantle
I agree all spending should be targeted and be tethered to fiscal responsibility and awareness that it is the taxpayers money and to be used for the benefit ultimately for the populations welfare and protection. At a time of both recession and climate change impacts great care must be taken to instill not just short term rampant comsumerism but investments in projects not just individuals. Inherently though most companies during recession do not spend and indeed try to curb their \\\\\\\'profiligate\\\\\\\' ways or overspends leaving social,cultural,welfare,infrastructure gaps and debts to be taken care of by the public purse somehow.Cutbacks in business tend to usually be in the safety and training investment or soft skills areas habitually /reactionarily and or any community programs. Of course we also hear the too common general excuse of having to cut all staffing...(not too many place sustainability and people above moderation of profits-of course if they exist) as a solution to bad and unsustainable management and market monitoring. Whats seems to be lacking is a co operative and entrepreneurial attitude between all stakeholders in our economy( during tough times especially)...i.e. community resources(which companies consider their own assets at times)business partners /investors and shareholders and the various levels of government.The common good and social & environmental responsibilities are being ignored in the bad times. We need all to provide and create sustained and moderated economic stimulus and wellbeing. Leaving all to the magic hands of capitalism in the good times has built the illusion that we can live beyond our means and buy time and security beyond logical and sustainable limits.This is a learning curve and may help us start to rebuild a collaborative culture that acknowledges the same lesson that biodiversity and ecosytems understandings teach us...that we are all linked and have impacts if we do not sustain and achieve some sense of balance and accountability.If we dont the system will collapse. Investment for long term is one of the keys along with creative and innovative/courageous thought and actions in the marketplace.Vision is what is required beyond just small minded and scaled point scoring defending outmoded perceptions of capitalism and the market economy. As small scale examples of partnering organisations ABAF \\\\\\\'Australian Business Arts Foundation and CANWA(Community Arts Network Western Australia) are one or two amongst many,many examples in the arts and culture area that could be adapted far more .There are many other examples of this of this potential of course.More broad based and diverse solutions /industries is what is required and equating social/environmental health with societal/environmental wealth.As a countries we have many resources squandered and mismanaged.In intiatives such as the Carbon Pollution Reduction Scheme (CPRS) we may see the seeds of this diversification and more socially responsive growth.http://www.abc.net.au/news/stories/2009/04/03/2533974.htm.we will have to wait and see. We need to push the reset button I think.

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