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Gfc stimulus harmed economy report says


IT TURNS those $900 cheques weren’t such a good idea after all.

The former Labor governments $100 billion stimulus package during the GFC has been slammed in a scathing new Treasury-commissioned report, which argues the cash splash actually weakened the economy and damaged local industry by overvaluing the exchange rate.

The report, authored by economist Tony Makin from Griffith University, says the Rudd government's fiscal stimulus was unnecessarily large and misconceived because it emphasised transfers, unproductive expenditure such as school halls and pink batts rather than tax relief and/or supply side reform.

The latter occurred in New Zealand, where marginal income tax rates were reduced, infrastructure was improved and the regulatory burden on business was lowered.

In sum, fiscal stimulus was not primarily responsible for saving the Australian economy from a narrowly defined recession in the March quarter of 2009, but a combination of lower interest rates, a major exchange rate depreciation, strong foreign demand for mining exports, especially from China, and a then more flexible labour market, the report says.

Fiscal stimulus later weakened the economy by strengthening the exchange rate and reversing the contribution net exports made to aggregate demand.

Commodity prices quickly rebounded in 2010-11, soon after the worst of the GFC had passed, to reach new record highs. At that time, a cut in government spending would have been the most appropriate fiscal response to boost business confidence and take upward pressure off the exchange rate.

Prolonged overvaluation of the exchange rate seriously worsened Australias international competitiveness and harmed industries in the tradeable sector, especially manufacturing.

The failure of successive governments to rein in spending has led to Australia experiencing one of the fastest rises in public debt in the world since the GFC, the report says, and budget deficits have persisted for longer than previous fiscal stimulus episodes in the 80s and 90s.

Australias subsequent fiscal repair has been weaker than the US, UK, New Zealand and Europe.

Interest paid by the federal government on its outstanding debt was under $4 billion before the GFC yet could reach $20 billion, or 1 per cent of GDP, by the end of the decade, the report says.

The servicing cost on foreign debt incurred to fund unproductive expenditure is a net drain on national income and on future budgets, and could potentially spark a vicious circle of deficits and debt if world interest rate rises combine with an interest risk premium that eventuates from a credit rating downgrade.

It points out that public debt interest now exceeds expenditure on the Pharmaceutical Benefits Scheme, unemployment benefits, higher education and foreign aid.

The report comes after shock GDP figures this week which showed the economy contracted by 0.5 per cent in the September quarter its first decline since March 2011 dragging the annual rate down to 1.8 per cent.

Federal government spending, unlike state government spending, is overwhelmingly recurrent, including a large social welfare component which does not generate a return to the government to service the debt incurred to fund it, the report says.

Fiscal consolidation focused on reducing recurrent government spending would exert downward pressure on market interest rates, lower foreign take up of government bonds, weaken the exchange rate and lift international competitiveness. At the same time, revenue neutral tax reform would improve productivity and growth in the long run, particularly company tax cuts that raise the economys capital stock.

Tony abbott makes case for onepage free trade deal with the uk


FORMER Australian Prime Minister Tony Abbott has called for a “one-page” free trade deal with the UK and greater visa access for Australians post-Brexit.

The one-time Remain supporter has changed his tune since the referendum result and is now backing a report that recommends opening up free-trade between the two countries.

Contributing to the Free Enterprise Groups report Reconnecting with the Commonwealth, the former leader said Brexit means that Britain is back and outlined plans for a quick deal to ensure greater movement of goods and people.

If Britain is determined to make the most of Brexit and everything about Prime Minister May shows this steely determination why not strive for a one-page FTA with Australia?

The movement of goods between our two countries should be absolutely free of tariffs or quotas. And each countrys product and service standards should be recognised in the other. If a car is fit to be sold in Britain, its fit to be sold in Australia. If a doctor is fit to practise in Australia, he or she is fit to practise in the UK, he said.

Provided people are coming to work rather than to take advantage of social security or health services, Australians should also be free to live in the UK and vice versa.

The comments come as the UK scrambles to figure out what its relationship with the EU and rest of the world will be post-Brexit, with little certainty over whether the government favours staying in or out of the single market.

In January, the UKs representative in Brussels, Sir Ivan Rogers, quit his post just two months before Britain was due to trigger Article 50, accusing the government of muddled thinking on the issue.

We do not yet know what the government will set as negotiating objectives for the UKs relationship with the EU after exit, he wrote in a resignation letter sent to 1400 staff.

The Commonwealth accounts for a tiny proportion of total UK trade in goods and services with the top ten countries making up just eight per cent of the total, as opposed to around 45 per cent for the European Union.

However the UK remains an important trading partner for Australia, ranking 9th in terms of imports and exports and in the top three in terms of services, according to the Department of Foreign Affairs.

Conservative MPs James Cleverly and Tim Hewish claim Brexit offers a chance for the UK to return to free trading principles, saying the Commonwealth has been neglected in this area for decades.

Mr Abbott said trade between two historically linked nations with much in common remains the obvious place to start.

The authors propose a five-phase approach that would include a scoping group for the possibility of freedom of movement for those on Tier 2 visas for citizens of Australia, Canada, New Zealand and the UK.

It claims the quota of 20,700 Tier 2 visas for skilled professionals will need to change if free movement is altered for EU nationals.

Exploring this with a feasibility study and working group between these nations should be an option, they said.

But free-trade advocates shouldnt get their hopes up too soon. The MPs claim the priorities will be deals with the EU and the United States as well as China who represent 44 per cent, 17 per cent, and 3.6 per cent of the UKs total exports respectively.

Australia is also in the process of scoping a free trade deal with Indonesia and the EU, which will take precedence over new deals in the pipeline.

Britain's outgoing ambassador to the European Union said Prime Minister Theresa May's negotiating objectives for Brexit were unknown to her government's representatives in Brussels, the BBC says. Mia Womersley reports.