Paper Markets

Brown-paper package or black box?

Unccovering the hidden costs of bail-out and stimulus packages.

THE recent announcement of the Federal Government's $42 billion stimulus package has prompted a lot of questions. Will it do the job? Does it have the right mix of measures? Is it big enough? Is it too big? Why have some groups missed out? And how will it be funded? Yet, the issue of the total cost of this and other support packages announced over the past four months has received scant media attention.

Many of the costs of government interventions go unstated, some by design, some not. When governments announce special packages, such as the $10.4 billion October Economic Security Strategy, the $4 billion November Australian Business Investment Partnership (to support major commercial property projects), the December $2 billion Car Dealer Financing package (to provide wholesale floor-plan financing to car dealerships), the February $42 billion Nation Building and Jobs Plan — to which I would add the $34 million child-care centre support package and the $6.2 billion New Car Plan — what they identify is the headline cost.

Six further categories of cost are associated with such packages:

■Delivery/implementation costs.
■Compliance costs.
■Costs of loans/loan guarantees.
■Opportunity costs.
■Government failure costs.
■The cost of moral hazard.

Delivery and compliance costs occur with all packages but will usually be minimal for broad-based tax and expenditure packages because the delivery mechanisms are already in place. But for
bail-outs, these costs involve the establishment of new program guidelines, the costs of assessing applicants, and then the costs of program monitoring. These can be resource intensive, especially where the form of help is loans or loan guarantees and the monitoring of companies in a fragile financial position is required.
Harder to identify because their link to subsequent expenditure is more tenuous are the costs associated with loans and loan guarantees. These may affect the credit rating of the government and impose higher future borrowing costs both on the government and on the private sector through crowding-out.
A major category of unstated
cost — and the cost that politicians like talking about least — are opportunity costs. Every dollar a government spends must be raised by taxes or borrowed from an owner who would have otherwise spent or saved it.

The main justification for doing this in regard to the stimulus packages is that the Government will spend more quickly than the owners of the funds would otherwise have done. In the case of bail-outs the justification must be to offset some form of failure in markets (for example, lack of availability of credit for "worthwhile" activities).
The extent of the positive impact the Government expects from the two stimulus packages seems to be limited to 75,000 jobs "protected" for the first package, and 90,000 "supported" for the second. Prospective benefits for the various bail-out packages have not been identified, with the exception of the $4 billion support package for commercial property projects, without which "up to 50,000 jobs out of 150,000 could be lost".
Unfortunately for governments, the projected economic impacts do not always come about. This may happen because the government's model is flawed or the assumptions behind the model are inappropriate. Or it may be because the government's perception of what is happening is mistaken — ranging from what exactly the problem is to how bad it is.


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