Griffith University Economics Professor Tony Makin and his co-author Shyama Ratnasiri have just published an interesting paper (Competitiveness and government expenditure: The Australian example) presenting new econometric evidence that suggests fiscal stimulus in response to the financial crisis worsened Australia’s international competitiveness. The decline in competitiveness occurred through the government bidding up wages and prices for resources to spend on stimulus initiatives, such as the Building the Education Revolution school halls. The decline in competitiveness, by adversely affecting our export performance, arguably offset the positive economic impact of the stimulus.

The new evidence presented in the paper is highly relevant to the recent debate over whether the Federal Budget should have done more to stimulate the economy (see my Budget briefing). Professor Makin has previously argued, correctly in my view, that fiscal stimulus would be unwise at the present time because it would add to upward pressure on the exchange rate, which the RBA is desperately trying to bring down using monetary policy.

My previous comments on fiscal stimulus have included:

Treasury’s dismissal of stimulus criticism is unconvincing

Stimulus was always going to be problematic in an open economy