Stimulus package big mistake, says Tony Abbott’s former chief economist

Tony Abbott’s former chief economist says the government’s $194bn in stimulus spending is a ‘colossal over-reaction’.

Economist Andrew Stone has described the government’s stimulus package as a colossal over-reaction Picture: Aaron Francis

Tony Abbott’s former chief economist has called the government’s $194bn in stimulus spending a “colossal over-reaction and mistake”, urging it to wind back promises before it’s too late in light of evidence the threat posed by coronavirus isn’t as large as first feared.

Andrew Stone, who left the Reserve Bank to become Tony Abbott’s chief economist in 2011, said in hindsight swaths of new federal spending announced in March — estimated to be the largest in the world as a share of GDP by the IMF last week — should be wound back.

“Government led people to believe the virus would be like a Spanish flu; that’s turned out not to be the case, and they will forgive it if it admits that, on new information, it was wrong and allows businesses to reopen,” he told The Australian.

“Most of all we need to avoid a situation whereby we’re effectively printing money to pay people to do nothing,” he added, referring to the government’s signature $130bn JobKeeper package, which begins next month.

Of the $194bn in new spending policies by Treasurer Josh Frydenberg in March, $65bn is due to be spent by the end of June, $126bn next financial year, and $6bn in the year ending June 2022.

The government is facing a $175bn deficit next financial year — around the same size as experienced during World War I — and almost a doubling of net debt as a share of GDP to 35 per cent, according to estimates by Andrew Boak, Goldman Sachs chief economist, published this week.

Dr Stone, who worked for Mr Abbott for almost five years, said such stimulus wouldn’t be needed if the government permitted businesses to reopen with strict social-distancing measures.

“Governments should immediately commence a phased, 4 to 6-week windback of the lockdown instituted since 23 March, conditional on infection rates not spiking alarmingly again,” he said.

Son of former Treasury secretary John Stone, Dr Stone also blasted an “open letter” from over 100 economists published earlier this week as “absurd”.

“It is astonishing any serious economist (let alone 174 of them) could suggest it,” he told The Australian.

“It is ridiculous that the current lockdown should remain fully in place for even one more day,” he added.

The economists, including high-profile professors Richard Holden and Justin Wolfers, said the “trade-off between the public health and economic aspects of the crisis was “ a false distinction”.

Dr Stone said “trade-offs were endemic to all public policy issues”.

“If an extra $1bn — let alone hundreds of billions — were spent on (say) the Pharmaceutical Benefits Scheme, some lives would undoubtedly be prolonged,” he said.