Self-funded fiscal stimulus and hand-to-mouth Ricardianism: why I accessed the COVID-19 super early release scheme

Plus, time’s up on the RBA review

A recent paper by Hamilton, Liu and Sainsbury (HLS) looking at the COVID-19 superannuation early release scheme has gained a lot of media attention and deservedly so (see the paper for a description of the scheme and its context if you are not familiar). As the authors note, it is not often we get to observe the effects of such a large positive liquidity shock (in this case, the removal of a binding saving constraint) holding lifetime income constant. This is an obvious test of the permanent income hypothesis, amongst other propositions. One in six working age Australians took advantage of the scheme, withdrawing $38 billion from their pension accounts.

The authors find a very high marginal propensity to spend out of the withdrawals, on a par with Andrew Leigh’s estimates for the government debt-financed cash transfers to households during the 2008-09 financial crisis. As a stimulus measure, the super early release scheme was a success, generating around 0.8% of GDP in additional spending between May and August 2020 in the early stages of the pandemic.

Had the same stimulus as a share of GDP been delivered by government cash transfers to households, the scheme would have been deemed successful on its own terms, as is generally argued in the case of the 2008 cash transfers.

It is possible that the scheme delivered more stimulus than the government would have been prepared to deliver via debt-financed fiscal transfers. As the authors concede, ‘to the extent it overcame fiscal constraints, it improved macro-stability, increasing welfare – including among the withdrawers (p.37).’ Ex post, you might argue that this led to too much stimulus, but this concern is independent of how the stimulus was delivered. It was not obvious ex ante that the stimulus was excessive (setting aside the issue of the fiscal-monetary mix). There were calls from the official sector, not least from the Reserve Bank, for the government to do more.

It is not a criticism of the scheme to observe there was a high propensity to spend out of withdrawals. Government debt-financed cash transfers can also be spent or saved and the marginal propensity to spend appears to be very similar from both types of stimulus.

The criticism of the COVID-19 early release scheme compared to cash transfers arises from their different distributional implications.