Wayne Swan has done much better job as Treasurer in combating a serious economic down turn than Paul Keating. Despite his constant boasting, Keating made the 1990-91 recession much worse than necessary. In contrast, Swan is reducing the impact of the global recession well below what it would have been if he had copied Keating.
After last Wednesdays’ national accounts showed that Australia has so far avoided the technical definition of a recession, Swan and Kevin Rudd were careful not to sound too pleased. After all, Treasury is still forecasting that growth will go backwards in 2009-10 and unemployment will peak at 8.5 percent in 2010-11.
With luck, these forecasts may turn out to be too high. If not, Australia looks like doing better than any other economically advanced country. Other factors were involved, but the combination of increased government spending and interest rate cuts contributed to the good result in the national accounts.
There is a reasonable argument that some of the “cash splash” component of the stimulus packages should have gone directly on boosting jobs. But it seems clear that the government’s overall stimulus package will keep unemployment lower than if nothing were done to counter the deepest global recession since the 1930s.
Even if nothing were done, the budget would have still have plunged into deficit, and net government debt would have risen, because of the way the global recession is expected to blow a $210 billion hole in budget revenue over the next four years. In an effort to limit the rise in unemployment, the government has added to the deficit with $70 billion in stimulus spending. But Treasury projections show that net government debt will remain the lowest in any advanced economy as a proportion of gross domestic product.
The Sydney Morning Herald's economics editor, Rodd Gittins, points out that the net interest bill will amount to 2.4 cents out of every dollar of revenue in 2012-13. Most people would be happy to pay a similar figure on a home loan. In an attempt to counter widespread misconceptions, twenty-one leading economists jointly authored an article in The Australian Financial Review last week arguing why it makes sense to use manageable levels of government debt to put idle resources to work during a severe downturn.
The big difference between Swan and Keating is in the size and timing of their response to warning signs that the economy was about to tank. Swan acted early and on a big enough scale to make a difference. Keating was slow to act. When he did move, he kept the brakes on for far too long. As a result, unemployment hit almost 11 percent following the recession — the worst level since the great depression in the 1930s.
Bad economic management largely caused Keating’s recession. His de-regulation of the financial sector can be seen as producing some long-term gains. But it also unleashed a wild boom fuelled by a mad lending spree by the banks. As usual, the boom ended in tears. Corporate cowboys were not the only ones in trouble. Unemployment rose to over 900,000 innocent Australians.
Keating boasted before the recession that he had the Reserve Bank “in his back pocket”. After being too slow to apply the brakes to the boom, his biographer John Edwards points out that Keating then backed the Reserve Bank’s policy of putting interest rates up too high and leaving them there for too long. As the Coalition never tires of reminding Labor, official interest were a punishing 17 percent in early 1990.
The Coalition leader Malcolm Turnbull makes a plausible case that the (now independent) Reserve Bank was wrong to lift rates to 7.25 in March 2008. But it then cut them with commendable alacrity to 3 percent by April 2009. On the spending side, Rudd and Swan announced their first stimulus package in October 2008. Keating did not announce his One Nation package until February 1992. By then, the recovery from the recession was already underway.
Keating’s performance was also worse than that of Gough Whitlam’s government in the 1970s when it confronted a international economic shock caused by a huge rise in oil prices by Organisation of Petroleum Exporting Countries. Inflation took off around the world. Excessive wage increases in Australia did not help. But it is not clear why a University of Wollongong historian Greg Melleuish referred in a newspaper article last week to the “horrors of 1974” in comparing the Whitlam government unfavourably to its successors.
Under Whitlam, unemployment was 2.4 in mid-1974. It was not until after his sacking in November 1975, that it reached a peak of 6.2 percent — an result for which he can be considered partly responsible. Economic growth only fell to 1.6 percent during the Whitlam era — far better than anything achieved by his successors during subsequent recessions. Whitlam increased spending —possibly more than needed — to stave off a recession. But spending as a proportion of GDP was much lower than the heights reached under the Howard government when no recession was looming.
Rudd and Swan will do much better than Whitlam on inflation, but worse on growth and unemployment. They will almost certainly prove much better economic managers than Keating.
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