Kevin Rudd's Labor government has every reason to worry about unemployment going up. When unemployment takes off, it can easily climb far higher than expected. With the economy stalled, most forecasts are for unemployment to rise to a peak of no more than 6.0 percent from a low of 4.3 percent. Bad as that would be, we should all be relieved if nothing worse happens.
History provides little comfort. In 1975, the Fraser government inherited an unemployment rate of 4.7 percent from the Whitlam government. By the time Fraser lost in 1983, this figure had risen to 9.9 percent. During the Hawke/Keating government, unemployment fell to 5.7 percent in 1988. By 1993, it had risen to a savage 10.7 percent.
The Reserve Bank and the Rudd government are now focused on trying to contain a rise in unemployment. But they were a little slow off the mark. As a several commentators noted at the time, it is hard to understand why the Reserve increased interest rates to 7.25 percent in March, having just increased them to 7.0 percent in February. Its own forecasts showed that the underlying rate of inflation would trend steadily down to its target range of 2.0-3.0 percent by June 2010, without the need for further increases in interest rates from 7.0 percent.
If success on the inflation front could be achieved in a reasonable time frame, why lift rates again in March? There is no satisfactory answer. Even the February increase is hard to justify when previous rate rises were still working their way through the economy.
Part of the explanation may lie in a speech in January in which the Reserve’s Governor Glen Stevens was unduly sanguine about the impact of the US sub-prime lending crisis on Australia. Leaving this factor aside, a case can still be made that he should have put more faith in the Reserve’s own forecasts and the effectiveness of its earlier rate rises.
The Rudd government increased the budget surplus in May to help slow the economy. Even it this had been the right overall policy, some cuts made no economic sense, including those to the CSIRO, the Australian Bureau of Statistics and the Meteorological Bureau. In contrast, there was no excuse for increasing the defence budget by more than Labor’s already generous promise of a 3.0 real increase — a figure that is likely to be more like 6.0 percent by June 30.
Now the government is under intense pressure to make an immediate commitment to buy early production models of the unproven US Joint Strike Fighter. The total cost is expected to be at least $16 billion on top of $6.4 billion for new Super Hornet fighters. There is no need for a decision on the JSF before 2016. Meanwhile, the government would be better off spending any spare money on stopping unemployment rising.
By September, the Reserve and the government were showing a commendable lack of stubbornness and started to back peddle rapidly from their earlier efforts to slow the economy. The Reserve has now cut interest rates by 3.0 percentage points since the March high of 7.25 percent. In October, the government announced a $10.4 billion stimulus package, with most of the handouts to retirees and families arriving this week.
With last week’s national accounts figures showing growth had shuddered to a halt in the September quarter, the about turn was not a moment too soon. In line with earlier promises on health and education, the Rudd government also gave the states more money at the recent meeting of Council of Australian Governments. Although spread over four to five years, the extra cash will underpin some jobs.
However, the states have been hurt by Rudd’s guarantee for borrowings by banks. Without a guarantee, the states are finding it just about impossible to raise money in bond markets for infrastructure projects. The simplest solution is to extend the commonwealth guarantee to the state borrowing. An alternative is for the commonwealth to borrow money and on-lend it to the states. Although denied by the government, the Opposition leader Malcolm Turnbull says it wants to set up a new infrastructure bank with funding from the middle east.
Either way, there is nothing wrong with borrowing for productive investment, particularly as the commonwealth has an extremely lazy balance sheet containing no net debt. There is no need to go to anything like this extent, but the Rudd government could borrow $500 billion and still be below the average level of debt of over 50 percent of national output in developed countries.
Unfortunately, there is now a strong chance of a recession occurring through no fault of those who lose their job. Other than companies with ridiculous levels of debt, businesses that go bankrupt will do so for reasons well beyond their control. The unemployed and most bankrupt firms will be the innocent victims of crazy excesses in international financial markets and a couple of unnecessary interest rate rises locally.
Although Australia has limited influence, Rudd is right to argue in international forums for serious global reforms. His more immediate task, however, is to keep unemployment well below Paul Keating’s post-war record of 10.7 percent.
Email a friend