Defective analysis and the "Never Never Budget".
Dinner address, 27 March 2009
The title for the H.R. Nicholls conference is drawn from the witches' cabal in Macbeth--"Fair is foul, and foul is fair". Could this be a reference to a certain "Welsh witch" who rides the Rudd Government's industrial relations whirlwind with an iron broomstick? More mundanely, I construe it as highlighting that the consequences of the so-called Fair Work Act 2009 for the Australian economy will be extremely foul, and that only witches could be so wicked as to describe its foul measures as being "fair".
When Ray Evans wrote asking me to speak, he began by observing that this year will see the 25th anniversary of my Shann Memorial Lecture, which he described as "arguably the seminal document in the campaign for liberalising our labour market". He said he would be glad if I "would pick up the leitmotif from that lecture and bring it up to date, in the knowledge that we are heading into perhaps the most serious recession since the 1930s". In passing, let me delete that word "perhaps". The recession in which we now find ourselves is certainly the most serious since the 1930s, and in some dangerous respects it is unprecedented in the Federation's history.
Ray then referred to some predictions of mine last year about the future of Mr Kevin Rudd, (3) and potentially therefore of his Government, and asked me to suggest some "things which a post-Rudd Government ought to do to ameliorate what will be an unemployment crisis greater than that of 1982".
I shall try to conform to those guidelines under four heads:
* First, I shall say something about the economic situation likely to confront us in 18 months' time.
* Second, I shall speculate briefly on the consequences of that for the Labor leadership in Canberra.
* Third, I note that, however politically propitious the economic circumstances late next year might seem to be for the Coalition parties, they have little hope of winning office under their present leadership.
* Fourth, since I may be wrong in that judgment, or the Coalition parties may meanwhile find themselves another, more electorally acceptable leader, I assume for the sake of argument that they do prevail at the 2010 election--or that even if they don't, by that time the Labor Party will have sufficiently come to its senses to amend its current policy stance. On one or other of those assumptions, I consider how the unemployment crisis then prevailing should be addressed.
The economic situation and prospect
Australia's economic situation grows more serious by the day. When the Rudd Government was elected 19 months ago, we were extraordinarily well-placed. We had no federal debt, a federal budget in strong surplus and a well regulated banking system largely free of the excesses of many of its overseas counterparts. We were enjoying strong economic growth, with record business investment and extremely low unemployment. Whether Labor likes to admit it or not, this was the legacy of the Howard-Costello Government.
Today, federal debt is growing by leaps and bounds. The budget is already heavily in deficit and destined to become much more so. Economic growth has vanished, business investment is beginning to fall, and unemployment is rising sharply. Our banking system is still relatively robust by international standards, but is under strain nevertheless.
Not all of this is the Rudd Government's fault. Many of the depressive forces acting upon our economy have their origins abroad. The real charge against the Government is that, in addressing those depressive forces, its analysis has been defective and its actions have been as reckless as they have been unproductive (or even counterproductive).
To make matters worse, the recent enactment of the Fair Work Act constitutes a disaster in the making. That Act not merely repeals the Howard Government's Work Choices Act but also takes labour market regulation back, in many respects, to pre-Keating days. At a time when the restoration of business confidence is a vital ingredient in any recovery process, Julia Gillard has laid an axe to it.
Moreover, although it is not a topic for this conference, the Government's Carbon Pollution Reduction Scheme, which it stubbornly proposes should come into operation next year, (4) would be another blow to our cost structure and hence, again, to business confidence. Even if you believed in the dodgy "science" purporting to underlie it, it would simply make no sense at this juncture in our economic affairs.
Why do I say that the Government's--and I fear, the Treasury's--analysis of our problems has been defective? It is because, I believe, it has wrongly diagnosed the very nature of those problems.
In a newspaper article last February, I urged the Government to think about how the present situation has arisen: (5)
For years now, many Australians, and many of our corporations, have over-borrowed. While the Howard-Costello Government was paying off the Commonwealth's entire net public debt, the private sector was hell-bent on the path of debt-financed asset inflation. The fact that most of the developed world (the United States in particular) was also doing so enabled this process. That has all changed. Asset inflation ... has been replaced by asset deflation. Share markets have fallen dramatically. Commodity markets, with the significant exception of gold, have fallen even more dramatically. House prices have fallen, and will undoubtedly fall further; so have commercial property values, despite developers' notable reluctance to admit it. ... Unemployment is rising, as are bankruptcies. Confidence, both of individuals and businesses, has been shot to pieces.
Last October, when the Prime Minister made his "decisive" decision to blow $10.4 billion of our money, he apparently did so on the basis of Treasury advice to "go early, go hard, go households". That advice was said to be based upon the Keating Government's experience when dealing with--or failing to deal with--the 1991-92 recession. If so, I believe that was a mis-diagnosis. Apart from its likely unemployment consequences, the recession on which, by last October, we were already embarked bears little relationship to that of 1991-92.
The difference was well defined in a paper (6) given to a special meeting of the Mont Pelerin Society in New York which I recently attended. It drew a sharp distinction between "conventional" recessions (like ours of 1991-92)--usually brought on because the monetary authorities have been forced to raise interest rates to check inflation--and the much rarer (and much more difficult to deal with) "balance sheet" recessions. (7) In this latter kind of recession, "corporate, financial or household balance sheets will have been swollen by large quantities of debt. Typically the debt will have been used to buy assets ... and the fall in asset prices will create widespread negative equity for firms and individuals, triggering an economic downturn. The main focus of indebted firms or households in this situation is de-leveraging or debt repayment". (Emphasis added).
The key point is that, once this kind of recession has become established, both households and corporations will wish to give priority not to spending, but to repairing their balance sheets. Even though "banks may have funds to lend, households or firms may not want to borrow, preferring to repair their balance sheets before spending again". (8)
This "deleveraging" process seems to me to describe very accurately the situation today not only in Australia but throughout the developed world. If so, no wonder Mr Rudd's $8.7 billion handout last December appears to have had so little noticeable effect on consumer demand. Most of it, as I suggested in that newspaper article, would have gone to repairing household balance sheets. I expect the same will be true of the $12.7 billion being distributed as part of Mr Rudd's $42 billion February package.
On that basis, these two measures boil down to requiring taxpayers to hand over $21.4 billion to people who have borrowed imprudently, so that they can reduce their debts!
If I am right about likely household behaviour in these circumstances, consumer demand is unlikely to recover for some time. Indeed, if household confidence is further sapped by watching the Government "making it up as it goes along", it will fall further. Falling business investment, including downward inventory adjustment, will exert further recessionary pressures.
Export demand, in turn, seems likely to suffer from the similarly mistaken fiscal policies enacted abroad by President Obama, Mr Gordon Brown, and to a lesser extent, others. To quote again that earlier newspaper article, "today's world leaders and self-interested International Monetary Fund spokesmen all seem hell-bent on committing errors similar to our own, thereby worsening the international environment".
There is much talk these days, both here and abroad, about the need for banks to "go on lending". Mr Rudd has even suggested, as part of the "seven-point plan" he is self-importantly taking to the 2 April G20 meeting, that any bank receiving government support (e.g., through sovereign guarantees on deposits) "must formally agree to maintain regulated levels of lending". (9) There are two problems with that fatuous prescription. First, it would be madness to pressure banks into lending to individuals or businesses no longer creditworthy. Isn't that how the sub-prime mortgage disaster came into being? Second, even otherwise creditworthy businesses which have belatedly recognised that they have too much debt "may not want to borrow, preferring to repair their balance sheets ...".
The coming federal Budget offers a last major opportunity to call a halt to Mr Rudd's style of decision-making. But don't hold your breath. Apart from general utterances both from him and the Treasurer about doing "whatever it takes", we have already been promised a significant increase in pensions from a budget that can no longer afford that. And there will be no lack of other spending proposals coming forward, most of them of the same low quality as those now comprising Julia Gillard's $14.7 billion "education revolution".
The Treasury figuring provided in early February in the Updated Economic and Fiscal Outlook (UEFO) paper is already out of date. I suspect that the revised figuring that we will receive in the Budget papers will also be dead on arrival. Apart from any other reasons, this is because the Treasury--and for that matter, private sector forecasters also--are trying to forecast an economic scenario for which there is no precedent in their databases.
(The same comment, incidentally, applies to the Treasury's attempt last year to forecast the effect upon the Australian economy in 40 years' time from the introduction of a measure--the emissions trading scheme--specifically directed towards changing the whole nature of the economy).
So where will we be in 18 months' time? The only honest answer is to admit that neither we nor the Government knows with any precision, and to acknowledge that there are serious grounds for apprehension. Unemployment will certainly be much higher--perhaps even doubling from its February level. So will be the level of government debt. Business investment will have plummeted. Because we entered the recession with an appreciable level of unsatisfied housing demand, dwelling investment may be relatively less affected, but is unlikely to be buoyant. Governments, both state and federal, will be increasing both current and capital expenditures--most of which, however, like the "education revolution" spending referred to earlier, will be relatively unproductive.
By that time, the IMF will have issued perhaps the 15th revision of its economic outlook forecasts over the preceding two years. The situation overseas will have become worse--perhaps a lot worse--although China, importantly, may be an exception. By that time, some individuals and some businesses may have sorted out--or be on the way to sorting out--their balance sheet imbalances. But with the ground constantly changing, or threatening to change, beneath their feet, I doubt whether their "animal spirits" will be much in evidence.
Labor leadership fallout
In a National Observer article last year, I said: (10)
Mr Rudd appears to suffer from a serious personality flaw--one might almost call it a disorder--of a kind, and an intensity, which should disqualify him from occupying the most powerful office in the land .... Whatever may be the clinical description for the personality flaw ..., a man who will brook no opposition to his 'decisive' views is clearly a danger not merely to his party's prospects of remaining in government, but also, and more importantly, to Australia.
Given that judgment, the evidence for which has mounted since it was written, I queried whether his colleagues would allow Kevin Rudd to lead them to the next election. "Enter Julia", I said, "stage Left". (11)
Whether or not there is a change in its leadership before the next election, there is no doubt in my mind that, other things being equal, Labor could then be eminently beatable. There is just one problem--the present state of the Coalition parties in general, and their present leadership in particular.
The Coalition's problems
We can all recall elections, both state and federal, where governments eminently deserved to be defeated, yet nevertheless survived. The best known federal example was when the Coalition, under John Hewson's leadership, lost the "unloseable" election of 1993. At the state level, the New South Wales election of March 2007 should have been a lay-down misere for the Coalition, but under Peter Debnam's lead- ership it became merely another in a succession of such Coalition debacles.
The lesson is, I suggest, that while the voters will throw out incumbent governments, as they did federally in the 1996 landslide, they will only do so if the potential replacement has policies in which, and a leader in whom, they feel they can repose confidence. The federal Coalition parties in Canberra are presently vulnerable on both counts.
There is no kindly way of putting this. At the heart of the problem is Malcolm Turnbull himself. He is unquestionably talented, and comes over, rightly or wrongly, as having a pleasant personality. But since gaining the office he had so long--and in some ways, so unscrupulously--sought, he has:
* Systematically trashed John Howard's Liberal Party legacy.
* Surrounded himself, in his shadow ministry, by in-effectual third-raters such as Senator Helen Coonan (Finance, Competition Policy and Deregulation), Dr Sharman Stone (Immigration and Citizenship) and others of a similarly soft-Left persuasion.
* Over-promoted second-raters such as Christopher Pyne (now the ineffectual Manager of Opposition Business in the House).
* Displayed, time and again, astonishingly poor political judgment, most damagingly in his initial concession that the Government had a "mandate" for its Fair Work Bill. As the Labor Party demonstrated in 1999 after "the GST election", there is no such thing as a mandate.
* Advanced one silly position after another on the emissions trading scheme question, to the point of seeking almost to "out-green" the Greens!
* More generally, persistently demonstrated a set of values that have much more to do with the elites of the electorate of Wentworth than with the values of average Australians--and even less of those "Howard battlers" whom the Coalition will have to win back if it is to regain office.
Let me elaborate a little on that last point. Today, the values of the Turnbull-led Opposition seem to bear little or no resemblance to those that kept the Coalition in office for almost 12 years. For example, when did you last hear a shadow Cabinet spokesman (or woman) attack the Government over any of the following matters:
* The composition (and in current economic circumstances, size) of our immigration program, including the huge intake of culturally incompatible, often non-English speaking people from various dreadful places around the world, with the massive rise in ethnic crime they have brought with them.
* The insane proposal (supported by, of all people, the National Party!) to import so-called "guest workers" from various South Pacific failed states, including not least the crime and corruption-ridden one that Papua-New Guinea has now become under a succession of "big men" living high off the hog of (among other things) Australia's aid program.
* The Prime Minister's dangerous proposal to seek, at whatever cost to our budget and our foreign policies, a seat on the Security Council of that most corrupt of international organisations, the United Nations.
* Kevin Rudd's apparent willingness--partly in pursuit of that worse than worthless UN Security Council objective--to hand over major parts of our mining industry to companies that are nothing more than agents of the Chinese Communist Party and its government.
* The ineffectual pursuit of the policies, initiated in 2007 by Mal Brough, to begin to repair some of the destruction wrought among Australians of Aboriginal descent by 40 years of failed policies of separatism from both sides of politics.
That list could be extended much further. The real problem here, I fear, is that policies of the kind I am criticising probably appeal to many of those Wentworth electorate elites referred to earlier. Yet, as the 1999 republic referendum showed, winning Wentworth can't win you Australia.
I could go on, but I merely reiterate that, however politically propitious the prospective economic circumstances late next year might seem to be for the Coalition parties, they have little hope of winning government under their present leadership.
Nevertheless, what if?
In these circumstances, there are three possible outcomes of the next federal election:
1) I may prove wrong, and Malcolm Turnbull may become Prime Minister.
2) The Liberal Party may, before then, find itself a more electorally acceptable leader, and that person may become Prime Minister.
3) The Labor Party, whether or not still under Kevin Rudd's leadership, and notwithstanding the economic shambles then confronting us, may nevertheless prevail, while coming to understand (as the Hawke Government did in 1983) that it needs to change course decisively.
So what should that new course comprise? In thinking about that I have, as requested, re-read my 1984 Shann Memorial Lecture--delivered shortly after I had made known my intention, in the near future, to resign my office as Secretary to the Treasury, and from the Commonwealth Public Service.
Much has happened in the almost 25 years since delivery of that lecture. (12)
In 1984 there were many similarities to the problems confronting Australia in the early 1930s that Shann was then addressing in his writings. Today, those similarities have diminished. As my earlier newspaper article observed, we now have a flexible exchange rate, an independent central bank and a less-regulated labour market subject to less trade union monopoly power.
Consider, however, that last point now that the Fair Work Bill has passed into law. It is bad enough that a huge number of small businesses, having 15 to 100 employees, will shortly be subjected again to the costly blackmail of "go away money". But the real threat, as the former Labor Treasurer of New South Wales pointed out recently, lies elsewhere. I quote from Michael Costa's article: (13)
The real problem with the legislation is its model of collective bargaining. This model is more than a restoration of the pre-Work Choices [Howard] or even pre-Workplace Relations Act [Reith-Kernot] arrangements. It goes much further. Even the ACTU acknowledged this was unprecedented ... when [last year] it said: "The new collective bargaining laws ... will ... represent one of the most momentous overhauls of industrial relations in this country for 100 years." The introduction of compulsory "good faith" bargaining with a new arbitral body, Fair Work Australia, means that an effective broad re-regulation of the labour market is likely. This overturns not only Work Choices but also important reforms made in labour market regulation under the Hawke and Keating Labor governments. (Emphasis added).
Hard policies for hard times
The most important need, in addressing the post-election situation, will be for public political pronouncements to face up to reality. Part of the Rudd Government's problem has been that, at the outset, "neither Mr Rudd nor his Treasurer, Wayne Swan, could bring themselves politically to concede the quality of their inheritance". (14) Later, neither man could bring himself to utter the words "budget deficit". Until late March, neither man could admit that Australia would suffer a recession.
Australian voters are not children. They deserve the truth, even when it is as unpalatable as much of it will be over the next year or two. The reckless promise of a pensions increase, for example, owes much to the Government's unwillingness to tell the electorate the truth that we can't afford it. (Tony Abbott, who had the courage to raise the issue, was immediately demonised--including, no doubt, by his own party room--for having done so).
Eighteen months from now, Australians on average will be significantly poorer. Many more of them will be unemployed. Many will be much less productively employed in one government spending program or another. Our gross domestic income will have suffered appreciably from the sharp fall in our terms of trade, and our national indebtedness to foreigners will be higher.
All this needs to be spelled out, and against that background, reality suggests a need for two things: first, to start cutting our coat according to our cloth; and second, the adoption of policies that will increase the amount of that cloth available.
On the last occasion when we were facing anything like (albeit far worse than) the present situation, even the then Arbitration Court showed some signs of coming to its senses. In its judgment of January 1930 it said: "The difficulty [in the hearing before the Court] was to get union advocates not to live in the past but to face the present situation and future prospects." Later in the same judgment, the Court said: "Great and increasing unemployment is strongly symptomatic of a wage level too high for our present capacity."
One hard lesson which, under the stress of the economic realities of that time, Australians were forced to learn was (and is) "that full employment is not only, or even primarily, a matter of governments manipulating aggregate demand, and that the labour market itself, and its participants, have a critical role to play". (15)
This is not the occasion for a 2009 Shann Memorial Lecture, but one other element of that 1930s situation may be worth recalling. In a joint submission to the February 1931 Premiers' Conference, the heads of four state Treasuries (headed, in those days, by public servants of substance as distinct from "politically acceptable" appointees) said:
... the grievous position of many thousands of [unemployed] people imposes a responsibility upon governments no less severe than the responsibility to restore financial stability. The differences between the two are these: (a) Financial stability is within the control of governments, and it is a condition precedent to the restoration of employment; (b) The restoration of employment is not directly within the control of governments.
And they went on:
Employment must be made profitable. This cannot be done by government relief works or subsidies to private industry, but only by removing obstacles to reduced costs, and by the restoration of confidence. (Emphasis added).
Some will say, no doubt, that not only were these state Treasury officers writing prior to the revelations of John Maynard Keynes, but also before the advent to the US Presidency of Franklin Delano Roosevelt and the subsequent wonders of his New Deal.
During my student days I would have broadly accepted both those caveats. By the early '70s I had parted company with the first of them, and these days I no longer accept the historical validity of the second. This is not the place for a lecture on either matter; but as to the second, I cannot recommend too strongly a highly readable book on the subject, The Forgotten Man, (16) by Amity Shlaes. Sub-titled A New History of the Great Depression, the recently published paperback edition of it has become a New York Times bestseller.
By the end of next year, whatever scope now remains for assistance from monetary policy will have already been fully utilised. As to fiscal policy, the Government has already committed to spend more than $52 billion in two major packages, as well as billions more in other announcements. If we set aside the CPRS (a net tax should it come to pass), the Updated Economic and Fiscal Outlook (UEFO) paper indicated a total of such new fiscal commitments (between October and early February) of $58.1 billion. (17) In short, the Budget is already in disarray, and 18 months from now looks certain to be more so--probably much more so. By that time, the only budgetary policy that will make any sense will be one of doing no further harm.
In effect, then, the only way in which, by then, unemployment could be quickly reduced would be via a significant cut in labour costs (as was eventually done, incidentally, in Australia during the Depression). Reductions in the many other regulatory barriers to job creation would also be helpful.
Today, as in 1931, "employment must be made profitable". So far as the export industries are concerned, their profitability will chiefly depend on demand for their products in overseas markets, and on the exchange rate. They too, however, can be helped by reducing their costs--in particular, the regulatory costs (such as the whole Native Title "right to negotiate" racket) that miners face in both exploration for and development of their mines.
For businesses serving the domestic market, costs are the principal impediment to profitability--which brings us back to such matters as the Fair Work Act, the proposed emissions trading scheme, the lock-out of the low-skilled and the uneducated through the operation of the minimum wage, and so on.
By the end of next year we may again be forcibly reminded, as that 1930 Arbitration Court judgment said, that "great and increasing unemployment is strongly symptomatic of a wage level too high for our present capacity".
To end on an optimistic note, however, the world meanwhile will have gone on steadily cooling!
Epilogue: the 2009-10 Budget
On 12 May the Treasurer, Mr Wayne Swan, brought down the 2009-10 federal Budget. By contrast with its predecessor only 12 months earlier, it revealed both a current scene of devastation and a future prospect so gloomy that even perennial optimists (18) find it hard to discern many crumbs of comfort.
To make matters worse, the Budget documents themselves, including but not confined to their forecasts/projections, give rise to serious doubts. Indeed, were one to seek a single phrase to describe it, this Budget might be termed "the Never Never Budget", so reminiscent is it of that old Australian saying when putting a monetary liability "on the Never Never". For example:
* The huge deficits now forecast for 2009-10 and 2010-11 will, it is claimed, disappear by (wait for it) 2015-16. (19)
* The Government will offset the cost of "pension reform" [read, the huge increase in the Age Pension for singles] by (wait for it even longer) 2021-2022. (20)
* "The Government will progressively increase the qualifying age for the Age Pension to 67 years, ... beginning in 2017 and reaching 67 years in 2023". (21)
* Net debt, after supposedly peaking at $188 billion in 2013-14, is projected to decline thereafter "to around 3.7 per cent [of GDP] in 2019-20". (22)
Other such "Never Never" examples could be quoted; but on a different rendering, the phenomenon is also to be found in the fact that, throughout his Budget speech, the Treasurer never, never uttered either the word "deficit" or the estimated 2009-10 figure for it ($57.6 billion). An uninformed listener would have had no idea that this man was bringing down the largest Budget deficit in Australia's post-war history.
The current scene
In the H.R. Nicholls Society address set out above I argued that, so far as the economic situation was concerned:
* "The real charge against the Government is that, in addressing [the depressive forces acting upon our economy], its analysis has been defective ...".
* That is because "the Government's--and, I fear, the Treasury's--analysis ... has wrongly diagnosed the very nature of [our] problems".
* "Apart from its likely unemployment consequences, the recession on which, by last October, we were already embarked bears little relationship to that of 1991-92", or that of the early 1980s.
* That is because it is not a "conventional" recession like those ones, but that much rarer thing (and much more difficult to deal with), a "balance sheet" recession--in which "the main focus of indebted firms or householders ... is de-leveraging or debt repayment".
* "The Treasury--and for that matter, private forecasters also--are trying to forecast an economic scenario for which there is no precedent in their databases".
* As to where we will be in 18 months' time, "the only honest answer is to admit that neither we nor the Government knows with any precision ...".
* "To make matters worse, the recent enactment of the Fair Work Act constitutes a disaster in the making".
* "... [T]he Government's Carbon Pollution Reduction Scheme ... would be another blow to our cost structure and hence, again, to business confidence".
Before turning to the Budget proper, let me briefly address those last two points. Since my original comment the Government has postponed the onset of the CPRS--formally by one year, effectively by two years--which has been mildly helpful even while failing to deal with the fundamental problem (the scheme itself).
As to the Fair Work Act, that juggernaut continues to bear down inexorably upon the labour market. With the new "unfair dismissals" provisions scheduled to take effect from 1 July, are employers likely to take on previously unknown employees, with all the renewed risks of becoming liable to "go-away money" blackmail that will then entail? And after 1 January next, when the new "modern" awards will impose hugely increased penalty rates in such areas as hotels, restaurants and other recreation industries, how many jobs in those industries will disappear? Yet amazingly, so far as I can see, there is not a single reference in Budget Paper No. 1 to the threat this poses to the economy. Talk about the unacknowledged elephant in the room!
Against the background of the other above-listed dot points (to which I still adhere), I have looked to see whether the Budget documents suggest any change in analytical posture. Regrettably, none is evident. In particular, the statement that "the recessions of the early 1980s and early 1990s provide the most insight into the current dynamics of the economy" (23) is flatly contradictory of my own view to the contrary.
As to that, let me be clear. On the one hand, we have ranged here the full analytical power and resources of the Australian Treasury, and the Australian Government more generally. They are backed up, so far as can be judged, by the might of the US Administration, the UK Government (such as it now is) and many other G-20 governments (although not, it seems, the New Zealand Government). The International Monetary Fund--despite some second thoughts beginning to peep through in its most recent utterances--is in the same corner, as is (again with some shades of difference) the OECD.
Confronting, on the other hand, this galaxy of Goliaths, slingshot in hand, is--myself. How presumptuous can that be?
So as I say, let me be clear. Unlike assorted government spokesmen and women, I make no claim to infallibility. The analysis and critique of policy in my H.R. Nicholls Society address may prove to have been in error, and the Government (and the Treasury) may emerge triumphant. Time, as it always does, will tell. All that I can say is that, so far, the governmental track record is not looking good.
For example, official forecasts which, in the space of a mere six months, can go from forecasting GDP growth of 2.25 per cent in 2009-10 to negative growth of 0.5 per cent, hardly inspire confidence that these latest forecasts (still less, the futuristic projections for years even further out) will now prove accurate. Given my earlier comment about there being "no precedent in their data bases" for such forecasting, the earlier failures should not be surprising. What is surprising--and deeply worrying--is the Government's continued insistence that it really does know what it's doing.
The future prospect
Confidence in a more optimistic future outcome has not been improved by the cobbling together of an array of projections purporting to show that, on the basis of a series of strongly questionable assumptions, certain relatively optimistic outcomes may be derived. While it would be going too far to describe these calculations as examples of the "garbage in, garbage out" genre, nevertheless they smack too much of contrivance for my comfort.
According to the Government, our economy will show no growth in GDP during the current financial year and negative growth of 0.5 per cent in 2009-10. Recovery will begin with sub-par growth of 2.25 per cent in 2010-11, succeeded by rapid growth of 4.5 per cent in both 2011-12 and 2012-13. Thereafter, so the medium-term projections have it, continued strong growth of 4 per cent per annum will occur for the next four years through 2016-17. (24) Meanwhile the unemployment ratio (5.5 per cent in April 2009) will rise to 8. 25 per cent by June quarter 2010 and 8.5 per cent by June quarter 2011, before subsiding to 6.5 per cent by June quarter 2013. Then, according to the medium-term projections, the ratio will steadily subside by 0.5 per cent per annum "until it reaches the non-accelerating inflation rate of unemployment (NAIRU) of 5 per cent in 2016-17". (25)
The Budget papers purport to find support for all this in some work by the IMF on international experience with recessions. (26) After noting the results (for duration, amplitude and recovery characteristics) "for a typical OECD recession" over the past 48 years, it is acknowledged that "the IMF finds more sobering results for recessions associated with financial crises or those that are highly synchronised across the world". Such recessions, it is conceded, "have been more severe and longer-lasting than the typical recession". Quite so; and as the concluding sentence in this reference rightly notes, "the current downturn is both highly synchronised and associated with a deep financial crisis, a rare combination in the past 50 years". (Emphasis added).
If I may say so, in this single sentence, the anonymous official author goes far towards conceding my case. Our current recession is rare indeed--in fact, virtually unparalleled in Australian experience; hence my earlier stated opinion about lack of comparable data in the Treasury's modelling database.
How then does that acknowledged fact compare with the official opinion, quoted above, that "the recessions of the early 1980s and early 1990s provide the most insight into the current dynamics of the economy"? That of the early 1980s (at which time I was heading the Treasury) was chiefly the result of a major wage shock applied to the economy by the Metalworkers' Union (under its then former Communist Party bosses Laurie Carmichael and the late John Halfpenny), aided and abetted by the ACTU under Bill Kelty. It had nothing to do with a deep financial crisis, nor was it internationally synchronised. It was, on the contrary, all our own work.
As for the recession of the early 1990s, while there were elements of domestic financial crisis involved--notably among some of our banks and some highly leveraged "entrepreneurial" businesses--there was no general situation of "balance sheet" imbalance throughout the business sector, and certainly not throughout the household sector. Nor, again, was there any international synchronisation. To suggest, then, that "insight" into our current troubles can be had from examining the entrails of those two very different experiences is surprising, to say the least.
Time, as I say, will tell. Even at the time of writing, however (only 10 days after the Budget), some warning flags are beginning to fly. For example:
* March quarter figures for Europe's largest economy (Germany), issued on 15 May, showed a fall of 3.8 percentage points--a record contraction for one quarter, and double the already dismay-producing 1.9 percentage point fall in the United Kingdom for the same period. (27)
* Figures issued on the same date for the European Union as a whole showed a March quarter fall of 2.5 percentage points, with countries such as Italy, Spain, Austria and The Netherlands all recording the largest slumps in their post-war histories. (28)
* Within hours of these figures appearing, the managing director of the IMF acknowledged that "this crisis is not over, and there will, in all likelihood, be further tests ahead". (29)
* March quarter figures for the Japanese economy (still our largest market), issued on 20 May, showed a fall of 4 percentage points--the largest quarterly contraction since records began in 1955. (30)
* On 21 May, publication of the minutes of the 28-29 April meeting of the Open Market Committee of the Federal Reserve revealed that its members now put the fall in US GDP in the December quarter this year at 1.3-2.0 per cent (annualised), compared to the previously forecast range of 0.5-1.3 per cent. (31)
* On the same date, an IMF mission report on the British economy "dismissed the Chancellor's claim that the recession will be over by Christmas", predicting that the economy will shrink by 4.1 per cent in 2009-"the biggest peacetime contraction since the 1930s"--and also cast doubt on the prospective effectiveness of the UK bank rescue actions to date. (32)
* A day later, the ratings agency Standard and Poor's announced that it was placing Britain's AAA credit rating on "outlook negative". (33) Although the two other major ratings agencies (Moody's and Fitch) re-affirmed their AAA ratings for Britain, the S&P shock not only contributed to sharp falls in stock markets in both Wall Street and London, but also even led some commentators to wonder whether the same doubts may not soon be raised about the credit worthiness of the USA itself.
I list these very recent (post-Budget) events not from any sense of schadenfreude, but simply to underline my view that the Budget's prognostications appear to me unduly optimistic, and to illustrate the sort of external events that could easily serve to undermine them. Domestically, of course, any comparable list would be headed, as already noted, by the Fair Work Act.
In such a world there is a new four letter word: Debt. Unfortunately, despite their reluctance to utter it, it is one to which our Government, in this Budget, appears to have become addicted.
(1.) The H.R. Nicholls Society was founded in 1986 by Peter Costello, Ray Evans, Barrie Purvis and myself to stimulate "debate concerning the role and purpose of trade unions, the Arbitration Commission and our various State wage-fixing tribunals".
(2.) The text has been very slightly edited to alter references that would now be anachronistic. The full text as delivered can be found at: www.hrnicholls.org.au
(3.) John Stone, "The future of Mr Kevin Rudd", National Observer, No. 78, Spring 2008.
(4.) On 4 May, Mr Rudd announced changes to the government's proposals, delaying introduction of the CPRS by 12 months and significantly softening (though not removing) its adverse economic consequences for a further 12 months.
(5.) John Stone, "Rudd set to reprise Whitlam's mistakes", Australian Financial Review, 25 February 2009.
(6.) John Greenwood, "How to escape from balance sheet recessions: lessons from Japan", paper given to the Special Meeting of the Mont Pelerin Society, New York City, 7 March 2009.
(7.) These recessions might also be known among professional economists (among whom I do not claim to be numbered) as "Fisher recessions", after the American economist Irving Fisher. See his article, "The debt-deflation theory of great depressions", in Econometrica, 1933, pp.337-57 (especially 341-42).
(8.) John Greenwood, op. cit.
(9.) Kevin Rudd, "Global fix for a global problem", The Australian, 6 March 2009.
(10.) John Stone, "The future of Mr Kevin Rudd", op. cit., pp. 8, 16.
(11.) Ibid., p. 16.
(12.) An appendix to the H.R. Nicholls Society address (not reproduced here on space grounds) spelled out both the background to the lecture and a staccato time-line of labour market events during the subsequent 25 years.
(13.) Michael Costa, "Unions may yet rue Rudd's IR reforms", The Australian, 20 March 2009.
(14.) John Stone, "The future of Mr Kevin Rudd", op. cit., p. 13.
(15.) John Stone, "1929 and all that", the 1984 Shann Memorial Lecture, University of Western Australia, 27 August 1984, p.37.
(16.) Amity Shlaes, The Forgotten Man: A New History of the Great Depression (New York: Harper Collins, 2007/Harper Perennial paperback, 2008).
(17.) Updated Economic and Fiscal Outlook (UEFO), February 2009, Appendix A: Policy Decisions taken since the 2008-09 MYEFO [Mid-Year Economic and Fiscal Outlook].
(18.) Among whom I number myself.
(19.) Budget Paper No. 1, Budget Strategy and Outlook, Statement 3, Fiscal Strategy and Outlook, pp. 3-6. This claim, and others such, is repeated on numerous occasions throughout Budget Paper No. 1.
(20.) Ibid., Statement 1, Budget Overview, p.1-36.
(22.) Ibid., Statement 7, Asset and Liability Management, p.7-4. See also the ludicrous Chart 3 in Statement 3 (p.3-9), purporting to underpin this claim.
(23.) Ibid., Statement 4, Assessing the Sustainability of the Budget, p.4-10.
(24.) Ibid., Appendix B (Medium-Term Analysis Methodology) to Statement 3, p.3-23.
(25.) Ibid. Note that there appears to be an inconsistency here with the projections in Table 1 of Statement 1 (p.1-7); on the basis stated, NAIRU would be reached by June quarter 2016.
(26.) Ibid., Statement 4, Box 2 (IMF research on the general dynamics of recessions and recoveries), p.4-14.
(27.) "Flash estimates for the first quarter of 2009", Eurostat news release, 15 May 2009, at: http://ec.europa.eu/eurostat
(29.) "Europe in deepest recession since War as Germany suffers", The Telegraph (London), 15 May 2009.
(30.) "Japan's economy suffers record plunge", The Telegraph, 20 May 2009.
(31.) "US economy to contract 2pc this year, says Fed", The Telegraph, 21 May 2009.
(32.) "More banks may have to be nationalised, says IMF", The Telegraph, 20 May 2009.
(33.) "Britain's AAA rating under review for first time in 30 years", The Telegraph, 21 May 2009.
John Stone is a former Secretary of the Australian Treasury and Senator, and is the founder of the Samuel Griffith Society.
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|Publication:||National Observer - Australia and World Affairs|
|Article Type:||Company overview|
|Date:||Sep 22, 2009|
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