Australian Election : Fetishizing The Surplus

Economist John Quiggin on the state of the Australian economy
by Gordon Campbell

If Kevin Rudd does lose this election, a prime reason will be his inability at staying on message. Instead of keeping a positive focus on promoting Labor’s track record of steering Australia through the Global Financial Crisis virtually unscathed – which would make it the natural party to lead Australia through the troubled global conditions ahead – Rudd spent most of the campaign on the negative tack of trying to scare the voters about Tony Abbott and his intentions.

Abbott may well be about to slash public services. (He has promised to get rid of about 12,000 public servants.) But pitching your tent on the opposition’s territory is a high risk strategy for Rudd – as a scaremonger, is he all that more credible a political figure than Abbott?

Crucially, the scare tactics have eclipsed Labor’s main claim to re-election : its handling of the economy, via its textbook execution of a Keynesian response to recession. The relatively large stimulus – applied in Australia and China alike – has worked, and New Zealand firms have enjoyed the side benefits of Labor’s economic strategy. One of the champions of Australia’s economic stimulus approach has been University of Queensland economist John Quiggin. For years, Quiggin’s blog has offered a perceptive commentary on political and economic events in Australia. For New Zealand readers, Quiggin is particularly interesting because of his Transtasman perspective. For instance, this August 5 column on New Zealand’ s recent economic history is a must-read evaluation of our neo-liberal experiment. It concludes: “Anyone who could seriously suggest NZ as an economic model should not be entrusted with the management of our economy.”

Werewolf editor Gordon Campbell spoke by phone to John Quiggin about some of the economic issues relevant to the current election:

Campbell: Almost alone among the OECD club of developed countries, Australia avoided recession in the wake of the GFC, kept inflation in check, dealt effectively with the housing bubble and the negative levels of household debt inherited from the Howard era, and kept unemployment in check. Shouldn’t a grateful nation be flocking to re-elect Labor on the back of those accomplishments ?

Quiggin : It should, but there‘s lots of political science research that voters pay no
attention to international comparisons. So they only look at Australia and where they expect that should be, and I think they’ve been fed an unduly negative picture even there.

Even so, could Labor have done a better job of selling its track record more effectively ?
Yes. The fiscal stimulus that Labor adopted in 2008 and 2009 was highly effective. But really, I feel that the Treasurer for most of that period [Wayne Swan] ran away from that, and back to the comfort of discussions on getting back to surplus as fast as possible.

Yeah, it was interesting that Swan seemed to treat the fiscal stimulus as a GFC aberration, and not something that good governments would normally do. Wouldn’t you have expected a Labor Treasurer to be a bit more forthright about resorting to standard Keynesian solutions during a recession?
Well, I think the government – and particularly Swan – were very much dominated by the kind of market liberal ideology that pre-dominated up until the crisis. And really, they were very keen to treat it as you say, as an aberration.

But to come back to the present day. If your argument is right and the Australian economy was steered relatively well by Labor during the crisis, how do you explain the fact that the economy is taking on so much water right now ?
Its slowing down a little. So we’re seeing the end of the construction phase of the mining boom and also a decline in minerals prices, but I think the slowdown we’re seeing is pretty much within the ordinary ups and downs that you’d expect over the course of the business cycle.

Really? But you will be aware that in some quarters, Australia is being depicted as quote, the Ireland of the Antipodes, unquote. Like Ireland, it did well for a while by having access to a huge nearby market but it now seems unable to cope given that the demand for its resources has petered out, somewhat. Obviously, you don’t share that sense of doom and gloom.
No. Obviously, the minerals boom was a nice bonus. But its only a relatively minor part of the economy and I think that role has been over-stated. In many ways the comparison to Ireland seemed more appropriate possibly six years ago when we were relying on what seemed like an unsustainable housing boom. We’ve really managed at least to get household savings back into shape, and to get house prices somewhat more in line with reality, since then. So I‘d say we are less vulnerable to an Ireland-type shock now than before the Global Financial Crisis.

And to repeat : you would say this was due to good political and economic management over the last few years, rather than to any mineral resources El Dorado.
It came down to two parts. First, our Reserve Bank strongly discouraged the boom on the way up, and it tried to discourage irresponsible lending, with at least some success – unlike the situation in many other places. So they managed the housing boom as well as they could. They probably had some good luck there, as well. And if we look at the minerals boom, it crashed pretty sharply in the immediate aftermath of the crisis. It was only when China and Australia both adopted fiscal stimulus policies that we saw a recovery. So I don‘t think it was the minerals boom that protected us from the crisis.

Yes. But your critics would reply that the dip in minerals prices you mention was only temporary. Like them, I could cite figures that the mining industry doubled its share of national output to 10% of the Australian economy in less than a decade. Exports relating to exploitation of natural resources now account for 60% of total export earnings – and moreover, while the mining sector has enjoyed growth by 7.5% over the past decade the rest of the Australian economy has expanded by around 2.5%. All of which can be taken as,evidence of Australia’s fabled two track economy in action.. My question being – do you think the Rudd/Gillard governments have managed growth in the non-minerals sector of your economy any better than the Key government has managed our economy here?
I’m going to come back to fiscal stimulus. Because I think the important point is – we wouldn’t have had a recovery without China, and China’s recovery was in turn due to fiscal stimulus. So the idea that this [ the fiscal stimulus] didn’t matter says – fiscal stimulus worked so well in China that it lifted Australia’s boats but it doesn‘t work at all in Australia. I think that argument is just crazy.

As for the other [the comparison with New Zealand] I wouldn’t contrast industry policy, which is very difficult to do. I would say that for the fourth or fifth time in a row Australia has had better fiscal policy than New Zealand. Going right back to the 1980s New Zealand has repeatedly adopted a contractionary fiscal policy, been cheered for it, and had disastrous outcomes. Australia has consistently been more expansionary, and has done better.

At the time though, business wisdom and the Coalition leading lights – such as Tony Abbott and Malcolm Turnbull – were arguing against the fiscal stimulus and advocating sweeping tax cuts instead. In your opinion, what would have been the outcome if those policies had been adopted in Australia in the wake of the GFC?
There’s two possibilities. One, that the tax cuts would have been as large as the stimulus and we would have had the same short run effect – but we would have had a much larger structural deficit. The alternative – which seems more plausible is that we would have relatively small permanent tax cuts and we would have had the same experience as other countries which have refused to undertake fiscal stimulus, or had a small stimulus and scaled it back very fast. Which is what nearly everybody has done. And the results speak for themselves.

Yes they do. And yet, this is the kind of argument that Paul Krugman always runs as well – that the stimulus is never big enough, and is never maintained for long enough. To some extent, isn’t this merely the flipside of the right wing’s tax cuts argument, that it never goes deep enough and long enough, for nirvana to be reached ?

Yes. But that’s not what I’m saying about Australia. Our stimulus was appropriately large, and it did achieve the desired outcomes.

OK, then lets bring this back up to date. What changes in fiscal and monetary policy can we expect to see under a Tony Abbott government?
Not a great deal, as long as good conditions continue. The real concern is if there is another crisis. Given his rhetoric, Abbott is locked into not undertaking any kind of stimulus. He’s locked into what is essentially an austerity view of the world. If we have another severe recession I would expect to see austerity policies, and with the same disastrous outcomes as has happened everywhere else.

Right. And as in New Zealand, balancing the budget is being treated by Abbott not so much as a tool to create jobs and economic growth, but as an end in itself. It always sounds virtuous – but with demand from China going off the boil somewhat, should balancing the budget be being treated as a high priority ?
The budget balance should be a tool of policy. So obviously, we have to have budget balance in the long run, which means we have to have surpluses at least some of the time. But Abbott’s vision is one of attempting to maintain the budget in consistent modest surplus. With the implication that if the budget should fall into surplus it should be wound back very fast. That’s essentially a failed policy.

Yes, and we saw that failure being manifested in the debates the other week when shadow Treasurer Joe Hockey said a Coalition government would rule out cuts in health, education, defence, scientific and medical research – but would cut what he called “waste” in other areas, and would not raise GST. At least, not until after he’d had a review, and let people vote on it. Which seems like shorthand for saying that he’d raise GST in the Coalition’s second term. Is that how you read the GST issue ?

I guess I don’t read the first part of it. This has happened many times before. I assume that after the election they will ” discover the situation is much worse than they thought” and will “need” to have the cuts after all.

And do you think the $70 billion in figure that Labor keeps mentioning – as the figure that Abbott will need to cut to keep his budget balancing promises – is accurate ?

There are bits so far that I’m doubtful about. Its very hard to get an accurate number because the Coalition still hasn’t released costings [ and/or the research behind those figures] for a substantial number of its policies. So I wouldn’t hang my hat on the $70 billion. {Since this interview, Joe Hockey has released a seven page paper detailing $31 billion in costings but without the full basis for those calculations. Labor has since claimed even these figures have an $11 billion hole in them, given certain assumptions. ]

But assuming the cuts will be sizeable and Abbott is serious about his budget balancing intentions, this will entail reducing government expenditure, just as the economy is weakening. The logic of that situation is that Abbott is only likely to make things worse.
That is my expectation. If I can just go back for a moment – although they’re now denying that cuts [to public services] will occur, Hockey was in the Financial Review as recently as May to a business audience, and promising that there would be large cuts. So I think [the denials] are understood to be the usual pre-election manoeuvring. What we’ll see I think, is the cuts in company tax – there’s a bunch of goodies that the Opposition has promised, that will have some stimulatory effect. The [other] cuts they’re proposing will have a much larger contractionary effect. It depends on how they’re willing to tie themselves to returning to surplus and how much the economy slows. If we have a substantial slowdown their position will be very bad. Because they have to get back to surplus by the time of the next election or they’ll look like fools. And the worse the downturn is, the more destructive that policy will be.

In New Zealand, that sort of pain would routinely be depicted as a sign of virtue, that the painful medicine was working.
Well, New Zealand has had 30 years of painful medicine, so far, and they’re 30 % behind Australia in national income. So that’s my view on that.

Which reminds me. Three years ago Tony Abbott was arguing – wrongly, as everyone from ANZ economist Cameron Bagrie to Prime Minister John Key conceded at the time – that New Zealand’s management of its economy had positive lessons to offer Australia. Has there been any further advocacy of the“ NZ approach” within Abbott’s recent statements ?
Yes, I have a quote right here. Its from Hockey, not Abbott. In his response to the most recent budget, Hockey pointed to New Zealand as a model. On the basis that it was returning faster to surplus.

OK. Do you think New Zealand has anything positive to offer Australia in terms of the policy mix it has been following ? Because in the classical view, recessions and depressions in a market economy are self-correcting. By this reasoning, a government’s best strategy in a recession is to put on the fiscal brakes, show restraint and leave active macroeconomic policy to the Central Bank because governments will always (a) get it wrong and (b) its attempts at stimulation will only “crowd out” private investment. That’s roughly been the prevailing wisdom here in New Zealand. But globally, do you think the history of the last five years has confirmed the wisdom of that approach ?
Obviously, it has confirmed the utter un-wisdom of that approach. It has been adopted on a widespread scale, most obviously in Europe, and it has proven utterly disastrous.

But to go back to the comparison with New Zealand. While your Central Bank Governor is cutting growth projections back to 2.25% there are some who are talking of 3% to 5% growth here next year. Does that level of optimism strike you as (a) unrealistic and/or should it be taken (b) as a sign of how far New Zealand has lagged behind Australia, and how much slack there is for us to pick up ?
That’s primarily the case. There’s two kinds of slack we can talk about here. One is the most recent business cycle. Where New Zealand had a recession – a double dip recession – and Australia didn’t. So, on all normal experience, you’d expect to see a period of rapid growth to catch up all that ground lost in the short macro term. Over and above that of course, there ‘s the process whereby one would normally expect economies with essentially similar structures and essentially similar work forces, to converge on GDP levels. But even at that rate, you would still take over a decade of the kind of growth differential that you mention, for New Zealand to catch up.

Finally, I’d like to mention a theoretical point. Earlier this year, you pointed out how technology has reduced the cost of most physical goods relative to the “human services” that require skilled labour. At the same time, the fact we’re living longer and the rate at which unskilled jobs are vanishing have both increased the importance of health and education. To satisfy the un-met needs in human services over the next decade, you have calculated that this would require something like an additional 3% to 5% of Australia’s GDP,, or around $40 to $65 billion a year. Only government can invest in human capital on that scale. Even so, does the political appetite exist anywhere in the developed world, to address those needs?
No, it doesn’t appear to at present. I think we’ve been dominated by the global financial crisis, and by perverse reactions to that crisis. The degree to which we’re seeing positively destructive counter trends varies. But no, we’re not seeing anything of the kind of investment that’s needed [ in human services]. Unfortunately.

That scenario is an argument for raising taxes though, isn’t it – or at least its an argument for shifting the revenue burden back towards the relatively affluent who have gained the most from the tax cuts of recent years.
And who, of course, have gained massively in other respects as well. I mean if you translate this to the US, you get that entire sum …just from the extra income that’s gone to the top one per cent of income distribution. Now, things aren’t as extreme as that in Australia and New Zealand, but there still has been very substantial growth in incomes at the top, and that’s been re-inforced by tax cuts.

If Abbott is elected on September 7th and most poll readings are indicating that is likely , should New Zealand firms be feeling any concern about that prospect?

Obviously, New Zealand benefitted significantly from the fact that Australia didn’t go into recession as well. I think should we have another crisis we can expect to see similar policies then being adopted in Australia and New Zealand, and – if you have the analysis that I do – that would suggest it would be substantially worse for New Zealand than it has been, where New Zealand adopted those kind of policies while Australia engaged in a substantial fiscal stimulus.

And speaking personally…looking at the Australian context, what would be your own biggest fear about an Abbott victory?
There are two things. One that is important to me personally is that he will almost certainly – and has announced he will – scrap our emissions trading scheme. And the policies [on emissions] he will have won’t even meet the very limited 5% target we have for reducing emissions. That is, in fact, my biggest concern. The other things he is likely to do will be bad – but assuming from current projections that it won’t be an overwhelming victory – he will be out again in three years. So you shouldn’t get too worried about changes in government. But with those policies [on emissions] that is something where I think the delay could have very bad consequences – for Australia’s role in the world, anyway.

ENDS