I suppose if you’re on the race track heading for a distant finishing line, one you can’t really yet see, even although your horse is tired and lagging way behind the field, you keep flogging it mindlessly, desperately hoping it will survive the race, buoyed by wild imaginings that it will get its second wind and bolt to the post. What else can you do? To acknowledge that the horse is moribund, to accept that it probably can’t even get to the finishing line, to have to dismount and quietly lead it back to the stables to be put out to pasture, would evoke ridicule from rivals and a realization by the betting public that the horse is finished, indeed was never really a starter. So you press on, convincing yourself that each shout of the race-caller confirms that you’re on track for victory, no matter how far ahead the other horses are. [more]
The horse is Debt and Deficit, out of Stimulus too Much, by the now-deceased Economic Credibility. It’s trained by newcomer Malcolm Turnbull who is yet to win a race on this track, ridden by apprentice Joe Hockey who still has a problem reading horse races, with Helen Coonan as the devoted strapper who thinks the horse can do no wrong. It is transported in a horse float labelled ‘Labor’s Debt Bombshell’, no doubt anticipating that Debt and Deficit will explode in the faces of the other horses, particularly the one way out in front. The horse’s owner, Federal Coalition, has a mixed stable of stayers – some now aging and close to retirement, some too cranky to put on the track, some too frisky to control let alone race, some youngsters that might become winners with more training, and some also-rans who will never make it.
In the face of the economic data that continues to emerge here and overseas, together with the considered opinion of most economists that the stimulus was necessary, was effective and needs to continue, and that the debt incurred is small and manageable, the only explanation for the Coalition’s persistence with Debt and Deficit and its insistence that the stimulus was too much and now needs withdrawal, is that it can’t think of anything else to do; it has no other horses ready to race.
Let’s look at the economic data. To date, Australia has avoided recession. The Federal Coalition would have us believe this was due to a combination of the Howard financial legacy, the sound well-regulated state of our banks, the interest rate cuts, the resurgence of China’s hunger for resources to feed its growing economy, and of course the GFC was not as bad as the Government insisted, leading to panic and cash splashed around recklessly to support an economy that hardly needed it, and jobs that weren’t going to disappear as imagined. In true Basil Fawlty fashion, the instruction went out from the Coalition spin doctors, ‘don’t mention the stimulus package’, which all duly followed.
Although everyone acknowledges the multiplicity of factors that contributed to the good outcome, asked on several occasions – surely the stimulus must have made a contribution to the good outcome – Joe Hockey had a simple answer: No – it was all the other factors. This came easy for Joe, who would have made a better contortionist than a jockey. He argued the Coalition line that it would support a stimulus, then that it wouldn’t, then that it was too much and poorly targeted, then that it would cause massive deficits and debt, then when the stimulus worked and things turned out better than expected, that the stimulus was hardly needed and should be withdrawn. Any internal inconsistencies in his argument were of no consequence to him, he rode Debt and Deficit as if it was a champion streaking ahead to the winning post.
A multitude of local economists, even some initially sceptical about the size and targeting of the stimulus, now acknowledge the stimulus saved us from recession, business failures and steeply rising unemployment. Add to that the opinion of the G20 leaders and finance ministers expressed only last weekend, the IMF, the OECD, the World Bank, the BIS, the governor of the Reserve Bank yesterday and the Secretary to the Treasury last week, and you have a pretty impressive body of opinion extolling the benefit of, indeed the necessity for the stimulus program, and the need to continue it until the economy shows it no longer needs the stimulus. Of course all these authorities might be wrong, and the few sceptics, Turnbull, Hockey and Coonan right. But who would back them in?
Even after hearing what Glenn Stevens said yesterday at the Greens-initiated Senate hearing, Coonan has her own twisted interpretation. Stevens said: "Debt levels will not put significant upward pressure on borrowing costs.” In other words debt will not increase interest rates, and "I think it is a bit hard to claim that as of this moment there is too much growth in the economy so I haven't really had a serious problem with what has occurred on the fiscal front thus far." In other words the stimulus package was responsible and acceptable and still needed. And about the danger of rising interest rates: “I would say myself that actually it's the possibility of very low interest rates for a long period is the bigger contributor to likely asset imbalances. That's actually an argument I think for making sure that the return towards normal on monetary policy is not delayed."
Instead of seeing that Stevens was saying a return to ‘normal’ interest rates from the current ‘emergency’ levels was desirable, and keeping them low a danger, Coonan’s take was: “He was very clear that if that spending were cancelled, that is the unspent stimulus, interest rates would result, at least interest rates would remain lower for longer.” whatever that means. Steve Fielding though takes the cake with: “Reserve Bank in no uncertain terms said that if the government spends another $20-$30b it will put upward pressure on interest rates.” which is not what Stevens said at all. This is the syndrome of hearing what you want to hear.
Today the Final Budget Outcome 2008-09 “...recorded an underlying cash deficit of $27.1 billion (2.3 per cent of GDP) for 2008-09. This outcome was $5.0 billion better than expected at the time of the 2009‑10 Budget, reflecting lower than anticipated spending of $2.2 billion and higher cash receipts of $2.8 billion.” Less was spent on unemployment benefits as fewer than expected were unemployed. This will come as a nasty shock to the Coalition who predicated its ‘debt and deficit’ campaign on huge deficits going on for years leading to a $315 billion debt, an appalling burden for future generations. In February Turnbull predicted every man woman and child in Australia would be weighed down by a debt of $9500. That was wrong even then as this piece, REALITY CHECK: "It's the children I'm thinking about”, by Peter Martin shows. So horrifying was this prospect that the Coalition constructed a ‘debt truck’ adorned with ‘Labor’s Debt Bombshell’ complete with a menacing bomb on which '$315 billion' was inscribed. This too was wrong - the debt truck will need to be scrapped. Earlier this month Martin wrote another piece The Coalition Debt Truck: Running on empty in which, quoting an estimate from Westpac, he pointed out that “Australia's government debt is set to top out at just $108 billion rather than $200 billion or more, used by the Coalition to justify its claim that the Rudd government plans to "lump every Australian with $9500 in debt". Today’s budget figures reinforce that estimate.
So where are the horses at? The stimulus has worked no matter what the sceptics say. It has saved Australia from recession and high unemployment. Consensus is that it needs to be continued until the fragile economy is stable and self-sustaining. The Reserve Bank asserts that the debt incurred from the stimulus is modest, especially when compared with other countries, is quite manageable, and will not put upward pressure on interest rates. The latest budget figures and projections indicate that the total debt will be nowhere near the grossly exaggerated $315 billion that the Coalition predicted; it may end up being around half of that.
The call for drawing back the stimulus is based on the Coalition view that it is more important to avoid debt than to build infrastructure in schools and major infrastructure such as roads, rail, ports and broadband. And preserving jobs and businesses in the process is also secondary to avoiding debt. This is consistent with the Coalition’s position over many years – bringing in surplus budgets at the expense of needed infrastructure, which it neglected for most of its four terms.
The Coalition is wrong on every count. Yet it flogs its exhausted Debt and Deficit relentlessly, it insists its horse is on track to victory; it backs its trainer, its jockey and its strapper; it believes the punters will bet heavily on it. It has wagered a lot of money on this horse, so can’t bring itself to retire it from the race, even although most of the smart money is on the Government’s horse. It argues that white is black; that it is right, that the horse will survive and in an unprecedented burst of pace will take the prize.
But let’s face it, if Debt and Deficit is not already dead, it’s moribund. To continue to ride it until it finally breathes its last, looks foolish. Its sire, Economic Credibility, would turn in his grave and wonder how he ever got mixed up with Stimulus too Much. Getting a more vibrant horse that has some hope of winning seems what sensible owners would do, a horse that the trainer can handle, the jockey can ride, the strapper can nurture lovingly, one that the punters might back. That would seem more rational. Admittedly though, rational behaviour doesn’t always come naturally, as the Coalition has so amply demonstrated.
What do you think?