A spending bonanza that lingers in the mind but not in bottom lines
Last week the government started taking credit for Australia's economic performance through the global financial crisis.
Kevin Rudd claimed to be proud that Australia was the only developed economy not to have experienced a recession, and of having protected Australian jobs. Others complained that the government didn't get enough credit for our economic performance during that time.
When many Australians think of the stimulus packages they remember hastily built school halls, pink batts, house fires and deaths. They may remember the billions sent out in cash handouts that got spent on the pokies, strippers, overseas holidays and plasma televisions.
In short, the government's recollection of the GFC is very different from what ordinary Australians remember. Australians may think about the $167 billion of accumulated budget deficits the Rudd-Gillard governments have racked up so far, and the debt that won't be paid off until 2021.
Many people forget that a return to surplus doesn't mean the debt is written off. We'll be paying for the stimulus packages for another 10 years. For all the talk of saving jobs, the unemployment rate in November 2007 was 4.5 per cent (at the bottom of Treasury estimates of the non-accelerating inflation rate of unemployment); that figure had risen to 5.9 per cent by June 2009.
Of course, we're invited to believe it could have been worse. Treasury forecast without the stimulus spending that unemployment would peak at 10 per cent by mid-2010. With the stimulus it was expected to exceed 8 per cent.
Without a doubt the federal government panicked in late 2008. Lenore Taylor and David Uren, in their 2010 book Shitstorm, relate how an inexperienced first-term government and a Treasury still shell-shocked from "the recession we had to have" in the early 1990s decided to "go hard, go early, go household".
The big question is whether there is credit to be had. Sure Rudd, Julia Gillard and Wayne Swan were in office, but can they really take credit for Australia's economic performance during 2008-09?
The fact of the matter is Australia will have very little to show for all that spending but did avoid recession. Taylor and Uren are damning in their assessment.
"Had the economy behaved anything like Treasury's forecasts for it, no one would have begrudged the money spent," they wrote. "But now $75bn has gone, with a negligible addition to Australia's productive capacity. The debt must be serviced and in due course paid back. In the context of a $1 trillion economy, it is not a crippling burden, but there is depressingly little to show for it."
Despite telling the Senate in early 2009 that Australians might never know if the stimulus packages had worked, Ken Henry later admitted: "History may judge that first stimulus package was too early, too large or the configuration of it was wrong, but my view was that we needed to do something big and do it quickly."
Too early, too large, wrong may not be as snappy as "go early, go hard, go household", but that seems to be the assessment.
In the years since the GFC a small but growing academic literature has evaluated the role government played in "guiding" Australia through the crisis. Tony Makin of Griffith University has done a lot of the heavy lifting. He is sceptical that the stimulus packages prevented a deep recession.
The thing to remember is that the Australian definition of recession is somewhat arbitrary. Two consecutive quarters of negative GDP growth is considered a recession. Despite a massive spike in unemployment and huge business losses, Australia did not experience two consecutive quarters of negative GDP growth.
Two of the three components that make up GDP, however, did experience two negative growth quarters. But the government ended up spending so much money that all that was masked in the national accounts. Real GDP per capita, however, did experience three consecutive quarters of negative growth.
Some may say that while Australia did not dodge a bullet, the government did.
Makin estimates that net foreign demand saved Australia in late 2008 through early 2009, and not government spending. He reckons the stimulus money started flowing only long after it was necessary.
Of course, that is the fundamental problem with activist fiscal policy: it simply takes too long to spend a lot of money. But the objective in 2008 and 2009 was to spend, spend, spend. It didn't matter that the money wasn't well spent.
The failure of stimulus spending is more obvious in the US than in Australia. The US government justified its stimulus spending by arguing that unemployment might rise to 8 per cent, only to find that unemployment rose much higher. This has led some to argue that the US stimulus was too small.
But the fundamental question is this: can spending money you haven't earned, on stuff you don't need, ever create economic value? All those who would argue that the Australian government saved the economy, or that the US should have spent more, need to address that question.
It is true John Maynard Keynes argued that Treasury could cure unemployment by filling old bottles with bank notes and burying them in disused mine shafts and have the private sector dig them up again. By that standard building school halls must be an improvement. But this sort of activity simply isn't sustainable.
The lack of sustainability in government spending was on display this week. Government spending expands industry beyond the size that the market would sustain. When the spending ends, the industry collapses. We saw that with pink batts and now with the rebate for solar hot water.
In the meantime people have invested their own capital and lives in business models that rely on unsustainable government spending. So it's clear that the stimulus packages weren't good investments and probably did little to shield that Australian economy from the GFC. Why harp on the issue now?
Well, we're still living with the after-shocks of that massive government spend. In the first instance taxation will have to be higher than it otherwise would have been to pay off the debt incurred by the packages. Government programs that would have been undertaken that are now shelved are part of the hidden cost of the stimulus. Shovel-ready but unwanted school halls will stand for many years.
The more important consideration is that the government put in place a fiscal plan to spend up big and then return to surplus by 2012-13. By May the Treasurer will have to make good on that plan. If he cannot deliver a surplus next financial year, then the stimulus plans will have failed by his own standard. They certainly haven't succeeded by any other standard. But if there is no surplus then even the ALP will have to accept the error of its ways.
The truth is the Australian economy performed during the GFC despite the stimulus packages. A generation of serious economic reform combined with swift monetary policy to shield the economy from the worst of the crisis. The best that can be said for the executive is that they didn't get in the way of the policy response.