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Recovery calls for bold moves

By Nicholas Gruen - posted Friday, 24 October 2008


“Go early, go hard, go households.”

This slogan, coined by Treasury Secretary Ken Henry in discussions on the fiscal stimulus takes me back. To another time - long, long ago. Flashbacks are better suited to the silver screen than newspaper columns, but imagine if you will your paper clouding into soft focus and slowly spinning. As the hypnotic sounds recede, and the colours turn to sepia everything’s changed.

It’s December 1991.

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I report to my new boss, John Dawkins, the new Treasurer in Paul Keating’s new Government. Official forecasts indicate a strong rebound from the recession we’ve just had so officials are wary of additional fiscal stimulus. And after some hefty surpluses the budget has plunged back into deficit and financial markets are fretting about our external deficit.

Official optimism makes a fiscal stimulus pretty unnecessary - and the market’s pessimism make it risky. So the Government’s attention turns towards longer term fiscal measures. Infrastructure projects will take a while to crank up.

And Dr Hewson’s Fightback! package gives the Government the kind of political opportunity that doesn’t come along every day. His personal tax cuts are predominantly funded from fiscal drag - the increasing tax take as peoples incomes rise into new tax brackets. So Keating’s crafts a fiscal package that delivers something like Dr Hewson’s income tax cuts without Dr Hewson’s GST. But that’s in two years’ time.

We’re pinning a lot on those forecasts that the economy will recover on its own. But with the evidence mounting that the forecasts are over-optimistic all staffers are recalled one Sunday before the package must be finalised to give it more immediate oomph.

Someone suggests an additional Family Allowance payment though some senior officials regarded it as a frivolous way to stimulate an economy. Where’s the nation building in tossing cash at Australia’s families? It’s the most clear eyed piece of economic policy in the package and feeds directly through to consumption a few weeks later.

But it’s painfully small - at 0.15 percent of GDP. And it leaves Keating a hostage to fortune with delays in cranking up the infrastructure and those L-A-W tax cuts in the out-years looking less and less A-F-F-O-R-D-A-B-L-E.

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And now - as your paper spins you back blinking into the bright colour of the present - you can appreciate Ken Henry’s fiscal war cry. Rudd’s package unloads 1 per cent of GDP, most of it next month. We’re going much earlier, faster and harder than last time. And we’re unapologetic about one off giveaways to families who’ll spend most of it quickly.

Having been impressed with this Government’s resolution and fleetness of foot, my remaining anxiety is that it will balk at going into deficit. Let’s hope it’s not necessary. But if it is, even if we hadn’t racked up $70-odd billion in surpluses in the last decade, we should have no qualms about deficit financing further stimulus.

The US is in a fine mess, with a deficit heading above a trillion dollars! Of course they shouldn’t have trashed their budget - tuning hefty surpluses in the late 1990s into deficits in the 2000s. Yet, as newly ennobled economist Paul Krugman put it last Thursday “The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit.”

But back in Australia wouldn’t the Opposition give the government hell if it took the Coalition’s string of surpluses and started running deficits? Too right it would, just as the ALP would with roles reversed. But, if another fiscal stimulus proves necessary the government will have to decide. Politically they’ll need to choose between a faltering economy, rising business failures and unemployment - or giving their opponents some ammunition that they’ll use. Economically, one way spells misery, the other hope and a better chance of success.

I’ll bet some of the Government’s political advisers counselled against the bold approach the Government took last week. “Couldn’t we keep more of the surplus?; Have two bob each way?” Now they’re eating their words. Using the economic textbook to manage the economy decisively is a political winner.

I’m only an economist. But if I were a Government politician I know which path I’d choose. If the economy falters I’d fight recession. I’d take some nasty hits from the Opposition rather than die the death of a thousand cuts while I waited for recovery to come in its own good time.

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First published in the Australian Financial Review on October 21, 2008.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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