Economy heads for a grim recession

The Reserve Bank is widely expected to cut interest rates today.

The economy is facing such a grim future that one can support such an outcome. But no one, not even the RBA, is coming to grips with the main problem facing Australia, which is double-digit cost disequilibrium -- a severe lack of international competitiveness.

Just like Treasury's failure to be ahead of the curve in forecasting, the Reserve Bank's apparent failure to understand our most important economic problem is bad news for all Australians. Paul Keating spoke (after the event of course) about "the recession we had to have". The severity of the 1990-91 recession (with double-digit unemployment) was entirely due to mistakes by key officials, and Keating himself, but at least the then treasurer eventually recognised the mistakes and tried to remedy them.

Now the nation's leaders are walking unknowingly into a new economic crisis, ironically just as other developed nations are showing signs of recovery. Warnings have been sounded, and not just by this writer, and the only excuse for the steady tramp into recession is the insularity and self-congratulatory hubris of successive ministers and officials, especially those in Treasury.

Where is the Westminster tradition of strong, independent advice? Treasury (and the Reserve Bank) has many excellent and dedicated economists. Have relevant warnings been ignored, or have the fine economists effectively been nobbled? Fear that the messenger will be shot is a powerful nobbling device.

Why is Australia headed for a grim recession and why will it be seen by historians as a recession we did not need to have?

The short answer is that Australians have been enjoying the largest investment and export boom we shall ever experience. The prices of our exports have rocketed and the wealth has been spread about, not least because of Keating's national superannuation plan.

However, in retrospect, national savings were not raised sufficiently, despite treasurer Peter Costello's Future Fund and paying down the national debt bequeathed Australia by the Hawke-Keating governments.

In retrospect, the Howard-Costello government failed to encourage saving sufficiently, as it could have done by spending less, introducing tax incentives to save and creating a sovereign wealth fund modelled on Norway's highly successful fund of this sort. It was brave when it introduced its radical Work Choices legislation, which helped create jobs, especially in small business, but failed to sell this to the voters. A pity, as the record of real wage increases and employment growth under this legislation is simply stunning.

The Rudd-Swan government faced the harsh reality of a global recession and, advised by a deeply Keynesian Treasury, responded with handouts, vainglorious spending, including the national broadband scheme. The struggle against global warming added further spending and confusion.

Work Choices was junked, and regulationist zeal was high among the priorities of the Rudd-Swan government. When Julia Gillard replaced Kevin Rudd, the spending continued. All worthy causes -- education, health, helping the disabled. You name it, we have it, but only affordable on the proposed scale if the China boom was going to continue at double-digit speed forever.

Treasury (and RBA) forecasts at first failed to allow for the strength of the boom and when it turned, forecasts failed to be recalibrated down sufficiently. Finally in quick succession have come a series of forecasting snafus; budget deficit upgraded, growth predictions reduced and unemployment hiked, still too little, too late, but that is the way of things with traditional incremental approaches to the dark arts involved in trying to predict the future.