The pitfalls in talking up the economy

Prime Minister Kevin Rudd and Treasurer Wayne Swan have been happily espousing the need to forget the doom and gloom mongers and go out and spend, spend, spend.

$10.4 billion will be distributed to Australia's aged pensioners, carers and families to be put back into the economy by spending to keep our local businesses operating and people in jobs. What businesses are we talking about?

The most obvious are retail, hospitality, tourism, entertainment, car dealers, real estate, and so on.

Spending, it appears, is the solution to recession and the short cut to the survival of our local industries and businesses, returning money to Treasury via GST, PAYE, taxes on profits etc.

The recent “glad tidings” from Mr Swan, confirmed that Australia is not in recession, and although we are very close to it, should not talk of gloom and doom.  Unfortunately the figures he quoted were for the September quarter before the real impact of the global crisis on the Australian economy was emerging.

Australia’s iron ore, coal and agricultural exports provided a timely buffer with a record trade surplus during a period of high iron ore prices and the approaching northern winter for coal demand. It was also before miners were being asked to delay shipments, cancel sales negotiations and then, to cancel orders. The spot market died.

At that time Mr Rudd was espousing that our strong and well regulated banking systems gave Australia a major advantage over other countries and he was confident that China’s demand for our iron ore and coal would continue, although at a slightly lower level.

What was needed was quick, innovative and positive action combined with strong leadership. Despite clear evidence that this crisis was already seriously impacting on China’s economy and declining demand for Australia’s resources, Rudd committed $10.4 billion to a consumer stimulus package to revitalise our economy. The intention was to produce a slower decline in the December quarter and suggest a softer rather than a hard landing for Australia's economy. The 2009 March quarter however will reveal the real state of the economy.

Is the strategy realistic in changing times?

Since the depression, spending has been a successful strategy to drive demand for local industries and keep the money in a country to revitalise the economy.

That was true however, before globalisation, rampant outsourcing and decimation of our skills base and local manufacturing industries. Our domestic industries would have been major beneficiaries from a spending spree except that this looming recession cannot be compared with earlier downturns.

A nation with thriving industrial and manufacturing facilities and a diversified skills base has been decimated. The skilled and unskilled job market declined as high labour content manufacturing industries migrated to China and Asia for cheaper labour and other cost savings.

Gone, the locally produced clothing, shoes, sporting goods, equipment, toys, hats, shoes, appliances, textiles, furniture …