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, everything’s changed.
It’s December 1991.
I reported for duty to the office of my new boss, John Dawkins, the new Treasurer in Paul Keating’s new Government. With official forecasts indicating a strong rebound from the recession officials were wary of additional fiscal stimulus. And after some hefty surpluses the budget had plunged back into deficit and financial markets were continuing to fret about our external deficits.
Officials’ optimism and the market’s pessimism increased the difficulties associated with an immediate fiscal stimulus. And so it was that most of the action in the new statement ended up in the out-years of 1993 and beyond.
Infrastructure projects would take a while to crank up. And Dr Hewson’s Fightback! package would be phased in several years away. Hewson’s personal income tax cuts were predominantly funded from fiscal drag. And so Keating’s energies went less into fighting our way out of a recession and more into crafting a fiscal package that delivered something like Dr Hewson’s income tax cuts without Dr Hewson’s GST.
But this was all predicated on the forecasts. It turned out they were over-optimistic. And with bad numbers persisting and the statement a few days away, all hands were recalled on deck one Sunday to give more immediate oomph to the package.
The result? An additional Family Allowance payment. 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? I thought it was the most clear eyed policy in the package and watched it feed through into consumption which was the point of the exercise.
But the short term stimulus in the package was painfully small – at 0.15 percent of GDP. And it left Keating a hostage to fortune with delays in cranking up the infrastructure and those L-A-W tax cuts in the out-years looking more and more D-U-B-I-O-U-S.
And now as your unclouding paper spins you back to the present you can appreciate Ken Henry’s fiscal war cry. Rudd’s package unloads one percent 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 many of whom will spend it quite quickly.
Having been impressed with the Government’s resolution and fleetness of foot, my remaining anxiety is that some arbitrary line will be drawn at the point where the surplus goes into deficit. Let’s hope it’s not necessary. But if it is, even if we hadn’t racked up seventy odd billion dollars in surpluses in the last decade, we could and should deficit finance the fiscal stimulus we need.
The US is in a fine mess, with a deficit likely to top a trillion dollars! Of course they shouldn’t have turned the surpluses of the late 1990s into the deficits of 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 Rudd Government hell if it took the Coalition’s string of surpluses and turned it into a deficit? Too right they 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 have 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 an excellent 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?”. But now they’re eating their words. Decisiveness in economic management is a political winner.
So while I’m only an economist, if I were a Government politician I know which path I’d choose. If the economy needs more stimuli I’d take the nasty hits from the Opposition rather than die the death of a thousand cuts entailed in an ailing economy.
Dr. Nicholas Gruen is the Chief Executive of Lateral Economics.
As published in The Australian Financial Review on October 21, 2008.