Election economics is all about saying that you can manage the economy better than the other side. Party leaders like to cast themselves as fiscal conservatives before elections. Recall that our previous Prime Minister claimed to be a fiscal conservative before he suffered a GFC road to Damascus experience.
Julia Gillard, so far as I know, has made no claim to be a fiscal conservative but I am sure she would say she was one, if asked.
As the road to Damascus has come into this piece, perhaps we can extend the biblical allusions and say we should know them by what they do; not what they say. Although Ms Gillard admits that the Rudd government (without ‘programmatic sphericity’ it must be said) had lost its way; apparently wild spending was not part of that misadventure.
Ms Gillard is fond of taking her credit for the stimulus that saved Australia. She has on occasion excused the excesses and waste of the BER on the need to stimulate the economy. And, on their face, ‘the facts’, according to the Government, are impressive: 225,000 jobs created or saved; recession averted; and the budget back into surplus in three years time.
If it were only all true it would be an impressive tale. Plausibility trumps facts is the real tale.
Australia’s economic performance has been impressive since the GFC. Success as they say has many fathers. Fiscal stimulus wasn’t one of them. None of them had anything to do with the Rudd government’s economic management. They were, in no particular order: China’s strong growth coupled with Australia’s mining exports (the continuing mining boom); the sound position of Australia’s banks (due less to their far-sighted management than to the fact that they were predominantly borrowing abroad to fund Australian investment rather than acquiring dodgy overseas assets); the scope the Reserve Bank had to reduce interest rates (itself also a product of the mining boom), and finally the Howard and Costello fiscal legacy of a surplus budget and zero net government.
Fiscal stimulus may have created some jobs but it probably extinguished others. Wild, willy-nilly, one-off spending simply cannot create sustainable employment. The figure of 225,000 jobs created or saved is a myth, which presumably fell out of a Treasury model. There is no substance to it at all. Such jobs have not been specifically identified nor could they be. Are we to believe that builders working on overpriced school halls would have been otherwise unemployed? Have you ever tried to get a builder? The ceiling insulation scheme may have drawn people out of unemployment. But it would have been far cheaper and less damaging to send them all on fully paid very long Mediterranean holidays.
To the extent temporary jobs were created at all they were very expensive ones. The government has spent big over the past eighteen months. Part of this spending, were the two so-called stimulus packages: $10.4 billion in October 2008 and the $41.5 billion in February 2009. Even at 225,000 jobs, that is $230,000 per job. If in fact, to be generous, as many as 50,000 temporary jobs were actually created then that is over $1million per job. The debilitating legacy of this spending is that net government debt will reach $90 billion by 2011-12.
Borrowing at this level, particularly when it is spent wastefully, puts upward pressure on domestic interest rates, even if all the borrowing is conducted overseas. Why; because the exchange will be lower, and imported inflation higher, than it would otherwise be.
The economy would now be stronger, if it had not been ‘stimulated’. Interest rates would be lower and builders and others occupied on redundant make-work projects would be employed more productively. And, of course, the Government might not have been fishing around for something to tax to bring the budget back into surplus. We might not have had the damaging and iniquitous mining tax.
When people are spendthrift and over borrow they have two choices: work harder and longer and/or cut spending. Governments don’t work at all; they live off the workings of others, so they can’t work harder. What spendthrift governments need to do is to cut spending. The soft option of taxing more inevitably damages the economy. That would be the result of the MRRT, if it were ever enacted. Hopefully, if Ms Gillard is returned, Colin Barnett will do his thing out West and mount a successful constitutional challenge. Then perhaps Ms Gillard would have to become a fiscal conservative and cut spending. But don’t count on it. Labor Governments have ways of making us taxed.