Did Labor Really Save Australian Economy?

By Niall Ferguson

In the US GFC brings to mind the recipe for deep-fried chicken devised by Colonel Sanders. KFC stands for Kentucky Fried Chicken. Here, GFC should stand for Gillard's Fraudulent Claim.

The claim in question is that it was the fiscal stimulus injected by the Labor government that saved Australia from much more serious recession. According to one recent election ad, "Labor did what it had to do to avoid recession and protect jobs." The ABC's Kerry O'Brien unthinkingly recycles this line when asking Tony Abbott how he would have saved the 200,000 jobs Labor "created". It must have been music to Julia Gillard's ears when Nobel Prize-winning economist Joseph Stiglitz gave her his seal of approval recently. He praised the government's debt splurge as "one of the best-designed Keynesian stimulus packages of any country".

Now, I like Stiglitz. Unlike some Nobel prize winners, he hasn't allowed the Swedish central bank's gong to super-size his self-esteem. But this is not the best argument I have heard him make, for three reasons.

First, he is appraising his own handiwork, since he was involved in the package's design. Second, he falls into the "post hoc ergo propter hoc" trap. Just because event B, an economic recovery, happens after event A, fiscal stimulus, doesn't mean that A caused B.

True, the Australian economy has posted just one quarter of negative growth since the crisis began in 2007, a far better showing than any other English-speaking economy. Unemployment peaked at 5.8 per cent, whereas in the US it rose above 10 per cent.

But is Stiglitz sure -- I mean graduate-seminar sure, as opposed to Fairfax-press sure -- that this was really due to the government's $52 billion cash splash?

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There's no denying the magnitude of the Australian handouts. If you rank developed countries' fiscal packages for the period 2008-2010, Australia's ranks third as a percentage of GDP, behind only the US and South Korea. So why did Australia's stimulus work so much better than America's? Spare us the fable that it was better designed. After the home insulation fiasco and the now-proven waste on new school halls, that can't withstand serious scrutiny.

Which brings me to problem two with the argument Labor saved Oz. Strangely, the professor has overlooked the other, more plausible explanations for Australia's relative outperformance. Step forward five candidates with a better claim to the credit: 1. Lady Luck 2. The Howard government 3. The RBA 4. China 5. The mining industry.

Let's begin with providence. Unlike the US, not to mention Britain, Ireland and others, Australia didn't have a sub-prime-fuelled housing bubble. Sure, prices went up substantially, but they also started correcting in 2003, well before others, and subsequent cost increases reflected a structural gap between supply and demand rather than crazy credit.

Australia's ability to circumvent the worst of the crisis was also assisted by better regulation -- with a single, empowered banking and insurance regulator in Australian Prudential Regulatory Authority -- and the banking system's strong domestic focus. Aussie banks were not looking to emulate their American peers, because they didn't need to. And the misfits that did exist, Allco and Babcock & Brown, weren't exactly Lehman Brothers. Any weak links in the system were easily gobbled up by the four majors, which now rank among only a handful of the world's AA-rated banks.

All this meant the extreme credit tightening that began in 2007 didn't trigger a surge in defaults or bank failures, as it did elsewhere. On the contrary, thanks to high immigration and fertility, it's the Australian population that has been surging.

Next, let's give at least partial credit to the previous government. The reason it was possible for Labor to run a deficit of 5 per cent of GDP was due to the fiscal position it inherited from the Howard government. With net debt essentially eliminated, Australia had the healthiest fiscal position of any developed economy outside Scandinavia. That is, of course, the biggest difference between Oz and the US, which entered the crisis with an already large structural deficit.

But perhaps most galling is how Labor can claim all the credit for the recovery when the RBA surely played at least as large a part -- and many would argue larger. The RBA cut its cash rate from 7.25 per cent to 3 per cent when the crisis struck. But the speed with which the RBA has been forced to raise rates -- faster than any other central bank in the G20 -- suggests the size of Labor's stimulus was unwarranted. The RBA was clearly concerned that Labor's stimulus risked over-heating the economy and stoking inflation. This is the downside of superfluous stimulus. As economist Christopher Joye has shown, small business, residential mortgage, personal and credit card interest rates have all been materially higher under the Rudd-Gillard government than under Howard.

The RBA's key role has in fact been the management -- through benign neglect -- of the exchange rate. That sharp depreciation relative to the dollar (down from 98 to 62 cents) probably did as much as anything to generate an Australian recovery. The trade statistics tell the story. Net exports surged from 2.4 per cent of GDP in the first quarter of 2009 -- the nadir of the GFC -- to 5.4 per cent in the first quarter of this year.

And that brings us to a further reason for Australia's buoyant performance: the role of China, now the country's biggest customer. If there was one place where stimulus really worked, it was China, though notice that it took the form of government-induced expansion of bank lending, rather than deficit finance along classic Keynesian lines. That Chinese stimulus sucked in a ton of imports from all China's Asian trading partners, including Australia.

Finally, let's raise our hats to Aussies who did the most to meet China's booming demand: the diggers. Yes, the Australian mining industry, which accounts for nearly 10 per cent of GDP and circa 40 per cent of total exports, moved heaven and earth -- well, certainly earth -- to satisfy China's needs. We see the fruits of this effort every day, most recently in the record $3.6 billion trade surplus in June, the biggest in history.

Unfortunately, the government is doing the very reverse of tipping its hat. On the contrary: it's dipping its hand into the mining companies' pockets. Even the watered-down proposal cobbled together by Gillard with three mining giants will still tax iron and coal companies' so-called "super profits" at a rate of 30 per cent.

"Super" currently means anything above 12 per cent returns on investment.

There are so many things wrong with this proposal that it's hard to know where to begin. First, it's a classic bit of arbitrary, inconsistent government action, moving the goalposts when the game is going in one direction -- rather as if Bill Clinton's administration had suddenly decided to tax dot.com companies on their market valuations in 1998. Second, it's the kind of thing that alienates foreign investors -- and Australia's vast mineral wealth cannot be fully tapped without their involvement.

Third, it capriciously penalises smaller firms in just two sectors. Fourth, it arguably infringes the traditional rights of the states to the mining industry's revenues. Finally, taxes of this sort are justified only when the revenues raised are devoted to accumulating alternative assets, to compensate future generations for the depletion of non-renewable assets by today's Australians. But that is not what Labor proposes to do with the $10.5 billion the tax will raise over the next two years.

Stimulus? Yes, sure, Labor has stimulated the Australian economy, in the same way that Ned Kelly used to stimulate the economy of Victoria.

 

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