The government's swift adoption of Keynsian policies protected the nation during the GFC. Now it is time to finish the job and bring in a surplus.
TWO and a half years ago, the fall of Lehman Brothers triggered the global financial crisis and sharemarket collapse that pushed the world economy to the brink of utter catastrophe. Australia's swift policy response saved tens of thousands of jobs, countless business failures, and a level of individual misery and hardship that can never be known. Today, despite the hammer blows of recent natural disasters, our economic outlook is strong and we are in a better position than almost any of our peers.
With private demand strengthening, unemployment falling and our economy pushing towards capacity, we now face new challenges. We need to restrain public spending, and stay the course back to budget surpluses. Just as it was the right thing to step in and support demand during the financial crisis, the right thing to do is to take a step back as private activity recovers. That's why, since we first put together the stimulus package, I have adopted the motto: if we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again. That means a speedy return to surplus.
To those who ask why that surplus is so important to me, I point to the influence of British economist John Maynard Keynes, one of the 20th century's great thinkers. His influence can be seen in both the government's response to the global downturn and to the recovery.
In the 80 years since the Great Depression, Keynes's belief that government has a role to play in avoiding recessions and ensuring prosperity and progress has become Labor's economic compass, helping us set a course through turbulent seas. His direct influence has waxed and waned, and in places been rightly superseded by the insights of other economic thinkers, but when recessions and depressions have hit, Keynes's broad prescriptions have come to the fore - and they have done so in a way that has maintained the essential social-democratic nature of Australian society. Like Keynes, Labor is guided by the understanding that recessions can and do have long-lasting costs through the destruction of jobs and small businesses, and the erosion of capital.
WHEN Labor returned to power in 2007, more than 11 years in opposition had filled our parliamentary party with big plans for economic reform. Our aim was to build on the achievements of the Hawke and Keating governments, but with new emphases on human capital investment, environmental sustainability, infrastructure development, and social inclusion. It was to be a modern incarnation of Labor's social-democratic vision, designed to maximise the advantage from the shift of world economic gravity to our region, and to ensure the benefits were enjoyed by more of our people.
Australia, it seemed, was on the cusp of perhaps the most significant burst of prosperity in its history, and our vision was to make that prosperity economically, socially and environmentally sustainable.
This time of anticipation paralleled another moment in Labor's history. In October 1929, the government of Jim Scullin was elected with plans to deliver greater prosperity to every Australian after five years of economic stagnation. But just two days after the swearing in of the new Labor ministry, those hopes were dashed when a Wall Street collapse plunged an unprepared world into economic chaos. Within 12 months, Australian GDP had dropped by 10 per cent and real private consumption expenditure by 20 per cent. Two years after that, our unemployment rate hit 19.75 per cent - one of the highest rates in the world at the time.
The Scullin government, hamstrung by a conservative majority in the Senate and crippled after the resignation of E. G. ''Red Ted'' Theodore, lacked the capacity to deal with the challenges of the Great Depression. Its flawed response was a deflationary policy, with cuts to wages, infrastructure projects and other public spending. Real aggregate government expenditure fell by 9 per cent at the height of the Depression, making the situation worse. It also led to the split of the parliamentary Labor Party and the destruction of the Scullin government.
As we know, in September 2008, just nine months after its election, our government was faced with its own Wall Street collapse that would quickly develop into another worldwide recession - the biggest since the Great Depression itself. The memory of the Scullin government's failure to beat the economic crisis weighed heavily upon us as we gathered around the cabinet table to face an equally daunting situation. We were determined that history would not repeat itself. Guided by Keynes and other outstanding economists, our government was able to draw upon the lessons of what went wrong in 1929 and in other recessions since.
From the comparative comfort of our strong economy, it's easy for politically and ideologically motivated critics to play down the threat presented by the financial crisis and just how exposed Australia was. The banking system was under threat, asset prices dived, global trade plummeted, companies stopped producing, households stopped spending, investment almost dried up, and business confidence took a massive blow. Eight out of 10 of our major trading partners went into recession. Unemployment rose by 175,000 within months.
This is the context in which we resolved to act.
The comparison between what we did and what the Scullin government did is, of course, informed by improvements in the policy levers at our disposal. We were not hampered by the gold standard, by the lack of access to international capital that restrained public and private borrowing and investment, nor by a weak central banking system.
We were also fortunate in that, unlike 1929, governments around the world acted largely in unison to guarantee their banking systems and stimulate their economies through public spending. Emerging powerhouse China, and also India and other developing nations with high demand for our exports, understood the force of the Keynesian argument for supporting their economies in this time of crisis.
But the fact that our government was not as helpless as Scullin's did not constitute an argument for doing nothing. Had we listened to our conservative critics and done far less, the outcome for our economy and our nation would have been far worse. We would have sunk into recession, hundreds of thousands more jobs would be gone, and more businesses would have closed their doors.
Underpinning our policy response were the principles of fiscal and monetary action to boost aggregate demand set out by Keynes: immediate stimulus measures to boost consumer spending and confidence; useful public works to create employment; lower interest rates to boost investment and spending; and concerted international action to strengthen the world financial system.
Recognising that long lead times can create a lag between the announcement and employment effect of major public works, Keynes was in favour of immediate action to boost consumer confidence and spending. This general principle provided the basis for the government's early action, which then Treasury secretary Ken Henry summed up as: ''Go early, go hard, go households.''
It is for this reason that one of our first responses to the crisis was the Economic Security Strategy, which provided $10.4 billion in targeted stimulus payments to pensioners, carers and families in December 2008, as well as immediate training places for the unemployed and additional help to first home buyers to stimulate housing construction.
The other element of fiscal policy Keynes recommended was public works to turn idle savings into useful investment - and this constituted the second part of the government's stimulus measures. In February 2009, the government began implementing a $42 billion Nation Building and Jobs Plan to support jobs and invest in future long-term economic growth. Some $16.2 billion of this investment was for the Building the Education Revolution program, which funded building and maintenance works across nearly 24,000 projects.
Without these measures our economy would have suffered a protracted recession and about 200,000 more Australians would have been put out of work. The swift pace of the government's response was a telling factor in Australia avoiding recession, while virtually every other developed economy did not.
Another of the big lessons of the Great Depression was that action to stave off slumps must be internationally co-ordinated. Keynes devoted much of his latter life to promoting global economic stability and growth, making an important contribution to the Bretton Woods Agreement, which established the International Monetary Fund and the forerunner of today's World Bank. In a similar vein, the Australian government was a leading voice for the co-ordination of international stimulus measures, the maintenance of free trade, and the redesign and reconstruction of the world's global financial architecture in the aftermath of the crisis. Most importantly, we have been a big advocate for the overhaul of international economic decision making, in particular by championing the G20 group of nations.
CENTRAL to Keynesian theory is that just as governments should increase spending going into a recession, once growth and prosperity have been restored, they need to restrain expenditure, budget for surpluses and reduce debt. That's why, when I announced our stimulus plans, I also articulated the path back to surplus.
This strategy hasn't and shouldn't change in light of recent events. Natural disasters at home and abroad haven't knocked Australia off its longer-term course. The fundamentals are strong and our economy is headed towards its capacity. We have low unemployment, strengthening incomes, terms of trade close to their highest sustained level in 140 years, and an unprecedented pipeline of investment. Most importantly, mining boom mark II will impose on us structural changes equal in magnitude to any we have seen before.
This economic environment underscores the importance of our fiscal commitments and strategy to return the budget to surplus. Through our cap on real spending growth and the fastest fiscal consolidation in at least 40 years, we are creating space for the significant expansion in our nation's capital base that businesses have planned.
Just as we supported demand during the global recession, we're making way for private demand in the expansion. Our fiscal strategy has been consistent from day one.
THOSE who suggest we should be less concerned about deficit and debt wrongly point to so-called ''Keynesian'' reasons relating to their low levels in Australia compared with other developed nations. Those facts are true; Australia is in a better fiscal position.
But those facts cannot be used as excuses to open the fiscal gate and allow ill-disciplined public spending. Adopting Keynesian strategies for avoiding recession does not mean jettisoning the reform lessons that made us more prosperous over the past three decades, or ditching Keynes in the recovery.
Compared with the events of 1929 and the fate of the Scullin government, the Australian story in the aftermath of the GFC has been a more positive one, though in our patchwork economy not everybody is feeling the gains.
Almost alone among the developed economies, we escaped a deep and damaging recession, with all the added hardship that brings.
One of the fundamental reasons for this is that we had the commonsense to follow the broad prescriptions outlined by Keynes. We acted confidently, swiftly, on a broad front, and in sufficient scale to rebuild consumer and investor confidence and fill the hole left by collapsing world and domestic demand for Australia's products. We also moved to shore up the fundamentals of our financial system to keep it operating effectively.
We did these things because we learnt the lessons of the past. And we did them because Labor, like Keynes, is driven by a morality that regards unemployment, ruined businesses, foreclosed mortgages and myriad other signs of economic distress not as part of an inevitable and desirable cleansing process for the economy, but as the symptoms of a recession that should and can be avoided with the necessary will.
The same degree of commitment is necessary today, as we do the right thing by an economy approaching capacity, and get the budget back to surplus as planned.
Source: http://www.smh.com.au
TWO and a half years ago, the fall of Lehman Brothers triggered the global financial crisis and sharemarket collapse that pushed the world economy to the brink of utter catastrophe. Australia's swift policy response saved tens of thousands of jobs, countless business failures, and a level of individual misery and hardship that can never be known. Today, despite the hammer blows of recent natural disasters, our economic outlook is strong and we are in a better position than almost any of our peers.
With private demand strengthening, unemployment falling and our economy pushing towards capacity, we now face new challenges. We need to restrain public spending, and stay the course back to budget surpluses. Just as it was the right thing to step in and support demand during the financial crisis, the right thing to do is to take a step back as private activity recovers. That's why, since we first put together the stimulus package, I have adopted the motto: if we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again. That means a speedy return to surplus.
To those who ask why that surplus is so important to me, I point to the influence of British economist John Maynard Keynes, one of the 20th century's great thinkers. His influence can be seen in both the government's response to the global downturn and to the recovery.
In the 80 years since the Great Depression, Keynes's belief that government has a role to play in avoiding recessions and ensuring prosperity and progress has become Labor's economic compass, helping us set a course through turbulent seas. His direct influence has waxed and waned, and in places been rightly superseded by the insights of other economic thinkers, but when recessions and depressions have hit, Keynes's broad prescriptions have come to the fore - and they have done so in a way that has maintained the essential social-democratic nature of Australian society. Like Keynes, Labor is guided by the understanding that recessions can and do have long-lasting costs through the destruction of jobs and small businesses, and the erosion of capital.
WHEN Labor returned to power in 2007, more than 11 years in opposition had filled our parliamentary party with big plans for economic reform. Our aim was to build on the achievements of the Hawke and Keating governments, but with new emphases on human capital investment, environmental sustainability, infrastructure development, and social inclusion. It was to be a modern incarnation of Labor's social-democratic vision, designed to maximise the advantage from the shift of world economic gravity to our region, and to ensure the benefits were enjoyed by more of our people.
Australia, it seemed, was on the cusp of perhaps the most significant burst of prosperity in its history, and our vision was to make that prosperity economically, socially and environmentally sustainable.
This time of anticipation paralleled another moment in Labor's history. In October 1929, the government of Jim Scullin was elected with plans to deliver greater prosperity to every Australian after five years of economic stagnation. But just two days after the swearing in of the new Labor ministry, those hopes were dashed when a Wall Street collapse plunged an unprepared world into economic chaos. Within 12 months, Australian GDP had dropped by 10 per cent and real private consumption expenditure by 20 per cent. Two years after that, our unemployment rate hit 19.75 per cent - one of the highest rates in the world at the time.
The Scullin government, hamstrung by a conservative majority in the Senate and crippled after the resignation of E. G. ''Red Ted'' Theodore, lacked the capacity to deal with the challenges of the Great Depression. Its flawed response was a deflationary policy, with cuts to wages, infrastructure projects and other public spending. Real aggregate government expenditure fell by 9 per cent at the height of the Depression, making the situation worse. It also led to the split of the parliamentary Labor Party and the destruction of the Scullin government.
As we know, in September 2008, just nine months after its election, our government was faced with its own Wall Street collapse that would quickly develop into another worldwide recession - the biggest since the Great Depression itself. The memory of the Scullin government's failure to beat the economic crisis weighed heavily upon us as we gathered around the cabinet table to face an equally daunting situation. We were determined that history would not repeat itself. Guided by Keynes and other outstanding economists, our government was able to draw upon the lessons of what went wrong in 1929 and in other recessions since.
From the comparative comfort of our strong economy, it's easy for politically and ideologically motivated critics to play down the threat presented by the financial crisis and just how exposed Australia was. The banking system was under threat, asset prices dived, global trade plummeted, companies stopped producing, households stopped spending, investment almost dried up, and business confidence took a massive blow. Eight out of 10 of our major trading partners went into recession. Unemployment rose by 175,000 within months.
This is the context in which we resolved to act.
The comparison between what we did and what the Scullin government did is, of course, informed by improvements in the policy levers at our disposal. We were not hampered by the gold standard, by the lack of access to international capital that restrained public and private borrowing and investment, nor by a weak central banking system.
We were also fortunate in that, unlike 1929, governments around the world acted largely in unison to guarantee their banking systems and stimulate their economies through public spending. Emerging powerhouse China, and also India and other developing nations with high demand for our exports, understood the force of the Keynesian argument for supporting their economies in this time of crisis.
But the fact that our government was not as helpless as Scullin's did not constitute an argument for doing nothing. Had we listened to our conservative critics and done far less, the outcome for our economy and our nation would have been far worse. We would have sunk into recession, hundreds of thousands more jobs would be gone, and more businesses would have closed their doors.
Underpinning our policy response were the principles of fiscal and monetary action to boost aggregate demand set out by Keynes: immediate stimulus measures to boost consumer spending and confidence; useful public works to create employment; lower interest rates to boost investment and spending; and concerted international action to strengthen the world financial system.
Recognising that long lead times can create a lag between the announcement and employment effect of major public works, Keynes was in favour of immediate action to boost consumer confidence and spending. This general principle provided the basis for the government's early action, which then Treasury secretary Ken Henry summed up as: ''Go early, go hard, go households.''
It is for this reason that one of our first responses to the crisis was the Economic Security Strategy, which provided $10.4 billion in targeted stimulus payments to pensioners, carers and families in December 2008, as well as immediate training places for the unemployed and additional help to first home buyers to stimulate housing construction.
The other element of fiscal policy Keynes recommended was public works to turn idle savings into useful investment - and this constituted the second part of the government's stimulus measures. In February 2009, the government began implementing a $42 billion Nation Building and Jobs Plan to support jobs and invest in future long-term economic growth. Some $16.2 billion of this investment was for the Building the Education Revolution program, which funded building and maintenance works across nearly 24,000 projects.
Without these measures our economy would have suffered a protracted recession and about 200,000 more Australians would have been put out of work. The swift pace of the government's response was a telling factor in Australia avoiding recession, while virtually every other developed economy did not.
Another of the big lessons of the Great Depression was that action to stave off slumps must be internationally co-ordinated. Keynes devoted much of his latter life to promoting global economic stability and growth, making an important contribution to the Bretton Woods Agreement, which established the International Monetary Fund and the forerunner of today's World Bank. In a similar vein, the Australian government was a leading voice for the co-ordination of international stimulus measures, the maintenance of free trade, and the redesign and reconstruction of the world's global financial architecture in the aftermath of the crisis. Most importantly, we have been a big advocate for the overhaul of international economic decision making, in particular by championing the G20 group of nations.
CENTRAL to Keynesian theory is that just as governments should increase spending going into a recession, once growth and prosperity have been restored, they need to restrain expenditure, budget for surpluses and reduce debt. That's why, when I announced our stimulus plans, I also articulated the path back to surplus.
This strategy hasn't and shouldn't change in light of recent events. Natural disasters at home and abroad haven't knocked Australia off its longer-term course. The fundamentals are strong and our economy is headed towards its capacity. We have low unemployment, strengthening incomes, terms of trade close to their highest sustained level in 140 years, and an unprecedented pipeline of investment. Most importantly, mining boom mark II will impose on us structural changes equal in magnitude to any we have seen before.
This economic environment underscores the importance of our fiscal commitments and strategy to return the budget to surplus. Through our cap on real spending growth and the fastest fiscal consolidation in at least 40 years, we are creating space for the significant expansion in our nation's capital base that businesses have planned.
Just as we supported demand during the global recession, we're making way for private demand in the expansion. Our fiscal strategy has been consistent from day one.
THOSE who suggest we should be less concerned about deficit and debt wrongly point to so-called ''Keynesian'' reasons relating to their low levels in Australia compared with other developed nations. Those facts are true; Australia is in a better fiscal position.
But those facts cannot be used as excuses to open the fiscal gate and allow ill-disciplined public spending. Adopting Keynesian strategies for avoiding recession does not mean jettisoning the reform lessons that made us more prosperous over the past three decades, or ditching Keynes in the recovery.
Compared with the events of 1929 and the fate of the Scullin government, the Australian story in the aftermath of the GFC has been a more positive one, though in our patchwork economy not everybody is feeling the gains.
Almost alone among the developed economies, we escaped a deep and damaging recession, with all the added hardship that brings.
One of the fundamental reasons for this is that we had the commonsense to follow the broad prescriptions outlined by Keynes. We acted confidently, swiftly, on a broad front, and in sufficient scale to rebuild consumer and investor confidence and fill the hole left by collapsing world and domestic demand for Australia's products. We also moved to shore up the fundamentals of our financial system to keep it operating effectively.
We did these things because we learnt the lessons of the past. And we did them because Labor, like Keynes, is driven by a morality that regards unemployment, ruined businesses, foreclosed mortgages and myriad other signs of economic distress not as part of an inevitable and desirable cleansing process for the economy, but as the symptoms of a recession that should and can be avoided with the necessary will.
The same degree of commitment is necessary today, as we do the right thing by an economy approaching capacity, and get the budget back to surplus as planned.
Source: http://www.smh.com.au
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