Coronavirus is not the villain: Australia’s economy was already on a precipice
by Richard Denniss
[Originally published by the Guardian Australia, 04 March 2020]
If you thought the prime minister was slow to respond to the bushfire crisis, take a look at his response to Australia’s ailing economy. Morrison is currently trying to pivot away from the government’s economic inaction using the coronavirus outbreak as cover, but the only reason the coronavirus might push Australia into recession is because the economy has been languishing since the Coalition took office in 2013.
In the past seven years of Coalition government, including the five years Scott Morrison has been treasurer or prime minister, the Australian economy hasn’t once grown above its trend rate of growth. As the figure below shows, the last treasurer to oversee an economy that was booming was Wayne Swan.
While treasurers Joe Hockey, Scott Morrison and Josh Frydenberg have between them forecast six times that Australia’s economy would return to trend growth soon, it hasn’t happened. Worse, the government has done nothing to fix it. The PM’s arm-waving about the potential impact of coronavirus on the economy highlights the government’s dithering, not its decisiveness.
Just as Morrison ignored the advice of emergency services chiefs in the lead up to summer’s bushfires, he has been ignoring the public and private advice of economists for years. The RBA governor’s preference for some government spending to help boost the economy was made clear in July last year, but back then Frydenberg and Morrison were still pretending the economy was set to boom. It didn’t.
Australia’s interest rates are at their lowest ever levels. After 16 interest rate cuts in a row, the Reserve Bank on Tuesday cut official interest rates to 0.5%. With only two more cuts of 0.25% available before interest rates hit zero, the RBA is clearly running out of ammunition. That’s why the RBA has been calling on the government to shoulder some of the load by boosting government spending. To date, Morrison has ignored the RBA’s advice.
We shouldn’t be surprised. When the Coalition won office in 2013, it was after sustained attacks on the Rudd-Gillard governments for running budget deficits during and after the GFC. According to Tony Abbott we had a “budget emergency” even though our level of public debt was low by historical and international standards. For the Coalition, budget deficits have become a signal of wasteful government while a budget surplus was a signal of virtue. Economically speaking, both positions are nonsense.
The macroeconomy doesn’t respond to such virtue-signalling. After the Coalition took office in 2013, the downward trends in GDP growth, wage growth and productivity continued. It turns out that ignoring economic advice is as dangerous as ignoring advice from climate scientists and emergency services chiefs. Who knew?
By December 2016, the Coalition had dumped Abbott and Hockey, but they kept faith in the symbolism of budget surpluses. In an excruciating interview with Leigh Sales, then treasurer Morrison refused seven times in a row to concede that sometimes it made good economic sense to run a budget deficit in order to stimulate economic growth. This is basic economics.
The whole interview is worth watching again, but the following exchange highlights the political and economic trap that Scott Morrison set for himself:
Leigh Sales: One tool that any treasurer wants to have in his or her toolbox is the ability to increase or decrease government spending to either cool down the economy or to stimulate it.
Isn’t it a problem that because you’ve made stimulus such a dirty political word, you’ve boxed yourself into a corner when it comes to policy options?
Scott Morrison: No, I disagree with that. Because the sort of stimulus that I won’t engage in is handing out cheques to 16,000 deceased people, setting fire to people’s roofs and overpriced school halls.
Morrison is hoping coronavirus will hide his escape from this self-made trap.
The Coalition has had fun deriding Labor for “posting cheques to dead people”, but the fact is: Labor was listening carefully to the economic advice it was being given by Treasury. In response to the GFC, Treasury advised: go hard, go early and go households.
The challenge was to get $100bn into people’s pockets quickly, and it worked. The Labor government’s good economic management helped Australia avoid recession when most other economies faltered. Hundreds of thousands of Australians kept their jobs, while millions of people globally lost theirs.
The fact that Labor posted cheques to dead people is both understandable (10,000 people die in Australia each month) and economically irrelevant. If their families spent the money it still helped stimulate the economy.
And then there’s the school halls. Of all the things a government can build quickly that will last for a century, school hall are about as good as it gets. Strangely, the Coalition seem far less concerned about the billion-dollar blowouts in the cost of their submarines (an eye-watering $200+bn) than they were were in the tens of thousands of extra dollars spent on a few shade cloths.
Which brings me back to coronavirus and the Australian economy. Wage growth in Australia is at record lows. The Coalition said that their tax cuts would boost productivity growth and wages, but neither of those things happened. Business investment is at record lows and the Coalition said that their tax cuts would fix that. That didn’t happen either.
The coronavirus, like the bushfires, will slow the rate of GDP growth for some time to come, but that’s not why interest rates are at 0.5% and it’s not why Australia is on the precipice of a recession. The Australian economy is on the edge of recession because for the past seven years the federal government has put virtue-signalling about a budget surplus ahead of acting on the economic advice it is given.
Coronavirus may well be the straw that breaks the back of 29 years of continuous economic growth, but that doesn’t make coronavirus the villain. Australia’s poor economic performance is entirely down to those who claim to be “great economic managers”.
• Richard Denniss is chief economist at the Australia Institute