Over the last few days the economic managers of our political class have made some very odd statements about exactly what the Australian government should be doing in light of the fact that the economy is beginning to stall.
Yesterday the Shadow Finance Minister was interviewed by the ABC and gave the following answers:
Andrew Robb says some parts of the economy have tanked already. He says the Government should stop spending, and the Reserve Bank should cut interest rates in response. Mr Robb claims Australia is highly vulnerable because the Government spent too much in its stimulus response to the last global financial crisis.
Mr Robb is speaking with our chief political correspondent, Sabra Lane.
ANDREW ROBB: The borrowing and the spending has materially weakened our position in the face of another downturn, and the Government should acknowledge that and then help with the community to deal with the problems. It needs to fireproof us for the future. And I think it’s coming. I think there is going to be a further greater weakness in the world market.
SABRA LANE: How bad do you think things are going to get?
ANDREW ROBB: I’m not sure.
SABRA LANE: You say Mr Swan should fireproof the economy. How can he do that?
ANDREW ROBB: For starters, the Government has got to seriously start to cut spending.
SABRA LANE: Well, most of the stimulus spending has completely tapered off. There is not much of it left to go, and aren’t most of these problems beyond Australia’s control? Australia can’t be responsible for what’s happening in Greece or the political lack of will in the Eurozone countries?
ANDREW ROBB: Well, I’m not saying they are. I mean, we cannot control things outside of our country but that’s all the more reason to live within our means. We are not living within our means.
How can the Government stand there and say that it is being fiscally responsible when in the middle, well almost two-thirds of the way through the biggest mining boom in our history, we’re still- they are still going to spend tens of billions of dollars more than they raise?
We need to pull our heads in, get rid of this carbon tax which is killing confidence and will add to costs. We need to stop government spending, and I think there is a case for the Reserve Bank to now start to cut interest rates because the economy is already starting to tank in various areas.
Some of our sectors are technically in recession now. The Government has got to recognise it and I think the Reserve Bank should recognise it.
I don’t totally disagree with what Mr Robb is saying in terms of private sector recession, but I do wonder if he completely understands what he is suggesting.
Let’s look at the fundamentals.
Australia has a external sector deficit. This means that non-external sector is constantly giving up wealth to non-Australians. In order to compensate for this loss of wealth the Australian private sector has done two things. Firstly it has sold off assets to foreigners and secondly it has continually expanded its borrowings to a point where household indebtedness has now reached over 150% of income. What Mr Robb is suggesting is that the government needs to stop spending and aim for a surplus budget, that is once again a net loss of wealth from the private sector. So under these circumstances the private sector would be giving up wealth to both the external and government sectors.
If the private sector was in a position to increase its productive capacity, that is increase its export output without the need for greater inputs, or had the confidence and capacity to increase its net debt then the overall effect on the private sector may not be deflationary. However it is obvious that at this time the Australian private sector is not in a position to do either of these things. Mr Robb seems to be suggesting that to compensate for this the RBA should drop interest rates. The only reason I can see for this suggestion is to spur an increase in credit issuance in the private sector. So what he is suggesting is that the RBA should drop rates in order to transfer the debt from the public to the private sector. Given that I can’t see any additional statements from Mr Robb about making sure that additional private sector credit issuance makes its way towards productive investments, I assume he would like to see that debt flow to housing. Bring back those Costello years!
And then there is Swanny:
The slowing global economy will make it harder to return the budget to surplus, federal treasurer Wayne Swan says. But he insists it can be done, as promised, by 2012/13. Mr Swan said the slowing global economy would have consequences for Australia.
“That has a flow-on effect for our economy, and impacts on our budget. It certainly makes the surplus harder to get to,” Mr Swan told ABC Radio in Brisbane.
“But we’re determined to get to surplus in 2012/13 but the conditions have just got a bit more difficult.”
He said the government wasn’t backing away from its surplus timeline, saying: “It’s only commonsense to acknowledge that the circumstances around the place are a bit different than they were at the budge”.
He said the Australian economy was “in good nick” and financial analysts continued to acknowledge its underlying strengths.
So our Treasurer wants the government to remove wealth from the private sector even as it hunkers down against global weakness. Clearly his aim is also deflation and/or lower interest rates, as well as, ultimately, more household debt.
Maybe our readers can shed some light on alternatives.