Frydenberg’s recession we didn’t have to have right on track

The drumbeat of contempt for the L-plated treasurer, Josh Recessioberg, is ceaseless and growing louder. Monetary curmudgeon Stephen Grenville leads us off:

The story begins in the 1960s. The combination of the Vietnam War, LBJ’s Great Society and the moon landing put such pressure on US capacity that inflation was inevitable. Once the inflation-expectations genie was out of the bottle, the 1970s stagflation followed, as tight policy attempted to counter inflation’s persistence…This painful period incubated a rethink of fiscal policy. Academics abandoned the Keynesian view in which fiscal policy was a powerful instrument to ensure full employment. Instead, it was argued that budget deficits would spill overseas into imports, push up interest rates and crowd out private-sector expenditures. Higher public debt would make consumers cut expenditure, anticipating future tax increases.

…The 2008 financial crisis changed all this. Globally, budget balance could not be maintained in the face of financial bailouts and the worst recession since the 1930s…But old ideas die hard. Once the Greek crisis unfolded in 2010, debt concerns encouraged the USA, the UK and Europe to impose budget austerity on the fragile recovery…Practical academics came to recognise the growth-sapping nature of this austerity.

What’s left of the balanced-budget doctrine? Based on the evidence, not much…Politicians might recall the Vietnam-era advice: when existing policy is headed for an unwinnable dead-end, you should declare victory and retreat.

Nice potted history there for our babe treasurer to learn. Meanwhile, business lobbies are also growing more restive:

Concern about the lack of state and federal government investment in infrastructure is proving a unifying force for business leaders keen to see strong economic growth.

Debate about the issue was fired up last week when Frank Lowy, who built a $33 billion global property business, said the federal government “needs to spend a lot more on infrastructure to make us current in the 21st century … we all know what needs to be done”.

…Telstra chairman John Mullen backed Lowy’s call for more investment in infrastructure.

…The incoming president of the Business Council of Australia, Tim Reed, said the pressure should be on the state governments rather than the federal government when it came to encouraging infrastructure investment.

A poor start by the new BCA head but otherwise good advice. Infrastructure is not “panicked” fiscal spending as Recessionberg characterised it yesterday. It should the opposite. Well planned and independently assessed for productivity gains. by not doing this now, Recessionberg is only ensuring that weak growth culminates in his own panic and poor investments are made.

Labor also has the bit between its teeth:

The Morrison government has spent just $2.2m of a $3.5bn fund designed to tackle “immediate priorities” in regional infrastructure, with construction yet to begin on 98% of projects identified under the ‘roads of strategic importance’ initiative.

Announced in the last budget by Michael McCormack, as part of the “significant infrastructure transport projects”, the roads of strategic importance program identified four “immediate priorities” to help upgrade key corridors in regional Australia, for tourism, freight and resource transportation.

But in response to a question on notice from the Labor senator Murray Watt, construction has begun on just one project, which was not included in the original list of immediate priorities.

So, as the terms of trade crash deepens over the next six months, just in time for write downs in the May Budget, two things will happen:

  • the future tax cut schedule will come under increasing strain given it was based upon cyclical gains in commodity prices;
  • the stall speed economy will demand more stimulus just as the fiscal tide goes out, making it increasingly difficult to deliver,
  • leading to panic stations for pro-cyclical cuts and/or deeper deficits than were ever required, chasing an increasingly unhappy consumer.

Josh’s recession we never needed to have is right on track.

David Llewellyn-Smith
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