Thursday, 14 May 2009
There’s no guarantees when you are in the middle of the most savage global recession since the Great Depression.
Wayne Swan 23 April 2009
In order to better inform Australians about the likely growth path of the economy, two substantive changes have been made to the forward estimates methodology in this Budget. The forecast period has been extended by one year to 2010-11, when the economy is expected to grow below trend. Further, GDP is assumed to grow above (rather than at) trend in the projection years. Both of these changes are broadly based on the historical experience of the economy as it emerged from the 1980s and 1990s recessions.
Treasury Budget Overview 12 May 2009
The media has rightly picked up on the central contradiction within the Budget. But the political problem is not that the Budget strategy is based on a forecast that is too optimistic of a rebound, but that it is based on a forecast at all. In the Budget, Treasury has changed its forecast methodology to allow for the experience of the last two recessions when the economy rebounded strongly. Rudd was right on The 7.30 Report that Treasury’s rebound assumptions are conservative relative to the last two recessions. The problem is that the Budget paper has gone out of its way to show why the trajectory of this downturn undermines any such comparison.
As the Budget Overview notes, the way we entered this downturn is unprecedented:
No economy has emerged unscathed from the global financial crisis. Following the rapid intensification of global financial market stress in September 2008, strong financial and real economy linkages led to an unprecedented synchronised fall in world trade and production in the December quarter of last year.
and the scale is unprecedented:
With rapid declines in credit flows, equity values and consumer confidence, strong financial and real economy linkages saw the tremors which rocked financial markets transform into an unprecedented synchronised global contraction of production, trade, and capital flows.
Which has led to a collapse in Australia’s trading conditions with its major partners that is also unprecedented:
Three factors explain why the region’s trade declines in recent months were worse than in past downturns. First, the speed and force of the recession drove world demand down to unprecedented lows. Second, the drop in global demand disrupted Asia’s integrated web of trade linkages, production networks and supply chains. Third, as credit conditions deteriorated, access to trade finance became more difficult.
So if the downturn is unprecedented, why has then Treasury chosen this time to change its methodology to allow more for the experience of past economic recoveries than ever before? The clue is in the other unprecedented feature of this downturn:
Following the collapse of Lehman Brothers, authorities provided liquidity to financial markets on an unprecedented scale.
This Budget is the product of an economic crisis merging with a political one. To get to grips with this, it is important to understand the assumptions behind Treasury previous methodology and what has changed. Past economic downturns would inevitably involve a counter-crisis strategy that would usually not be a lot of fun. Treasury, ever helpful to Australian business to encourage such restructuring, would reinforce this by not automatically assuming any above average growth after the upturn.
This was a time when the Right would normally be ascendant because the counter-crisis measures, cutting wages (“increasing workplace flexibility”), slashing welfare (“balancing the budget”, “incentivising business”) would usually fall smack into their court. Of course, in Australia, with a weak Right, it was usually left to Labor to do it; at least it was in the early 1980s (after the feeble efforts of Fraser/Howard), and again in 1990-1991.
The trouble for Labor was that in all those good deeds, it undermined its social base, its core support and its relationship with the unions. The exhaustion of Labor’s programme under Hawke effectively marked the end of any effective political force able to implement a counter-crisis strategy or what is traditionally recognisable as any type of economic strategy at all.
The moment this occurred was captured in Keating’s notorious description of the last downturn as “the recession we had to have”. Part of it summed up what had been the traditional economic view, that a downturn required economic restructuring. But it also suggested Keating’s belief it was the downturn itself that would force it, hinting at the increasing exhaustion of Labor’s political agenda to carry it out. As time went on and the end of any real economic programme from the major parties became clear, Keating’s phrase increasingly turned into little more than callousness to the damage done by an economy that was now out of anyone’s control.
Following that we had a decade of government still claiming that it had economic control; a pretence that came to an end on Melbourne Cup Day 2007, when something happened that no government with influence over the economy would ever allow; an interest rate rise during an election campaign.
This leaves us where we are now. This is the first Labor government with no real relationship to the unions and so no real basis of an economic strategy. Rudd’s political strength has rested on him being more open about the fact and reminding everyone that there is “no silver bullet”. The government has also emphasised its limits by playing up the global scale of the crisis, although in reality the last recessions were pretty global in scale as well.
The real difference with the global downturn this time is the absence of any national solutions. The only response around the world to the downturn is to delay its effects as long as possible by pumping in money until it is no longer sustainable and it will then be necessary to think of something else. Implicit in the economic justification for this is a view that no restructuring is necessary, merely to hold out until the cycle has turned again like the weather. Treasury’s new methodology takes this a stage further in this Budget by using the cycle as a counter-crisis strategy itself.
Rudd has a political strategy to deal with the presentation of this, but not with the economy itself. Watching Rudd on The 7.30 Report you can see what this means with Rudd having to answer questions of a complexity that you couldn’t imagine Howard having to handle. When talking about the economy, Rudd has to sound like an economist or a Treasury official because he can’t sound like a politician.
The response of the coalition shows that this isn’t just confined to Labor. The coalition calls for the government to make tough decisions, but ‘tough’ isn’t a strategy either. It just means the coalition calling time earlier than Labor on the spending, but with as little idea of what to do next. Besides, it was the coalition who set the government tone, both with the hand-outs under Howard and the New Sensitive gestures of Nelson, which was why the coalition could hardly oppose a pension increase they themselves proposed last year.
But this goes beyond just the political class. Labor’s defence on any questioning of the forecast by the coalition is to hide behind Treasury. Hockey and Coonan on Budget night could undermine Treasury but not directly attack it. Instead Hockey tried to get around it by saying it was Swan’s Budget not Treasury’s. He is right, it is Labor’s Budget, just as in reality, it’s the coalition’s as well. But it also a Budget of Treasury and the state apparatus. The crisis is that profound.
Posted by The Piping Shrike on Thursday, 14 May 2009.Filed under State of the parties