Policy myopia angles Australia towards recession
The budget debate and recent Senate theatrics gloss over what is in truth a much broader malaise. No one should be under any false pretense: the Senate could pass the budget in its entirety and it would make no difference to the underlying fiscal strategy. Nor would it shore up our defences against a downturn, since there is no proposal to cut expenditure in any meaningful way.
Consequently, claims that Senate obstructionism will cost the nation some $43 billion over the forward estimates, or that the job of fiscal repair will be made harder - and the budget crisis unresolved - are disingenuous. Allowing for the tendency of expenditure forecasts to undershoot by some margin, a surplus remains a dream either way. This is what we saw under the previous government and it’s what we are seeing now. Strong on rhetoric and weak in action, forecast surpluses repeatedly morph into realised deficits.
Glenn Stevens' contribution (in an exclusive interview with The Australian) was to suggest that the complacency of our politicians opened us up to a deeper and more prolonged downturn: "We should be doing what we can to give us the chance for the future downturns to be short and shallow." He’s right of course, that our fiscal position exposes us to a deeper and more prolonged downturn is an undeniable truism. We are currently in a much worse position to deal with any exogenous shock, should one materialise, than we were in the immediate aftermath of the GFC. The fiscal deficit is little changed at nearly $50bn from the post-GFC peak of $54bn.
Yet the RBA board itself is complicit in Australia’s precarious policy position. Monetary policy is spent! Policy purists may giggle with delight over the 2.5 per cent buffer the board can play with. This is illusory - there is little more a 1 per cent or even zero per cent cash rate could achieve. More than that, it is unlikely that monetary policy will ever return to its prior pre-GFC glory. That is as a stabilisation tool. Debt levels are rising, not falling, and by the time we actually see a meaningful lift in rates - debt levels will be even higher still. Noting this, there is little chance the RBA can restore any sizeable policy buffer without causing a recession.
The real problem then is not Senate obstructionism, or some imaginary political divide. It’s the overall policy psyche. It afflicts both sides of politics, the bureaucracy and the RBA board itself.
Look at Australia’s key metrics. It’s a sad indictment that concerns are credibly raised about our ability to withstand the next downturn while the country enjoys a once-in-a-generation mining boom. GDP has increased at an annualised pace of 3.8 per cent -- well above trend -- in all but two quarters over the last three years. The unemployment rate remains low, the terms of trade historically high etc. That these metrics are then expressed by policy makers is all the more concerning.
Seeing this, it would be very difficult to argue with the proposition that a more trend-like rate of growth over the last few years would have been a small price to pay for less extreme policy settings now. Settings that would place Australia on a much better footing for long-term stable growth.
The great irony is that it has been fear of a downturn that has put us into this very position. Fear has kept policymakers from making any genuine attempt at fiscal repair -- something met with a considerable chorus of approval from the economic community I might add (recall the consensus that the Australian economy was far too fragile to withstand ‘severe’ spending cuts or tax hikes). Similarly, monetary policy ammunition was whittled away on an exchange rate obsession -- a fear that a strong dollar would somehow derail growth.
Fear is their legacy and it is in this respect that policymakers have failed the nation. At the very least no one would suggest that this country is fulfilling its potential. Our policymakers have spent more time awaiting the next downturn than trying to build the economy up. Meanwhile, we aren’t building enough houses, the ones we’ve got are too expensive, business isn’t investing, consumers aren’t spending, savings are high -- confidence is shattered.
Two things follow from this. Nothing is going to change. Politicians and bureaucrats aren’t about to conduct any meaningful fiscal reform -- they’re simply too afraid of a downturn. Similarly, the RBA isn’t going to recalibrate policy more appropriately to Australian conditions or drop its focus on the exchange rate. Citizens are right to be concerned.
Yet, and contrary to some of the rhetoric, we do have time. This policy myopia is unlikely to create any near-term dilemmas for the citizenry. Prospects for both the Australian and the global economies are too strong -- it will likely be years before the next downturn, and the fiscal position isn’t so dire that the rate of indebtedness can’t rise further in response. Net public debt is low.
Australia’s Great Recession will come though, and it will likely be one of our worst. A legacy of the decisions policymakers have taken today, as they mindlessly mimic their global peers. It need not be this way, but our policymakers seem unable to dissociate themselves from global policy trends and calibrate macro settings more appropriately for our actual economic circumstances.