Anyone who thinks Australia’s Labor Government hasn’t got it right on the economy need only look at Britain’s woes under the Conservatives.
In judging economic policies, it is best to consider not just what happened after a given policy came into effect, but what would have happened without the policy in question. Policy wonks call this the ‘counterfactual’; the consequences of specific action not taken. It means “what has not happened but could, would, or might have under differing conditions”.
Here in Australia, the factual success of economic stimulus has been proven time and again by the Australian Bureau of Statistics, supported by the judgements of the most respected international institutions. By any objective measure, economic growth is solid and unemployment, inflation and interest rates are all low.
Despite the kerfuffle over budget surpluses and deficits, Australia’s fiscal position is also incredibly strong; in much better nick than comparable peers. It’s also why we are one of only seven countries to enjoy the coveted top rating of the three major ratings agencies, with a stable outlook.
It is not always easy for Australians to put a finger on the ‘counterfactual’, which is lower GDP, higher unemployment, and much more red ink than would have been the case without dramatic government intervention into the economy. This is arguably one of the reasons why the public does not always fully comprehend the benefits of the Labor Government’s economic stimulus packages of late 2008 and early 2009, and why people wrongly attribute all of our success to mining, or luck.
Simply put, Australians were not touched by what the Keynesian injection of government spending was carefully and successfully calibrated to avoid. Paradoxically, this means the policy worked as planned, but some of the political credit was harder to come by.
But, four years on, Britain’s prime minister David Cameron and his chancellor of the exchequer George Osborne are giving the world an unfortunate lesson in what happens if you don’t prioritise growth and jobs when the economy enters into a slump. The experience of the Old Country shows what might have been here at home in Australia.
As extraordinary as it may seem, the United Kingdom is on the verge of a triple-dip recession, facing at least two consecutive quarters of negative growth three times in four years. Remarkably, the output of the British economy remains lower than what it was before the crisis, in 2007. As a comparison, remember the Australian economy is more than 13 per cent bigger over that period. Even the American economy, from where the original crisis emanated, is marginally bigger now than in 2007.
In a note to their Australian clients, ANZ has written this week of expectations of a UK “triple-dip recession which would confirm the worst phase of economic growth since World War Two”, in which “GDP has been negative in 10 of the last 19 reported quarters”.
Little wonder then, that Prime Minister Cameron and Chancellor Osborne have been on the defensive when it comes to their budget strategy and its dire impact on economic growth in Britain. Just last week, Cameron gave a high-profile speech defending the program of radical austerity that he has stubbornly adhered to since the Conservative Government’s first budget statement in 2010.
Austerity is the label stuck to deep budget cuts in the UK and throughout Europe. For some time in the aftermath of the GFC, it was the buzzword of the international economy: a way of describing government action intended to dig countries out of deepening deficits and ballooning debt.
The consequent problem, now more fully appreciated, is the drastic, demonstrable impact these cuts are having on growth and jobs. Ultimately, of course, lower growth means higher deficits and debt, as governments spend more on unemployment benefits and rake in less tax revenue. This has come to be known as the ‘false debt debate’.
David Cameron likes to pretend otherwise. That’s why his speech attracted a high-profile rebuke from one of the world’s most respected economic commentators, the Financial Times’ Martin Wolf. Writing yesterday, pointing to stagnating growth and disappointing budget outcomes, Wolf dismisses Cameron’s argument as “wrong-headed“.
Anyone doubting the magnitude of Australia’s economic policy triumphs of the past five years should not just take Wayne Swan’s word for it, or Julia Gillard’s or Kevin Rudd’s. They should read Wolf as well. Because in his words you see laid bare the imperfect but instructive ‘counterfactual’ to the Australian experience.
Of course, no economy can be perfectly compared. They have different relative advantages and challenges – in our case, things like substantial mining investment or a high dollar. But macroeconomic and fiscal management has mattered a great deal as well, knowing when to be flexible enough with the budget settings to support the economy.
Nothing could be more different than the policy approach of the Australian and British governments. One country prioritised growth and jobs; the other, austerity. The consequences? One country has solid growth, low unemployment, sensible fiscal policy delivering a strong budget, and near-universal international acclaim. The other, unemployment of almost 8 per cent, a triple-dip recession in prospect, and Martin Wolf to answer to.
First published by The Drum on 14 March 2013.