For an economist, the most striking feature of the 2009-10 Budget is the reappearance of old-time Keynesianism, after more than three decades in which fiscal policy took a back seat and monetary policy was primarily based on inflation targeting. The rhetorical change from the ‘recession we had to have’, when ‘pump-priming’ was a dirty word, is striking.
And while the response to the 1989-91 recession eventually included a significant dose of fiscal stimulus, ‘eventually’ is the operative word. In 1989 the government and the Reserve Bank kept squeezing the economy long after everyone else could hear bones breaking. This time around, the first round of stimulus money was going into bank accounts before the contraction (as measured by quarters of negative GDP growth) had even begun.
The Budget claims success for the stimulus measures that have already been introduced, and its projections assume even more success for the measures that will take effect in the second half of 2009. On the first point, the government points to the resilience of Australian retail sales and a recovery in consumer confidence, in sharp contrast to the situation in most economies overseas. The budget claims stimulus has already raised 2008-09 GDP by 1 per cent, which seems plausible.
The critical test will come in 2009-10. In the absence of stimulus, the Budget projects, Australia’s GDP would contract by more than 3 per cent, the worst performance since WWII and only a little better than the advanced economy average of 3 3/4 per cent (though the latter number takes account of the projected effect of stimulus measures in those economies). The stimulus package is projected to raise the level of GDP by 2 3/4 per cent, with the result that the projected contraction in the economy will be long (two full years of zero or negative growth) but not as sharp as in previous post war recessions.
If the government can deliver on these projections, the impact on economic policy debate in Australia will be profound. Much of the thinking that has dominated policy for the past three decades will have to be discarded. Older concerns about the kinds of fiscal measures that are most expansionary or contractionary and the point at which necessary macroeconomic stabilisation becomes counterproductive ‘fine-tuning’ will be revived.
The political implications will be equally profound. Success in steering the economy through the crisis could see the Rudd government entrenched for a decade or more. Failure could add to Labor’s long list of short-term governments derailed by external crises.