Letter From Australia (About a Ruinous Government)

Cleaning Up The Unlucky Country

In hindsight it will likely be told that Australia, of all the developed countries, handled the Global Financial Crisis (GFC") the worst--and that, dear friends, from a country which went into the crisis positioned far better than most.  What caused the manufacture of such a crisis?

• A grandiose Prime Minister who cast himself in a Churchillian role
• An insecure Prime Minister who wanted to be seen as the Barack Obama of the Asia-Pacific Region
• An economically ignorant Prime Minister who thought that money could be borrowed ad infinitum.

The name of the one who is arguably Australia's worst Prime Minister?  Kevin Rudd.

Paul Sheehan, Sydney Morning Herald correspondent, fills in the details.

Unusually, history offers a precise time and place, right down to the day, to appreciate why Australia has gone, seemingly suddenly, from a land of boom to a nation facing an austerity budget with sacrifices expected of all. The date was February 4, 2009.

On that day, for the first time in the 15 months since the Howard government had been defeated, a spontaneous upsurge of genuine unity, concern and outrage came from the opposition. It crossed all factions and cliques. It fused Liberals and Nationals.  The cause of their collective alarm was the size and scale, and haste and dubious design, of six appropriations bills that Kevin Rudd’s government was about to ram through Parliament. These bills would transform the budget.

The catalyst for this was the 2008 financial crisis that had thrown the United States and western Europe into recession and come close to fusing their banking systems. The crisis had not, however, affected Canada or most of Asia. It was countries running big government debt and deficits that were in crisis control.

At the beginning of the GFC, Australian banks were rated the best and strongest in the world; the government was running a fiscal surplus and had done for years; mining and its downstream industries were booming due to strong demand from the developing world.  But either Rudd panicked, or his vaunting ambition saw an opportunity to paint his inflated ego into history's portrait gallery, or he was just plain economically ignorant. 

Rudd said Australia needed decisive action to avoid a recession. When the opposition caught a glimpse of what he intended it saw immediately that Rudd’s grandiosity was dangerously at work. We are now discovering in great detail, via the Royal Commission into the Home Insulation Scheme, the extent of dysfunction of Rudd’s management vision.

Joe Hockey, who was about to become shadow treasurer, opened the attack on February 4. "We have not seen the six bills that are going to be introduced, debated and voted on in this place today," he said. "These six bills will take us into $100 billion of debt."

Malcolm Turnbull, then opposition leader, followed soon after. "In four years, net debt will be $70 billion … and the government has asked for the right, just a moment ago, to borrow up to $200 billion, or $9500 for every man, woman and child in Australia," he said.  "The plan reeks of nothing more than panic ... We do not reject the need for a stimulus at this time. Our judgment is that $42 billion is more than is appropriate right now. The government is looking increasingly like a frightened soldier who fires off all his ammunition in a panic in the first minutes of an engagement … Our judgment is that a more appropriate level of stimulus is in order, 1 to 2 per cent of GDP, or between $15 billion and $20 billion."

All night, Coalition members, 57 in the House and Senate, rose to speak. Former treasurer Peter Costello, silent on the back bench for a year, was moved to genuine outrage.  "When you inherit an economy which has a budget in surplus and no net debt, which has unemployment at 30-year lows, where the credit rating has been restored to a AAA rating on foreign currency bonds, where you have a Future Fund of $61 billion and a Higher Education Endowment Fund, when you inherit an economy in that condition you have to find a fault somewhere," he said. "If you cannot find a fault somewhere, what problem have you got to solve? So the Labor Party, naturally enough, looked for a problem. The trouble is, it was the wrong one."

The problem lay with a minor matter called government debt.  Borrow in haste, repent in leisure.  It will take decades for the fiscal damage done by Rudd to be repaired--and it will inflict pain upon at least two generations of Australians.  Or, they will cave, and kick the can down the road for their grandchildren to face up to. 

When debate was finally guillotined it was 4.45am. For the opposition it was a new dawn. It did not need to wait for opinion polls or focus groups. Typical was this from former minister Bruce Billson. "The Coalition is seeking to ensure that the nation does not sleepwalk into a poorly designed, irresponsible and unsustainable package dreamt up by a panicked government," he said. "The only certain outcome of this package is waking up to the nightmare of decades of excessive debt and deficit."

That is exactly what happened. Rudd was worse than Whitlam. In the six years Labor was in government, the growth in Australia’s real federal expenditure was close to highest in the Organisation of Economic Co-Operation and Development – even though Australia was a resource economy with a sturdy banking sector and no housing bubble, and thus not susceptible to the financial shock in the US and much of Europe.

It is difficult to move the macro-economic needle quickly in a $1.5 trillion economy that is the 12th largest in the world (larger than Spain, which has 47 million people). In 2009, Rudd managed to jolt the needle, ramping up federal spending as a percentage of GDP.

He was also more profligate than Julia Gillard and she was no prize, loading future budgets with the Gonski education program, the national disability insurance scheme and the multibillion asylum seeker debacle without seeming to have a Gonski about how it would all be paid for.

Now that the bills are coming due, neither Rudd nor Gillard are around. It is the morning after. The clean-up. The payment due date. And the demographic challenge has loomed into focus. So let’s not confuse who did the spending and who is having to pay. . . .

A clean-up is not a crisis. We’ve already had a false crisis and are about to pay for it.