The most recent column in the Fin.
We wont criticise Kevin Rudd for his Christmas break, but it was ironic that on the first day after his months leave he could only say, The government stands ready to take whatever action is necessary in the future. This must have been important: Rudd said it seven times in the one interview. But it is something you say when you have nothing to announce.
The Reserve Bank Board also had a Christmas interlude, despite urgent calls for further substantial interest cuts. Expect a fall today of at least one percentage point. A large reduction wont stoke inflation because, as the Bank reported on Friday, borrowing is contracting. Unfortunately, it wont recharge the economy either: there are too few investors and consumers. What we need is another spending package.
Contrast this holiday air with President Barack Obamas first three days. He decided that the government would regulate hedge funds, derivatives, mortgage brokers and credit rating agencies. He also resolved to curtail remuneration of executives of government-supported banks. The Rudd government has yet to pronounce on these matters. Then Obama obtained Congress assent to the final tranche of President Bushs US$700 billion intervention, equivalent to five per cent of the United States GDP, and he launched an US$819 billion dollar package (another 6 per cent of GDP) which he promised during the election.
True, the US needs are great and a fading mandate emasculated the Bush administrations capacity to intervene. But Obamas first try at meeting economic problems – he also actively addressed other issues – is impressive.
On January 20, Rudd at last had something to say. Notwithstanding government bank guarantees, for which over forty foreign-owned banks are eligible to apply, these same banks might not renew loans to Australias property sector. The risks warranted a $4 billion fund which the government and the major Australian banks established to make good some of the possible lending shortfalls.
Rudd was right to expose consequences of Australias dependence on overseas borrowings. But he didnt reveal all. The most recent data from the Australian Bureau of Statistics show that Australias net foreign debt has been growing at around $70 billion a year, seven per cent of our GDP. At end September, it stood at $658 billion, over 60 per cent of GDP. Around 94 per cent of this was owed by the private sector, mostly by our banks.
Had Rudd painted the full picture, he would have explained that we should be simultaneously increasing savings and domestic spending. Increased savings are needed to reduce reliance on foreign borrowings which might be affected by the international financial crisis. And Australians ought to be spending more to boost lagging economic activity. Rudd might also have explained how we are to meet these two somewhat conflicting goals.
Another important advance occurred last week when the Treasurer, Wayne Swan, decided he had enough evidence to act again. He resolved to use overwhelming force to stimulate the economy by adding to the deficit. He will augment programs announced last year totalling about $15 billion (about 1.5 per cent of GDP). Because Rudd and Swan had chosen not to go to the World Economic Forum in Switzerland – reversing a decision they had earlier made – we might see when parliament resumes tomorrow how the government will use budget policy to increase economic activity.
While progress seems slow, it compares well with the inactivity of the Howard government. We should have addressed asset inflation earlier, but John Howard said the problem did not exist: he knew of no-one complaining about the increased value of their home. We should have attended to our household debt problems when we had better scope to do so. But the then treasurer, Peter Costello, argued that this increased debt was offset by growth in household income and wealth.
With falling asset prices and incomes, we are left with a debt problem as well as a weak economy. Pity is we cant properly address both problems at the same time. Because the government has rightly decided to stimulate the economy, we have to hope that foreign savings will remain reasonably available to support our debt.
