Federal Opposition Leader Malcolm Turnbull has once again gone all selective and forgotten recent economic history in bagging the Rudd government for not acting sooner to shield Australia from fallout from the global economic crisis. In his speech to the nation last night, Mr Turnbull accused the government of failing to heed the warning signs earlier in the year that pointed to the scope of the problem.

“With the benefit of hindsight, government should have acted a lot earlier,” he said.

Ah, those weasel words for anyone in economic commentary trying to make a point: “The benefit of hindsight”.

When deciding on policy, hindsight is only handy to politicians, economic historians and journalists and others trying to score points. It’s useless in policy terms because economic policy is all about the future, altering demand and output, inflation, spending etc.

In fact, if Malcolm wants to have others use the benefits of hindsight, it’s clear the Howard/Costello gang failed to cool the economy enough in the first half of 2007, that they continued to spend heavily, supported by the flood of money from the resources boom, and failed to notice the outbreak of the economic crisis in July-August last year.

Peter Costello makes a big point in his book and various columns about his warning of a financial tsunami, but he said that as a cheap political warning to voters, akin to Malcolm Fraser’s silly warning about putting your savings under your bed in the 1983 election campaign.

The Howard/Costello Government didn’t make any changes to policy, despite the evidence of the gathering storm in the US and Europe about the subprime mess, and the emergence of problems in hedge funds and the sharemarket here.

“Regrettably, Mr Rudd’s government missed the warning signs at the beginning of the year and talked up inflation, and consequently interest rates, at precisely the wrong time,” Mr Turnbull said last night.

Well, regrettably for Mr Turnbull, there was no sign in last year’s mid-year financial review of any recognition of the looming tsunami that Mr Costello now claims credit for.

This is from Mr Costello’s Mid year Economic and Fiscal review press release issued last October 15, just over a year ago.

The Australian economy is expected to grow by 4¼ per cent in 2007‑08, compared with 3¾ per cent forecast at Budget. The upward revision reflects a broad‑based strengthening in growth during the first half of 2007, which is expected to be sustained. Business investment is forecast to grow strongly, underpinned by ongoing profitability in the mining and construction industries.

Despite some near‑term strength, wage and inflation pressures are forecast to ease in 2008‑09. This reflects an easing in demand pressures and increasing supply flowing from strong and sustained business investment and stronger productivity growth.

Using Malcolm’s “hindsight” Peter Costello looks a right goose for those comments now. No mention of a tsunami there!

Less than a month later the RBA put up interest rates because of the splurge of spending adding to the inflationary pressures of the resources boom and capacity constraints caused by a decade of under spending on training and infrastructure by state and Federal Governments. (The Labor state governments were just as culpable as the Federal Government in cutting spending on education and infrastructure. Just look at NSW)

Because the federal government at the time did not allow the RBA to issue statements after every board meeting and minutes, we had no way of knowing at the time just what the central bank think. Those minutes were released earlier in the year and there was concern. but there was also concern about inflationary pressures.

It might pay for members of the Liberal Party to read the minutes for the November 6 meeting. Here’s one comment from the minutes for that meeting:

Since May, parameter variations had suggested an increase in the surplus to around 2½ per cent of GDP over the period covered by the forward estimates. New expenditure and revenue measures announced since the budget and in the early part of the election campaign had since reduced the projected surplus to around 1 per cent of GDP. This meant that fiscal policy was roughly neutral in its overall effect on growth as conventionally measured, the recent initiatives having offset the ‘automatic fiscal stabilisers’.

So fiscal policy went from being tight to being ‘neutral’ because of post budget spending and expenditure decisions of the Howard/Costello Government. This was at a time when inflationary pressures were rising:

In considering the recommendation, Board members agreed that on domestic economic grounds, the case for a further tightening of monetary policy was clear. Key data on demand and activity and prices all pointed to the likelihood of stronger medium-term inflationary pressures.

The longest section of the minutes was in fact on discussing the impact of the crunch and international financial conditions, so the RBA was very aware of what was going on.

Peter Fray

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