Judging by the continuing commentary and criticism of the Government’s stimulus packages, not too many people have any idea of what the central economic problem is for this country and the rest of the world.
It’s not the recession or the credit crunch, nor is it the stimulus spending, or even debt — it’s the sustainability of the recovery now falteringly underway in the US, Europe, Japan and the UK, and well underway in China, Australia, India, South Korea and most other economies of the region.
Making that recovery sustainable will allow it to continue, as Government revenues regenerate and unemployment peaks and then falls.
Despite what Malcolm and the alarmists claim, debt is not a problem exclusive to Australia — every major economy has seen bouts of debt-financed Government spending boosts. We are not alone, despite what Mal and his pals might suggest. Nor is this necessarily a problem — we have the capacity to cut debt far more quickly than many people think because of where we are placed in the world and our continuing closeness to China’s economy.
The only way we can cut that debt pile and the accompanying deficits is through a sustainable recovery, and the only way that recovery can be made sustainable is by making sure it doesn’t fall in a hole due to withdrawing that stimulus by way of spending cuts or interest rate rises (which would in turn damage business and consumer confidence). Government spending will have to be cut, taxes will have to change and tough decisions required of Mr Rudd.
But what is confusing all the alarmists is the way they are unable to see the difference between Australia and the rest of the world (and Wayne Swan and Kevin Rudd should stop being Pollyanna and start being realistic optimists).
The Federal Opposition continued their attacks on the Government yesterday without understanding that they could redirect their criticisms by pointing out the way that Australia is different to the rest of the world and what needs to come from Canberra.
The $50 billion LNG deal with China underlines that difference.
Unlike China, the US, Europe and Japan, we don’t need to restructure our exports and imports, change demand patterns like the major economies do; all we have to do is make sure the economy doesn’t fall in a hole (as Ken Henry and the RBA have warned), while the resources boom recovers, and brings with it a return of the investment boom.
The renewal of the resources boom, driven by demand from China and soon India, will make more companies more confident to resume investing, a point the Reserve Bank has now remarked on three times in the past two weeks in various statements.
What we need is to make sure the economy continues to be supported to when the resources boom recovers, to prevent a dip in activity and a nasty rise in unemployment.
Tens of billions of dollars are waiting to be invested in projects like the Gorgon gas project, a similar, but smaller project from Woodside, others in the same area of WA. There are at least four major projects in Queensland exploiting coal seam gas into LNG; there’s Olympic Dam in South Australia and coal mining projects in NSW and Queensland.
That’s also why the infrastructure spending in the second stimulus package will be vital, especially in rail and port capacity expansions.
The RBA summed up the current policy dilemma in the minutes of its August board meeting.
In discussing the timing and process of removing some of the current expansionary policy setting, members noted that it would, when it began, involve balancing two risks. There was a risk of overstaying a very accommodative setting in a recovering economy, particularly when underlying inflation still needed to decline to reach the target.
On the other hand, there was a risk of an early tightening choking off confidence and demand prematurely.
A particular source of uncertainty was whether the recent growth in household spending was due mainly to the temporary fiscal measures, in which case it would probably soon fade, a more general decline in risk aversion, or the more persistent effects of lower interest rates. Information over the period ahead would be important in judging this.
This is different to the central policy problem for the rest of the world which was nicely captured overnight in an article by IMF chief economist, Olivier Blanchard.
He highlighted the central problems for the world in the recovery now under way: “The turnaround will not be simple. The crisis has left deep scars, which will affect both supply and demand for many years to come.”
US consumption, which accounts for about 70% of the American economy and a slab of global demand, would not quickly return to pre-crisis strength as households cope with trillions of dollars in losses from the falling housing and stock markets. We have had a series of figures in the past 10 days which confirm that point, from consumer debt, spending to retail sales and bank lending data
With US consumers unlikely to return to their big-spending ways pre 2008, the United States and its trading partners will have to adjust. Emerging Asian countries, especially China, must play a big role.
From the point of view of the United States, a decrease in China’s current account surplus would help increase demand and sustain the US recovery.
That would result in more US imports which would help sustain world recovery.
Changes in the composition of world demand, as consumption shifts from advanced to emerging economies, may require changes in the structure of production.
But in order for China to boost domestic demand, it will need to provide a stronger social safety net and increase household access to credit, which will encourage its consumers to save less and spend more.
“Both higher Chinese import demand and a higher (Yuan) will increase US net exports,” he said.
And, there’s the difference between the rest of the world and Australia, as illustrated overnight by the $50 billion LNG deal with China.
That’s the import by China of an export from Australia — it’s a resource (and a lot of carbon). We don’t have to cut our manufacturing export sector or dramatically curb domestic or expand consumption as Germany, Japan, China and the US, all have to do in coming years, all we Australia have to do is make sure we have sufficient productive capacity to curb bottlenecks and other potential boosters of inflation.
That’s why stimulus spending on infrastructure, job training and re-training and education is vital for Australia. It’s also why the Reserve Bank is very worried by the potential for a housing bubble emerging, because it does so quickly and the bank knows that it will have to lift rates sharply and quickly to kill it off, and that could imperil the overall economy and the recovery.
Our biggest future policy problem isn’t debt or deficits — it’s a return to the inflation, inadequate capacity, job bottlenecks and not getting to biggest returns for our resources that we saw in 2006-2008.