“Because of the global financial crisis and the global recession it has caused, we need fiscal policy and monetary policy working strongly together, and they are, they are working in tandem.”

That was Wayne Swan back in 2009. It used to be Labor mantra. Kevin Rudd even had his own hand gestures for it to deploy in question time. Others got in on the act too. “We need to get the physical and monetary policy working,” Steve Fielding once said.

In 2010, when the financial crisis looked to have passed and the Australian economy appeared to have sailed clear through the storm with barely a dip in its speed, the mantra was changed to: Keynesians on the way down, and Keynesians on the way back up. The RBA was lifting interest rates off their emergency lows and the government was planning for a rapid fiscal contraction to demonstrate to voters the opposition’s incessant rhetoric about profligate Labor was wrong.

Then came the decoupling. Revenue failed to recover as quickly as expected. Our terms of trade fell more quickly than forecast. Commodity prices fell more than forecast, in particular, slashing revenue from the government’s mining tax. The economy, after performing more strongly than expected after the disasters at the start of 2011, headed below trend as we entered the forecast year of surplus. But Labor had wedded itself to a surplus, come what may.

Suddenly monetary and fiscal policy no longer need to work in tandem, they need to operate against each other. And the more, the better. The more the government cuts spending, the more room for interest rates. Monetary policy is now the only instrument of stimulus except in the case of emergency, which is the only circumstance in which fiscal stimulus would be resorted to.

Few bother to point out how the government has entirely backflipped on its economic philosophy. Not just a normal, trivial, press gallery-type “backflip”, but a monumental one over the entire nature of the economic policy. And as each MYEFO and budget downgrades revenue forecasts, the backflip becomes all the greater.

Peter Fray

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