A paper currently in the news by Professor Tony Makin from Griffith University, published on the website of the enigmatic Treasury Research Institute, asserts that the Rudd government’s stimulus spending in response to the global financial crisis generated no benefit at all. Further, it “worsened Australia’s international competitiveness and damaged industries … particularly manufacturing”. Let’s examine those claims, shall we?
Several passages in this “external paper” have been queried. But this one is a doozy:
“In sum, the nature of Australia’s fiscal stimulus was misconceived because it emphasised transfers, unproductive expenditure such as school halls and pink batts, rather than tax relief and/or supply side reform, as occurred for instance in New Zealand where marginal income tax rates were reduced, infrastructure was improved and the regulatory burden on business was lowered.”
Makin is declaring here — not for the first time — that cash outlays were useless and that cutting taxes would have worked. His exhibit A is New Zealand.
This is truly extraordinary, given what actually happened places where taxes were cut — and in New Zealand in particular.
Before analysing this, some local history. Malcolm Turnbull led Australia’s federal opposition when the GFC hit in late 2008. He had a tenuous hold on the top job, having won it in September 2008 from Brendan Nelson, 45 votes to 41.
Turnbull supported the Rudd government’s first stimulus package in late 2008, although not all Coalition MPs were gruntled at this. He opposed all subsequent stimulus interventions.
Makin is correct in asserting that New Zealand — to the applause of the Coalition across the Tasman — did cut taxes instead of increasing spending. This was the opposite of what Australia did.
A paper from the Organisation for Economic Cooperation and Development (OECD) shows New Zealand effected the world’s greatest tax cuts and Australia undertook the fastest and greatest stimulus spending. (See the dark blue bars for tax cuts and pale blue bars for spending in figure 3.2.)
So what were the outcomes? We can readily compare these across the OECD — the club of 34 developed, mixed free enterprise economies.
In fact, between 2008 and 2010, New Zealand was whacked with the most sustained recession of all 34 countries. It experienced eight negative quarters of GDP growth, six of them consecutive, and two years of negative growth. Second worst was Spain with six negative quarters, all consecutive. Seven countries endured five consecutive negative quarters: Denmark, Estonia, France, Iceland, Italy, Luxembourg and the United Kingdom. Twelve countries copped four negative quarters, and seven experienced three. Only two countries kept their recession to just two quarters: South Korea and Norway.
Four well-managed economies escaped recession completely with just the one negative quarter: Australia, Israel, Poland and Slovakia. Of these, only Australia also avoided widespread and devastating job losses. Israel’s jobless rate surged to 8.0%, Poland’s and Slovakia’s, above 12%. Australia’s peaked at just 5.9%.
By the end of 2010, the fortunes of Australia and New Zealand could hardly have contrasted further. Australia’s economy was clearly the best-performed in the world, with this profile:
- GDP annual growth 2.7%, after one negative quarter of GDP growth,
- median wealth per adult US$124,234, second highest in the world, behind Norway;
unemployment 4.9%, down from a peak of 5.9%,
income (GDP per person PPP) US$39,168;
- Aussie dollar worth US$1.02;
- government gross debt 20.5% of GDP, up from 9.7% in 2007, an increase by a factor of 2.1; and
- trade surplus +$1169 million in a streak of nine positive months.
New Zealand’s, in stark contrast, was thus:
- GDP annual growth 0.3%, after eight negative quarters of GDP growth,
- median wealth per adult US$61,971, ranking 17th in the world;
- unemployment 6.2%, only just below the peak of 6.5%,
- income (GDP per person PPP) US$31,270;
- Kiwi dollar worth 78 US cents;
- government gross debt 13.6% of GDP, up from 5.4% in 2007, an increase by a factor of 2.5; and
- trade deficit -$217.7 million in a streak of six negative months.
Is there an NBN black spot over Griffith University that prevents access to basic information via the internet?