The last time Australia had a recession, it wasn’t merely fashion, hair styles and media that were different. Economic policymaking was very different, too.
The technical “recession that we had to have” never technically happened: Paul Keating uttered that line in November 1990 after the release of the September quarter national accounts by the Australian Bureau of Statistics (ABS), which showed the second contraction in a row after the June quarter.
But the June quarter result was already being revised higher even then. All these years later, the June 1990 quarter is estimated to have grown 0.1%, not contracted. Remember that on Wednesday, when the ABS releases the June 2020 quarter national accounts.
In any case, the recession would come soon enough, in the March and June quarters of 1991. The GDP numbers by that stage were moot — unemployment had begun rising from early 1990, having briefly bottomed below 6%.
The main culprits were the Reserve Bank (RBA) and Keating himself — this was pre-central bank independence — and their determination to crush inflation, at that point running at a peak of 8.7%. The bank only began lowering interest rates from 17% in April 1990; a year later they were down to 12%; by April 1992, 7.5%. None of the RBA’s post-meeting statements even mention “recession”, referring instead only to weaker demand. Inflation was the main game.
Those interest rate cuts had little effect on unemployment, which hit 10% in 1991, hovered around 11% up to and past the 1993 election, before falling below 10% in May 1994. Bank collapses in Victoria and South Australia, and the government’s persistence with its tariff reduction policies, made things especially grim in those states, with unemployment peaking at 12.5% in Victoria. By mid-1994, the RBA had lowered rates to 4.75%.
But in August that year, with unemployment still above 9%, the RBA declared “economic recovery in Australia is now well established” and jacked rates up by 0.75%. Remarkably, two more increases of 1% would follow that year, reflecting that inflation had gone up over 2%, on its way to a peak of 5% in late 1995.
If the RBA had been slow to respond to deteriorating unemployment, the government was even slower. The Hawke government, on its last legs without Keating as treasurer, struggled to formulate a significant response to soaring unemployment. A coherent policy awaited Keating’s seizure of the prime ministership. The One Nation stimulus package was unveiled in February 1992, when unemployment was 10.2%.
The immediate stimulus component of the package consisted of some cash handouts and sales tax cuts, but was mostly infrastructure projects; although unemployment would be above 10% for another two years, much of the infrastructure spending would not reach the economy for years to come. Keating also announced what became the infamous L-A-W tax cuts, but they weren’t scheduled to commence until the 1994-95 financial year.
The origins of Ken Henry’s phrase “go hard, go early, go households” lies in his firsthand experience of these years — he was an adviser to Keating until mid-1991, before he returned to Treasury for a year prior to taking a Treasury post in Europe.
That lesson informed Labor’s enormously successful stimulus package in 2008. And despite reluctance to commit to fiscal support, the Morrison government also went hard and went households — and went early enough — on the JobKeeper program. The RBA also moved quickly this year, but had virtually no room to move on interest rates; instead it focused on ensuring the financial system has sufficient cheap money to support lending.
As is now well-rehearsed, it took many years for unemployment to come down to the levels we’ve become used to now. It was still above 8% when Howard defeated Keating; it was still nearly 8% when Howard narrowly avoided defeat in 1998. Two governments had secured re-election despite levels of unemployment we would now regard as unacceptable.
The RBA currently sees unemployment peaking at 10% this year, with a “gradual decline” expected after that. Participation will play havoc with the headline unemployment rate. After peaking at 64%, it fell to just over 62% in the depths of the early 1990s recession, but rising employment pulled people back into the jobs market, pushing unemployment back up to 11%.
But that was a heavily gendered phenomenon. The early 1990s recession was just a blip in the long-term rise in female participation (needing two incomes to pay 18% mortgages will do that). Female participation was above 52% going into that recession and by 1995 had hit 54%.
But male participation suffered long-term damage: nearly 76% at the beginning of the recession, it was below 74% in 1995 and continued falling in the Howard years, below 72%, only picking up briefly during mining boom mark one. It was 71% heading into this recession.
This government’s great economic achievement has been to get participation up to 66%; that fell back down to early 1990s levels in May but is now back to 64.7%. But it’s entirely because female participation, driven by government spending in health, social care and education, is now at 60%.
The challenge for policymakers is to avoid a repeat of the 1990s experience: they need not merely to ensure that unemployment doesn’t remain near 8% in the late 2020s, but that it doesn’t inflict permanent damage on participation.
They have intervened far earlier, and far more effectively, than in 1990-91. But, given interest rates are already effectively at zero, there are years of work ahead of them to ensure that this recession is both shorter and shallower than what happened to us a quarter of a century ago.