Former Australian Prime Minister Kevin Rudd. Photo / AP
COMMENT:
As New Zealand moves towards the 2020 Budget, there is increasing talk about shovel-ready projects, stimulus and building the recovery. It all makes me nervous, probably because I am still spooked by another crisis in another country.
So, let me take you back to Australia in 2011. With my wife, I spent that year's Easter long weekend in the Central West region of New South Wales.
A four-hour westward drive from Sydney, the pretty city of Orange lived up to its name in the autumn haze. It was gorgeous. Once travel to Australia opens again, you should visit.
But I also have another somewhat weird memory from that short break, and that was our Easter Sunday excursion to a little town called Carcoar.
If you have never heard of Carcoar, I do not blame you. The small settlement's modern history began with European settlers in 1821. For the next few decades, it was thriving as a place of commerce and administration. Some grand buildings like the Italian-style courthouse are a reminder of this early period.
Sadly, the decline of Carcoar started with the discovery of gold further to the west. That was in the 1860s. Over the next one and a half centuries everything closed: the Carcoar Chronicle, the courthouse and the railway station. The last census recorded only 200 souls living there.
By all accounts, Carcoar was not so much a dying town but a dead town when we visited in 2011. Indeed, that made it quite charming. Until I discovered not one but two big signs at the entrance of a newly built playground.
"Nation Building – Economic Stimulus Plan supporting jobs and building our infrastructure for the future," said the first. The other explained that the swing, slide and rocker combo had been "funded through the Australian Government's Community Infrastructure Program."
When I recall the madness of the Australian Government's response to the Global Financial Crisis, I picture Carcoar in my mind. It sums up perfectly what was wrong with the Rudd Government's economic stimulus programme. The stimulus was all about spending money, not about creating any lasting value.
I lived in Australia from October 2008 to April 2012. It was a crazy time, but not mainly because of the GFC. The Rudd Government's response to the crisis made it crazy.
The Prime Minister was on a mission to throw everything he had at the crisis, and then some. If there was one expression he used ad nauseam, it was 'shovel-ready'.
Canberra gallery journalist Annabel Crabb distilled the crazy mood of the time when she wrote up a typical Rudd media briefing in 2009: "There was much excited talk of partnerships, roll-outs and 'shovel-ready' projects. There are to be staged deliveries and a whole network of co-ordinators general linking hands across this wide broke land."
No one was more confident than Rudd himself that his genius would turn blind activism into a splendid success. As Crabb put it: "Kevin Rudd held court passionately and unintelligibly for several minutes on the details of the administration structure. It seems that after a spot of light benchmarking, most of these projects are in fact shovel-ready."
I am not a psychologist, but I believe that having lived through the Rudd years, I am traumatised. Whenever I hear expressions like shovel-ready, nation-building, or economic stimulus, it all comes back like a nightmare in which Kevin Rudd is prime minister again.
Then I hallucinate new and empty playgrounds in near ghost towns. I am spooked by the thought of school halls built at gigantic expense – even when the schools do not need them. I am haunted by the thought of home insulation schemes administered so poorly they result in house fires and avoidable deaths.
This nightmare was Australia's economic reality in the GFC years. It was a time of mad activism all in the name of stimulating the economy and preventing a recession.
Some people still claim it worked, not least Rudd and his Treasurer Wayne Swan. And yes, it is true, Australia did not experience a technical recession in the GFC.
That, of course, ignores the two biggest factors in fighting the recession were the Reserve Bank's dramatic cut in interest rates and China's various stimulus measures, which benefitted Australia.
But all this nation-building, stimulus, pink-batts and 'Building the Education Revolution' stuff that the Australian federal government did? Surely it had some effect, you might ask.
The answer must be: "Of course, it did." But not exactly what Rudd intended.
A few years after the crisis, the Australian Treasury commissioned Professor Tony Makin of Griffiths University, one of the country's finest economists, to review the effectiveness of Australia's fiscal policy during the GFC.
He found two things. First, Makin noted that Australia's relatively good performance during the GFC years had nothing to do with fiscal policy: "What prevented Australia from experiencing a technical recession at the critical juncture in 2008-09 was a combination of lower interest rates, a major exchange rate depreciation, strong foreign demand for mining exports, especially from China, and a then more flexible labour market."
And second, Makin found that: "There is no evidence fiscal stimulus benefited the economy over the medium term."
As if that had not been bad enough, Makin added that Rudd's fiscal activism failed to help and actively hurt the economy instead: "Largely implemented after the worst of the GFC had passed, fiscal stimulus countered the effectiveness of monetary policy by keeping market interest rates higher than otherwise and therefore contributed to a strong exchange rate."
All this meant that Australia became less competitive because of Rudd's stimulus spending – and, of course, much more indebted than at the beginning of the crisis.
I never want to live through such a policy nightmare again. For my sanity, and New Zealand's long-term prosperity and fiscal sustainability, I therefore, have three wishes.
First, I never want to hear another excited word about shovel-ready projects. Second, I would like to see decent cost-benefit analyses before any new spending project. And third, I wish the public service would curb any over-enthusiastic minister on their respective pet projects.
I hope this Budget will be as dry and boring as the one Grant Robertson delivered last year and as Steven Joyce and Bill English delivered before him.
And as for the fiscal ghost of Kevin Rudd, may it remain in Australia and haunt those empty playgrounds in rural New South Wales.
- Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative.
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