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In times of uncertainty we can’t afford ideologues

In 2013, Nobel Prize winning economist Joseph Stiglitz visited Australia. In an article in the SMH titled Australia, you don’t know how good you’ve got it, he warned that the tone of the economic debate in Australia was “both far too pessimistic about the current economy and far too complacent about the risks in the future”, labelling the “obsession” with public debt “a distraction from the more fundamental question of how to establish sustainable long-run growth.”

He made the following points:

  • While other countries fell into the global recession, Australia maintained strong economic growth, low government debt and a triple-A credit rating.
  • In Australia the stimulus helped avoid a recession and saved up to 200,000 jobs.
  • When the economy is weak, the long-run tax revenue benefits of keeping businesses afloat and people in work can be greater than the short-run expenditure on stimulus measures.
  • Cutting back on high-return investments just to reduce the deficit is misguided. If we are concerned with long-run prosperity, then focusing on debt alone is particularly foolish because the higher growth resulting from these public investments will generate more tax revenue and help to improve the long-term fiscal position.
  • Proposals for substantial budget cuts seem particularly misplaced at this time given that Australia’s economy is confronting new global challenges. Commodity prices are softening and growth is slowing in many key export markets. Australia is already facing declining mining investment.
  • Sharp cuts to public spending over the next few years will exacerbate these challenges. Withdrawing government spending as the economy weakens risks tipping Australia into recession and increasing unemployment.
  • Assuming standard multipliers, cutting public spending by $70 billion from an economy the size of Australia’s over a four-year period could reduce GDP growth by around 2 per cent and cost up to 90,000 jobs.
  • Instead of focusing mindlessly on cuts, Australia should seize the opportunity afforded by low global interest rates to make prudent public investments in education, infrastructure and technology that will deliver a high rate of return, stimulate private investment and allow businesses to flourish.

Before the GFC, a secret report by banking regulator APRA warned of the danger of rising private debt and lax lending standards, forecasting a massive and unprecedented rise in the number of people who couldn’t make their home loan repayments with a 7.5 per cent home loan delinquency rate in September, 2009 if the economic environment remained unchanged.

As it turned out, dodgy lending overseas caused a global meltdown, the Reserve Bank slashed interest rates, the Government threw money at households and a home-grown banking crisis caused by lax lending was averted, temporarily at least. But were any lessons learned?

While incomes stagnate, household debt has soared to new records. Household debt in Australia is now bigger than the entire annual output of the economy, the highest level in the world.

APRA chairman Wayne Byers admitted at a Senate committee last year that a further erosion of bank lending standards in recent years had caught the regulator unawares.

WAYNE BYERS, APRA CHAIRMAN: We were a bit surprised by how much the competitive pressures in the industry and the competitive dynamic in the industry had led people to do things that were, you know, really, in our view, lacking in common sense.

The banking watchdog is now fighting a rearguard action to reign the banks in, demanding that banks raise more capital, curb investor housing loans and tighten lending standards. There is real concern that if interest rates go back to normal, people will not be able to service their mortgages and there will be wholesale defaults.

It is impossible to know yet what the fallout from Brexit will be and how it will affect Australia, but one thing is certain. We cannot afford a government who is ideologically opposed to public spending whilst encouraging the private sector to go into even greater debt. We cannot afford a government who wants less regulation of the financial sector. We cannot afford a government who wants lower wages.

If we do not want to follow the road to recession that the other proponents of austerity found themselves on, we cannot afford the Coalition.

 

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10 comments

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  1. Matters Not

    While incomes stagnate, household debt has soared to new records

    Not all ‘incomes’ have stagnated.

    The latest figures for Australian household incomes and wealth released last week showed that income inequality has risen in the past two years. The average annual income of the richest 20% rose by 7%, while median households saw their income rise by just 1.3% in the same period

    It’s called ‘hollowing out the middle’. And it happened in the US and is happening here. The existence of the ‘middle class’ faces real and present danger.

    https://www.theguardian.com/business/grogonomics/2015/sep/10/australias-rich-are-getting-richer-everyone-else-is-stagnating

  2. Jack Russell

    Labor knows this. If they win government we will be okay.

    If not, we are done for. Another term of social austerity and siphoning off the wealth of our country into private hands by the current fascists will be a bridge too far.

    So many voters just do not understand.

  3. totaram

    Free thinker: I don’t need to read any more articles. the first 3 points of Kaye Lee’s post say it all. Repeat after me….. again and again.

    There are people who still think the stimulus of the Rudd govt. was a “waste”. They think the money was wasted because we have “nothing to show for it”. This assumes that all the insulation provided to millions of homes with the “pink batts” has evaporated, and the school halls built with the BER program have collapsed into ruin. What can you do with such people? Frankly, not much. Either they are incorrigible fools, or they are paid to regurgitate this rubbish.

    Unfortunately, there is a large cohort of people who are simply not aware of the facts or can’t be bothered. I don’t really blame them too much. The world has become increasingly complex and no one can understand everything, or even absorb the information required to evaluate choices rationally. We are all time poor, struggling to get on with our lives, and that is where the ownership of the “free press” plays a role – in misinforming the public. Fortunately the role of the MSM is diminishing because of the internet, but our clever neo-liberals are onto that. Mr. Fraudband has tried to ensure that Australia will fall behind most other countries in the years to come, thus allowing the MSM to still exert some of its fading influence. If we work hard we can try and counter that.

  4. philgorman2014

    I’m not so sanguine about being OK under a Labor government. Labor too is unduly influenced by over mighty corporate and union interests, including Citizen Murdoch. They too are dogged by malfeasance, dodgy contributions, careerists, fear of media moguls and plain old corruption.

    Labor has proved unable to clean up its own act, even failing to democratise its branches. Too many right wing factions are influenced by the ideologues of the neo-liberal corpocracy that has displaced genuine democracy in this country.

    A pox on both their houses. A hung parliament is the best we can hope for. Like the last one it would free up debate and allow fresh thinking in. It might even force Labor to reform itself. The reluctant major parties might even be dragged into to a Federal ICAC.

  5. Jennifer Meyer-Smith

    This LNP government won’t adopt the advice of Stiglitz or Kaye because it wants Australia down on its knees. This is so more and more of its gluttonous Big Biz mates can pillage more public assets and Big Banks can feed on private household debt and mortgage defaults.

    That keeps the puppet masters happy and the LNP Degenerates in jobs once they’re sacked by the Australian people on 2/7/16.

    ….

    Hear, hear philmorgan2014.

  6. Shelley

    +1000000 philgorman2014! Thanks Kaye for a fabulous article

  7. @RosemaryJ36

    I am not voting for either major party – – they will be my last preferences but I will put the ALP above the Coalition!

  8. Terry2

    When Turnbull talks of market turbulence and global financial instability what he is saying is that his mates in the merchant banks had ‘shorted’ the pound and stock market betting that a ‘remain’ vote in Britain would create a surge in the pound and the stock market and they would all make a motza.

    So for once the bookies , the speculators and scammers have missed out and as Cayman Mal will tell you these people are not used to losing their bets and they will be very annoyed. But don’t worry about them, they will very quickly find another way to exploit global markets.

  9. jimhaz

    [Household debt in Australia is now bigger than the entire annual output of the economy, the highest level in the world]

    and it kills productivity. You’d think Treasury would have warned govs since Keating many many times about this aspect of high house pricing.

    This article professionally expresses concerns I’ve raised amateurishly before.

    http://www.macrobusiness.com.au/2014/02/its-housing-thats-killing-productivity/

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