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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