The ambitious Australian financial rescue package, announced by Prime Minister Kevin Rudd last month, has been welcomed by most Australians. However, some key policies, such as the carbon trading scheme, may have to be placed on hold to pay for the rescue.
Rudd has announced several measures designed to reduce the immediate impact on Australia of the global financial crisis.
These include additional spending of $9.7 billion in 2008-09 (equivalent to about 1 per cent of GDP), the purchase of an additional $4 billion of residential mortgage-backed securities and the provision of (temporary) government guarantees of deposits with financial institutions and of bank borrowings overseas.
Some commentators are suggesting the extent of these measures is too great given the strength now of the Australian economy and the monetary easing already implemented by the Reserve Bank.
However, even before the crisis, the economy had slowed below the Budget forecast of 2.75 per cent growth and the very serious implications of the crisis overseas justifies abnormal early action to offset downwards pressure here. This is the one occasion that a resort to Keynesian stimulatory policies is warranted.
Indeed, even with the measures already announced, Australia will be fortunate to avoid a period of three to four years of much lower levels of economic activity and employment.
No one can predict confidently economic growth in the period ahead and the many comforting forecasts from institutions should be treated with scepticism. Most such forecasters are trying either to calm nerves or promote their own interests.
The reality is that there is now a high risk of a global economic recession and, if that happens, it will be difficult for us to avoid one.
We cannot escape the effects of global developments and, with the virtual collapse of the world banking system as a supplier of credit, a much more difficult environment for recovery exists here than after the 1980s share market crash.
Even assuming the government guarantee allows our banking system to continue to obtain the large funding from overseas it previously has been accessing, it will now be much more cautious in its lending policies to companies and individuals. The large increase in debt levels in recent years will be taken into account.
Although the Prime Minister still claims strong Chinese growth will continue to buoy our exports, he fails to understand the relatively small aggregate importance of that demand source for Australia. Our exports to recession-bound Japan are a much higher proportion of total exports (22 per cent compared with 15 per cent to China) and are not as dependent on one export (iron ore) as those to China.
In these circumstances, the question is whether the measures the Government has taken already are sufficient. The most important additional action the Government could take would be to avoid introducing policies that will add to the increased uncertainty companies and individuals already face.
If the Government proceeds with its intended announcements before Christmas on workplace reforms and emission reductions, they will add greatly to uncertainty through the regulation of labour markets and of carbon emissions. These policies should be deferred for further consideration in three years’ time.
Equally, a continuation of the proposed large immigration program could only exacerbate what will be a higher rate of unemployment. This policy must be amended.