Rudd came to office promising to be an “economic conservative”. His government is crafting a similar image as it prepares to fight this year’s election. Contrary to the received wisdom in the media, this is neither a popular nor a smart idea.
Treasurer Wayne Swan has confirmed that in this year’s budget the government will introduce a cap on new spending of 2 per cent, to remain until the government deficit is paid off. The cap will see government spending as a proportion of GDP shrink over time.
It means a return to austerity policies after Rudd’s response to the global economic crisis, when he condemned “extreme capitalism and unrestrained greed” and launched over $60 billion in stimulus spending.
The government’s spending cap means new spending on health and education—for instance to put the funds into hospitals that could really fix the problems Rudd’s federal takeover is targeting—will be impossible without cuts elsewhere.
Rudd has capitulated to the Liberals’ scare mongering about the size of the budget deficit. It is another issue where he has tried to outflank Abbott on the right.
When Rudd first adopted his “economic conservatism” during the last election, many media commentators labelled this clever politics, claiming big spending initiatives from government would not be popular with voters.
But austerity measures are not popular with the majority of the population. A comprehensive poll on attitudes to tax and government spending done last year showed 79 per cent want governments to spend more on public services. And 64 per cent thought big business paid too little tax.
Rudd’s support for austerity is about appeasing big business, who want taxes kept low in order to maximise profits.
But austerity measures also run the risk of tipping Australia back into recession.
Recent economic figures show the Australian economy grew by 2.7 per cent in 2009. This is near the expected “trend” of the boom conditions of the last decade. The Deputy Reserve Bank Governor, Ric Battellino, has declared that the threat of recession, “has passed, [and] the underlying dynamics of the resource boom are starting to re-appear”.
But as economics writer Peter Martin wrote in the Fairfax press “Take away the stimulus… and it’s hard to find evidence of a boom.”
Terry McCrann wrote that the main contributor to growth in the December quarter was “a massive 11 per cent increase in business investment”. But this was a result of a government tax break that ended in December—and mostly went on new cars.
The expanded First Homeowners Boost, which gave new homeowners up to $21,000, increased the number of new houses built per month from 7500 to 9600. This was also withdrawn in December.
As Wayne Swan admitted, “The stimulus peaked in the middle of last year and it will detract from growth as we go through the year.”
Most of the growth in the last year—1.7 per cent of the 2.7 per cent growth—was a direct result of the stimulus measures.
With the stimulus removed, there is no certainty that the Australian economy can keep growing. And this is without considering the impact that a new shock to global markets from more bank failures or the default of unstable countries in Europe such as Greece could have.
At the same time as the stimulus is disappearing, the Reserve Bank has begun putting interest rates back up. This will drain household incomes. According to calculations by economist Steve Keen, the cuts to interest rates added 5 per cent to disposable incomes during 2009, more than the stimulus measures which added only about 4 per cent.
Confident that the economy will keep growing, the Reserve Bank lifted interest rates to 4 per cent in March. This is up from 3 per cent in September. Some economists expect another percentage point increase by the end of the year.
Interest rate rises so far have already lifted repayments on an average $300,000 home loan by almost $200 a month.
As interest rates move back to the levels of a few years ago the huge debts that homeowners have racked up, encouraged by Rudd’s homeowners grants, will start to bite again.
Rudd’s obsession with cutting spending will be no help as working people feel their living standards threatened.
By James Supple