Ken Henry and David Gruen of Treasury should spend less time sneering at Barnaby Joyce and more time contemplating the unfolding calamity in Europe, and coming to grips with what’s really going on in Australia.
As I explain below, Australia’s debt-funded fiscal stimulus is double what was announced and is only half-spent. In other words, the government is still in stimulus mode while interest rates are going up and unemployment is falling.
In general, what we are seeing is not just a Mediterranean muddle – it is the beginning of the great global fiscal stimulus reckoning.
It’s true that Greece is both horribly, irretrievably insolvent and too important to fail, so that Germany and France last night had to cobble together a debt underwriting.
Despite last night’s agreement, the outlook for Greece and the EU remains grim indeed because France and Germany are adding to their own liabilities while not reducing Greece’s, and Greece will be quite unable to do what’s required – that is cut its deficit by 10 percentage points of GDP (from 13 to 3%).
The mob is already baying and unions are already striking: the idea that the Greeks will allow themselves to be pushed around by the Germans again and told to eat gruel, 56 years after their liberation from the invading German army, is fanciful.
But it’s not just about Greece: the entire western world is now in fiscal crisis as a result of the wild economic stimulus measures announced between September 2008 and June 2009.
And unfortunately for the taxpayers who must now foot the bills, nobody knows whether that’s what saved their bacon, or whether it was the monetary policy and liquidity actions of the central banks.
In fact it was probably just the central banks. It was certainly liquidity that turned the markets last March and zero interest rates that saved the banks and restored their profits – but nowhere, except Australia perhaps, has government spending actually brought down unemployment.
Unlike virtually every other western country, Australia is not facing a fiscal crisis – partly because the government entered the financial system meltdown with budget surpluses and partly because of the incredible performance of the labour market, as evidenced by yesterday’s revelation that another 52,700 jobs were added in January and the unemployment rate has fallen to 5.3%.
The problem for Australian taxpayers is that the stimulus is still going flat out even though there was no recession here, unemployment is falling and interest rates are on the rise.
The OECD puts the Australian stimulus package at 4.6% of GDP in total – third largest behind the US and China.
In fact that seems to be a colossal underestimate of what the Rudd government is actually doing – it looks like the actual stimulus is double that figure, and what’s more there is at least a third of it still to be spent, possibly half.
The forward estimates surpluses in the 2008-09 budget brought down in May 2008 totalled $79.3 billion, spread over four years to 2011-12.
The 2009 Mid Year Economic and Fiscal Outlook last November contains deficits for the same years of $162.5 billion – a turnaround of $241.8 billion.
Of that figure, $143.1 billion is due to non-discretionary automatic stabilisers (mainly lower tax revenue), which leaves $95.7 billion in the discretionary fiscal stimulus bucket.
So whereas Kevin Rudd’s fiscal stimulus announcements in December 2008 ($10 billion) and February 2009 ($41 billion) do add up to 4.6% of GDP, there is $44.7 billion of discretionary spending unaccounted for, taking the actual stimulus to 9 per cent – easily the world’s largest.
Moreover, the OECD’s interim report says that 31% of the Australian stimulus is to be spent in 2010. That refers only to the “official” stimulus announcements; the unofficial stimulus would have been less than half spent in 2009.
That suggests the Rudd government will be pouring something like $40 billion of stimulus into an economy this year that the Reserve Bank is trying to hold back with higher interest rates.
And since this is an election year, there is no way Treasurer Wayne Swan is going to bring down a “spending cuts” budget in May: the spending is locked in. The saving grace is that Treasury has been too pessimistic about unemployment and tax receipts so the non-discretionary part of the forward deficits will be lower.
As for the rest of the world, it is far worse than it looks.
Last night the Societe Generale economics research team put out a frightening estimate of the real liabilities of western governments – including off balance sheet debts.
In every case the off-balance sheet numbers – including unfunded pension fund liabilities – dwarf the official debt position.
Greece is by far the worst because of what Otmar Issing, the German former chief economist of the European Central Bank, described yesterday as “one of the most luxurious pension systems in the world”. Its total net liabilities are about 800 per cent of GDP – eight times the official position.
Here are Soc Gen’s figures for the others (% of GDP): US 550, UK 400, Germany 400, France 550, Italy 350 and Spain 250.
In other words, the entire western world is insolvent and each country is facing its own day of reckoning – starting, appropriately enough, in Greece, the place where western civilization itself began.
This article first appeared on Business Spectator.
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