Who’s running the economy??? – The counterproductive policies of Glenn and Wayne
The Australian economy is racing along at break neck speeds with RBA Governor, Glenn Stevens, frantically slamming on the brakes from the driver’s cabin, whilst Wayne Swan and the Government keep obliviously shovelling coal into the boilers.
The economy is kicking along at a healthy 2.3% growth rate, our terms of trade are at record levels and unemployment is at a rock bottom 4.9%. On top of this stellar report card, we have another mining boom stretching out before us and a world economy emerging from the ravages of the GFC, with billions globally steadily being dragged out of poverty into a middle class obsessed with consumption. In summary – the economy is good. The problem is the Government is still spending like its bad.
Why are we stimulating an economy with spending which is already growing too fast? Why are we racking up debt, which will need to be repaid in full with interest, in good economic times? Why is the government fuelling the economy whilst the RBA is lifting interest rates to slow it? Who’s running the economy? These are all good questions - with no good answers.
This coming year we will rack up some $40 billion in federal borrowings, adding to the $140 billion we borrowed in the previous 3 years. Alarmingly, our debt levels will continue to rise beyond this year, hitting $300 billion by 2014. We are borrowing hundreds of millions of dollars a week, every week. Outrageously, all this is happening during a time when we are expecting strong above trend economic growth when we should be saving.
So how did we get here? In 2007 we faced the GFC. It tore apart economies around the world, plunging the globe into a recession. In response, our government rightly started to spend – saving jobs and the economy. But after the initial stimulus package, they developed a liking for spending and rolled out massive long term spending projects like the National Broadband Network, The Education Revolution and the Ceiling Insulation program; they built up a long term structural deficit in response to a short term downturn. To their shock, the economy turned around faster than expected catching them with their pants down and wallets open.
The Reserve Bank is now, quite rightly, trying to slow the economy as inflation rises above acceptable levels. But it has to act more heavy handed because government spending is still driving an expansion. Households have been needlessly crunched between a discerning RBA and decadent Government spending, getting hit once now with higher interest rates and again later with higher taxes to pay off the debt.
Our fiscal and monetary policy needs more coordination. The lesson to be learnt is that Governments need to prioritise flexibility in their fiscal arrangements, keeping themselves responsive to handling dynamic economic conditions – ensuring that we never again see the RBA pitted against its own Government. For now, however, our hands are tied; all we can do is to hope this doesn’t all end in a train wreck.
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