- Having overseen a successful sidestep of the last real recession risk, former Prime Minister of Australia Kevin Rudd has offered his strongest piece of advice yet to the current government, in an opinion piece published on Thursday in the Australian Financial Review.
- In it he argues that Australia has a one-in-three chance of going into recession next year, as policy makers become complacent at the same time that the world wrestles with a great many and varied geopolitical and economic threats.
- He advises the Australian government to do more now to offer the country the best possible shot at avoiding a recession, including undertaking signficant reforms, increasing government spending and stepping up on the global stage.
There’s plenty going on in the world right now to make investors, markets and even former Australian Prime Minister Kevin Rudd nervous.
Interest rates in Australia and abroad are at record lows, the US-China trade war is escalating, a hard Brexit is fast-approaching, and the prospect of war with Iran could capsize the world’s oil supply. Italy is still at risk of defaulting while the UK and Germany are proabably already in serious economic trouble.
And that’s just the tip of the recessionary iceberg, the world is sailing towards, Rudd warns.
“Global economic storm clouds are gathering. The US is already 10 years into its current growth cycle – the longest in modern economic history. Markets are anticipating a correction,” he wrote in an opinion piece published in the Australian Financial Review (AFR) on Thursday.
All of these factors have placed world economies in a precarious position, including Australia. In fact, Rudd puts our chances of going into a recession next year at “one-in-three”.
“The risk of recession in Australia next year is therefore real. The question for government is, are they prepared to prevent it?” Rudd asked.
What prevented an Australian recession in 2008?
It’s an interesting question to be posed by Rudd, having been at the wheel when the 2008-2009 Global Financial Crisis (GFC) sent many countries into recession, but not Australia.
The reasons why is a matter of debate.
Some will tell you that good governance saved the country. The Treasury, for example, notes that the OECD called Rudd’s cash handouts “among the most effective in the OECD” and that it “helped avoid a recession”.
Dissenting views say Australia was helped far more by China, which went on a spending spree to save its own economy and inadvertently Australia’s. Treasury again maintains a mixed view.
“While demand from China provided considerable support to the economy during this period, it was not the only factor, nor the main factor, underpinning the resilience of the Australian economy,” it concluded in 2011.
Regardless, Rudd would likely tell you he single-handedly did it himself, with one-off cash handouts to taxpayers to spend and get the economy going. He’d also probably tell you he’d be able to do it again if it wasn’t for those meddling kids currently in office.
Rudd claims current government “complacency” threatens the Australian economy
This, of course, is where a Kevin Rudd opinion piece was always destined to go: a self-serving legacy piece with a few potshots at the current government for good measure.
“Australia should reflect carefully on the lessons from a decade ago when we last faced such a challenge…In 2008-2009, we faced the reality of a global financial crisis, collapsing financial institutions, global recession and the possibility of a second global depression,” he wrote.
He then outlines seven key points as to what his “politically and psychologically prepared” government did in response. Interestingly, he lists the fact the country “benefited from the continued growth in emerging economies, especially China” as a lesson. Perhaps Rudd expects Scott Morrison to go hat in hand to Chinese President Xi Jinping and ask him to save Australia once again.
It should be said Rudd’s piece is not being entirely unreasonable — unlike the time he tried to deliver a message in Mandarin.
Once he gets through a long list of his own accomplishments, he does mention the unique challenges currently facing the world and Australia.
He correctly points out that global interest rates nearing zero constrains the ability of monetary stimulus. Just this week the Reserve Bank of Australia (RBA) admitted that the stimulatory impact of further cuts will be minimal.
Rudd also notes that “China has less capacity and political appetite for the scale of fiscal stimulus it did in 2008-2009”, that growing protectionism amid the ongoing US-China trade war is making things worse, and that government budgets aren’t nearly as ample as they were a decade ago.
Despite that final admission, Rudd also couldn’t help himself when he gleefully lashes those at the controls this time around.
“The current government, rather than returning the budget to surplus over the last three-six years, as it solemnly promised during previous elections, is now politically obsessed with a 2019-20 surplus, potentially exacerbating any slide towards recession,” he wrote.
Rudd says Australia might be able avoid a recession in 2020 with the right steps
Political differences aside, this observation does have a ring of truth to it.
RBA governor Philip Lowe has all but asked Morrison and Treasurer Josh Frydenberg to loosen up the purse strings and ramp up government spending on things like infrastructure and raising Newstart to get the economy firing. The subtle advice has all but fallen on deaf ears, forcing Lowe begrudgingly down a path of lower rates instead.
But if Frydenberg doesn’t want to sacrifice his precious budget, there are other options on the table.
“Canberra will need to use its ‘special relationship’ with Washington to fight protectionism – the new leitmotif of the Trump administration,” Rudd wrote.
Given Trump has disregarded the urging of his own advisers on the issue, it would seem unlikely that Morrison could do much to persuade Trump to change his mind.
Wishful thinking aside, Rudd does have support when he recommends that Australia undertake serious economic reform.
“Assuming Canberra can avoid recession, now a one-in-three risk for 2020, it must also act to reform an economy that has at best been bumping along the bottom for the last five years with negligible productivity growth,” he wrote.
Reform, however, is something that has been lacking from successive governments for much more than five year years, arguably including Rudd’s.
His suggestions are many. He proposes small business tax reform, using a small part of Australia’s superannuation to back Australian tech start-ups, and a big investment in STEM education to prepare the Australian workforce for the future.
He also suggests making a long-term commitment to large-scale migration to offset an ageing population, among other ideas.
Some, including think tank The Grattan Institute and property group Domain, have called for stamp duty — the lump-sum tax paid by homebuyers — to be scrapped, a move which would boost the economy by an estimated $17 billion.
Given, Frydenberg just this week poured cold water on Rudd’s claims of recession, it’s unlikely the government will be receptive to any of his ideas.
If the country does plunge into one as a result, it will at least come with one small upside — the former PM will be happily vindicated and have another triumphant chapter for his next book.