The Money Men

the fund’s chief economist, Olivier Blanchard, encouraged member governments to commence stimulus. So while he was still in Washington, Swan revisited the stimulus package that he and Rudd had first discussed in August and that had been progressing since then—the Strategic Priorities and Budget Committee of Cabinet (SPBC), which consisted of Swan, Rudd, Gillard and Tanner, had been briefed on the contours of a potential package on 7 October. Time was of the essence. It was necessary not only to calibrate a sensible stimulus package, but also to have it announced quickly to reassure markets and consumers that there would be government intervention to make up for the inevitable contraction in the economy. Swan phoned into an SPBC meeting from the Maryland home of the Treasury’s representative in Washington. For some reason, the only room in the house in which the highly secure phone line could be made to work was the bedroom of the Treasury representative’s teenage son. Swan joined his colleagues in making decisions on how many billions to spend under the watchful eye of Jimi Hendrix, whose poster adorned one wall.

Rudd and Swan, endorsed by Gillard and Tanner, were working to stimulate the Australian economy before any other country did likewise. They were trying to avoid recession by correcting the negative economic growth before it took off. This was a perilous call on their part, but hindsight shows it to be the right call. Being one of only three major advanced economies to avoid recession during the GFC is enough justification of the risk they took.

In Canberra, the Treasury was recommending a particular style of stimulus: ‘Go early, go hard, go to households’ was the pithy expression that Treasury secretary Ken Henry used to encapsulate his advice. The last stimulus attempted in Australia had been engineered by the Keating government in 1991 to assist the country in climbing out of recession, and it had had a limited effect. The Keating government had waited too long before embarking on the stimulus, with growth already in negative territory before it had been agreed upon. A Treasury analysis had concluded that the infrastructure-laden ‘One Nation’ package had not had the necessary effect on unemployment because the projects had taken too long to plan and build. Hence, Treasury’s advice to consider direct payments to households. As early as 2004, Treasury had undertaken war-gaming exercises regarding how to respond to a dramatic global downturn. Undertaking this due diligence had been well advised, as the work was now dusted off to give a relatively new government some timely recommendations.

This advice to the Rudd government had actually first been given, in a highly confidential manner, as early as 5 August 2008. The world crisis was not yet underway, but the warning signs were ominous enough for contingency planning to be put in place. From The Lodge, Rudd had convened a telephone conference with Swan, Henry and a small, select group of the prime minister and treasurer’s staffers. Rudd wanted to know what action would be recommended if the rumblings in the US financial markets became a calamitous roar. Henry presciently warned that in this environment, interest rate cuts would be highly unlikely to be effective enough to avoid recession. He advised that a fiscal stimulus of around 1 per cent of GDP could well be required. The political staff were then asked to draw up an options paper based on Henry’s advice. As the journalists David Uren and Lenore Taylor wryly observe, ‘When Lehman collapsed a month later it was obvious the papers were going to be needed.’⁷

This was very much a Rudd–Swan plan for stimulus. Deputy prime minister Gillard and finance minister Tanner first learnt of the plans for a major cash injection for the economy at the SPBC meeting on 7 October. Henry briefed the committee that the automatic stabilisers of reduced tax take and increased welfare spending, together with the inevitable interest rate cuts and Australian dollar devaluation, would not be enough to avoid a recession. Still, Tanner, who had put in considerable work to deliver the cuts in the May Budget, was reluctant to rush to undo all that work with a large stimulus. But during the meeting, news came through that the RBA board had just cut interest rates by a full percentage point, or 100 basis points. I also remember hearing that news as assistant treasurer: it concentrated the minds of all. A cut of 25 basis points had been expected, with a 50–basis point cut considered a less-likely outcome. A cut of 100 basis points signalled that the RBA judged the situation to be extremely serious. Cuts of a full percentage point were more common decades ago when Australia was less leveraged (that is, households carried less debt), but such a dramatic cut was unprecedented in modern times.

So the work on a potential stimulus package was already underway when Swan left Australia for the IMF meeting. During his absence, Rudd convened a two-day meeting of the SPBC, on the weekend of 11–12 October. The Australian Stock Exchange (ASX) index had fallen by 7.6 per cent on the Friday, and the government was well aware that a number of mid-tier banks were coming under pressure. They needed to act before the opening of the market on the Monday. It was this marathon meeting that Swan phoned into from a teenager’s bedroom in Maryland.

The SPBC heard the evidence from Treasury that a stimulus was required and that payments to households were the most efficient option. Swan reinforced the need for drastic action. The SPBC then sifted through the options. Pensioners were an obvious target as they were, to use an economic term, liquidity constrained—to use a more common term, they were poor. As a result, they would spend almost all of any windfall that came their way, which was just the economic stimulus the government needed. In addition, pensioner groups had already run a campaign calling for an increase in the age pension, to which the government had responded