The SPBC agonised over whether to include more direct-cash payments in the second package. Indeed, the Treasury, in particular the head of its Macroeconomy Policy Division, Dr David Gruen, urged Swan and the SPBC to embrace more cash handouts. Despite some nervousness that the popularity of handouts was waning, Swan took the Treasury’s advice, and his colleagues concurred. This time, the payments to families took the form of tax and welfare bonuses to the value of $8 billion. The total value of the second stimulus amounted to a whopping $47 billion, which equated to 2.4 per cent of GDP in 2008/09 and 1.4 per cent in 2009/10.
The size of the second stimulus package sparked a debate that would dominate at least the next five years of Australian politics: Labor would claim that its decisive action had seen Australia weather the GFC, while the Liberals would claim that Labor was addicted to big spending and deficits. The Liberal opposition had backed the first stimulus package as appropriate in the circumstances. But after some internal debate, the shadow Cabinet decided to oppose the second package, saying that it would have brought down a (still substantial) stimulus of about half the size, around $20 billion.
How effective were the decisions taken on Swan’s watch to avoid a recession? Here my objectivity is of course strained as a member of the same government—the assistant treasurer at the time of the GFC. However, enough evidence has come in for us to consider both the merits and downside of the stimulus.
Some of the detractors who have criticised the Rudd government’s actions argue that the Treasury overestimated the scale of the risk to Australia, and therefore the stimulus was too big. Others posit that the strength of the Chinese economy and its impact on Australia’s mining sector got Australia through the crisis. Still others say that the strength of Australian financial regulation and the comparative health of the country’s banks were the key factors. Each of these claims can be considered against the view that the stimulus was absolutely necessary to avoid recession.
It must firstly be remembered that Australia acted early. The first package was in advance of almost every other economy. The government decided to put a significant stimulus into the economy before a negative quarter of economic growth. Here, it avoided one of the key drawbacks of fiscal stimulus: that by the time the problem becomes apparent, it is too late to do anything about it. Under the usual circumstances (including those surrounding the last significant stimulus, after the 1991 recession), by the time a government has decided on a stimulus package, planned its elements and gotten money flowing into the economy, confidence has been so undermined that it takes a long time for the economy to pick up.
Retail sales were subject to a solid increase of 4 per cent in December 2008, when they could have been expected to fall as Australians adjusted to the idea of an inevitable global recession, and after they had shown only anaemic growth earlier in the year. Contrary to a likely contraction in domestic demand without cash payments, household consumption strongly contributed to growth during 2009.
The boost to the First Home Owner Grant announced in the first stimulus also had a clear impact on economic activity. As former senior Treasury official Gruen notes, based on Treasury analysis:
Combined with lower interest rates, the introduction of the First Home Owners Boost in October 2008 saw a huge rise in finance by first home buyers. The non-residential building sector also saw a huge lift in building approvals because of the school infrastructure program from the Nation Building and Jobs Plan.11
Gruen and the Treasury conclude that:
without the discretionary fiscal action, the economy would have contracted not only in the December quarter 2008 (which it did) but also in the March and June quarters 2009 and that unemployment would have risen significantly more … the economy would have contracted significantly over the year to June 2009 rather than by expanding by an estimated 0.6%.12
Similarly, academic and former Swan chief of staff Chris Barrett’s analysis finds that ‘Australia would have suffered two large negative quarters of growth without fiscal stimulus. The figure for the 2009 June quarter of a 1.4% fall in GDP compares to the worst negative quarter of the early 1990s recession (1.3% in March 1991).’13
Both Gruen and Barrett were intimately involved in Swan’s decisions at the height of the crisis. But this should not lead us to discount the quality of their ex post facto analysis.
The criticism that the Treasury misjudged the risk posed to Australia by the global recession is misplaced. It is true that the Treasury forecast a much bigger contraction than that which eventuated. However, the fact that the Australian downturn was much smaller than originally predicted must be seen to a large degree as a triumph of policy rather than as a failure of forecasting.
Closely related to the above argument is the thesis that while a stimulus was clearly required, Labor spent too much—in particular, that the second stimulus package was too large. The economist Saul Eslake puts this criticism in context:
Hindsight is always 20/20. Once the Government decided to implement a fiscal stimulus in order to manage a deep recession it had to make one of two mistakes. The stimulus could be too little, forcing the Government to try again, or the stimulus could be too big. The chance they could get it exactly right was zero. In the end, Labor made the right mistake.14
Then there is the argument that
