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This Government Has No Idea How To Prevent A Recession

By any measure, last week was a miserable one for economic news.

On Monday, the Australian Bureau of Statistics reported that manufacturing, wholesale sales, dwelling approvals, productivity and company profits were all declining. On Tuesday ANZ bank reported that job ads fell 1.7 percent in November, and by nearly 13 percent since the start of the year. With so few employers hiring, unemployment can only go up.

On Wednesday, the ABS reported GDP growth slowed again in the September quarter (to just 0.4 percent), and consumer spending decelerated to the slowest pace since the Global Financial Crisis in 2008. The very next day the ABS released further retail sales data showing no growth at all in October.

On Friday, beleaguered government officials heaved a sigh of relief: no major economic data was released that day. For them, no news is definitely better than bad news.

Together, all these flashing minus signs indicate Australia’s economy is tiptoeing along the edge of recession. That’s highly inconvenient for Coalition leaders, who just months ago based their re-election on their claim to be the best “economic managers”. Now the government would rather talk about something else -- anything else. It no more wants to discuss the economy, than to discuss the links between climate change and bushfires.

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Indeed, the main government response to gathering economic gloom has been to try to change the channel. Peter Dutton held a photo-op to announce airport police will now carry M18 assault rifles to counter unspecified terrorist threats. And Scott Morrison launched a major restructuring of the Commonwealth public service -- featuring head-scratching “efficiency measures” like merging the arts department with the transportation department, environment with agriculture, and emissions reduction with industry.

Treasurer Josh Frydenberg was left to carry the economic ball. He invoked the Coalition’s tried-and-true touchstone: don’t worry, he assured us, Canberra is still on track for a budget surplus. If consumers aren’t spending, it’s only because they’re emulating the wise actions of his government in setting aside cash and paying down debt.

This is totally fine.

Running a budget surplus during an economic downturn is worse than a hollow victory: it actually makes the downturn deeper. And Mr Frydenberg’s effort to find a silver lining amidst all this pessimism reveals a startling lack of understanding of how consumer mood swings can actually redirect the whole economy. If enough worried consumers cut spending to prepare for a possible recession, they can actually spark the recession they all feared: it’s a self-fulfilling prophecy. Government’s job is not to endorse this self-defeating behaviour; rather, it must swim against the tides of mass psychology, and do everything possible to keep spending flowing.

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That’s why the end-of-year tax cut (the Coalition’s signature promise in the 2019 election) was completely ineffective at boosting the economy. The idea was to reduce income taxes and stimulate spending by Australian households -- already hard-pressed by the long-term stagnation of real wages. But ABS data shows that for every $1 Australians received in year-end tax cuts, they saved $1.50. That completely negated the stimulus: not a single dollar of the tax cut showed up in aggregate consumer spending. And the tax cut’s ineffective design -- as a one-time end-of-year rebate -- reinforced the tendency of consumers to save, not spend.

To shore up economic growth and prevent recession, government needs to act more directly to support spending. Vague claims that balancing the budget will boost “confidence” are wishful thinking: businesses care more about selling their products, and consumers about paying their bills, than whether Canberra has a small surplus or a small deficit.

Genuine and immediate spending stimulus could be provided by:

  • Ramping up government capital spending on infrastructure and public facilities (like transit, schools, and utilities). Despite myriad pre-election photo-ops and ribbon-cutting ceremonies, federal capital spending actually fell five percent over the last year.
  • Expanding direct employment in public services like aged care, child care, education, and public administration. These sectors can be economic leaders when private sector hiring is sluggish. But the government is still obsessed with downsizing and outsourcing (like contracting out visa services) -- all in search of the Holy Grail of budget surplus. Mr Morrison’s puzzling shake-up of the public service will only make things worse.
  • Directly boosting wage growth, which is far more important to consumer spending than tax cuts. The government could start by relaxing the arbitrary two percent wage cap on its own employees -- a measure that completely contradicts its own budgetary forecast (which predicts wages accelerating to 3.75 percent). And instead of attacking and criminalising unions, it should support union efforts to get wages going again.

In sum, in every case the government is doing the exact opposite of what’s required to steer the economy away from recession. Instead of boosting spending, expanding hiring, and lifting wages, it is cutting back and pulling money out of circulation -- just as shell-shocked consumers did in the September quarter. The painful irony is all that restraint will only hasten the arrival of the recession the government wants to avoid.