Prime Minister Seeks to Rewrite History

In Davos at the World Economic Forum last night Prime Minister Abbott sought to re-write economic history when criticising the Labor Government’s stimulus spending during the global financial crisis (GFC) in 2008-09. He ignored the widespread praise and recognition from around the world for Labor’s aggressive response, which averted a recession in Australia.

All developed economies were impacted severely by the GFC. As markets collapsed and workers lost jobs in their millions all governments scrambled to respond. Only one developed nation emerged almost unscathed from that turmoil: Australia. As private aggregate demand collapsed the Labor government stepped in with stimulus to shore up demand. It was textbook countercyclical budget policy as opposed to the pro-cyclical budget position of former Treasurer Costello, who in the boom years was throwing money at the electorate for political advantage. This had been inflationary and pushed up interest rates.

By 2012 Australia found itself a clear world leader on economic indicators with contained inflation, low unemployment, low public debt and low interest rates with a AAA credit rating. The only other developed country to avoid two negative quarters of gross domestic product growth and thus avert recession was Poland, which executed similar stimulus spending.

The Organisation for Economic Cooperation and Development (OECD) found that Australia’s fiscal stimulus measures were amongst the most effective in the OECD in terms of stimulating economic activity and supporting employment. The organisation said that although Australia had entered the deep global downturn in good shape, including having a healthy budget surplus, by itself this had been insufficient to protect it from the worst of the world recession. They said:

"This would not have been enough if monetary and fiscal policies had not been developed to respond to the crisis. These have in no small part shielded businesses and citizens from the initial damaging impacts of the global recession."

Nobel Prize-winning economist, Joseph Stiglitz said:

''Not only was it the right amount, it was extraordinarily well structured, with careful attention to what would stimulate the economy in the shorter run, the medium term and the long term. When I look around the world, it was, I think, probably the best-designed stimulus program in the world and you should be happy that in fact it worked in exactly the way it was designed to work.''

The GFC was the moment of truth for the idea central to the neo-liberal faith and the Liberal Government – the superiority of the invisible hand of the market to the economic intervention of government. It was shown to be a myth. The fact is that, depending on the circumstances, both market forces and government actions have their place.

Joseph Stiglitz summed it up as follows:

“Most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal…The embracing by America – and much of the rest of the world – of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.”

If the Labor Government had not implemented timely and targeted stimulus, we would have experienced a deep recession and much higher unemployment, with all the destruction of capital and skills that comes with that. The Prime Minister’s Davos contribution makes it plain that the Liberal Party does not understand this, and that had they been in Government during the GFC Australia would have joined the rest of the developed world in deep and prolonged recession.