With the Morrison government’s federal budget just weeks away, what are the lessons policymakers can learn from Keating’s approach?
AustralianSuper chairman Don Russell, who was Keating’s principal adviser from 1985 to 1993, said the broad strategy during the 1990s was right overall but much of it was new ground for the nation, so there were clear teething problems. Russell says the main components included direct cash payments to households and major infrastructure spending.
“There’s always a natural reluctance to embrace a new approach, because the people will naturally want to make changes at the margin,” Russell says.
“You’ve got to be quite ruthless in your thinking and the starting point has got to be that we’ve really got a problem,” he says. This requires policymakers to have courage and be willing to deviate from previous promises and plans, which he believes both the Morrison and Keating government have managed to do.
“It was really only Keating who could ring the bell and say, look … the current circumstances require a different approach,” Russell says. “Nobody else felt comfortable changing the approach so radically, you often see this at times of dramatic change.”
Most economists spoken to agree that while there are major differences between the current recession and that of the 1990s, there are many lessons that should be remembered from the handling of the One Nation plan.
‘Go early, go hard and go to households’
Former treasury secretary Ken Henry says in retrospect it’s clear the government should have ramped up stimulus faster in the 1990s.
“At that time there was a concern that much of the hard work that had been done in the 1980s to repair the budget could be undone were the government to respond in a big way to the recession through expansionary fiscal policy,” he says.
By the time the government stepped in to spend, Henry explains, unemployment was already much higher than it could otherwise have been. It’s this experience that led to Henry coining his famous “go early, go hard and go to households” mantra to handle the global financial crisis in 2008.
“You have to go hard, the measures have to be large and the quickest way to get fiscal stimulus implemented is to provide extra spending to households,” he explains.
As households, particularly those with less income, tend to spend quickly when given extra cash, this is a fast way to get money moving around the economy.
Russell says a major part of the One Nation approach was cash payments but policymakers and economists at the time were not supportive of the approach, seeing it as a “cash splash” to curry favour with voters. He says the spending, which didn’t lead to structural budget changes, is now widely accepted as a good approach at even higher levels.
“A lot of institutions are fighting the old war – the great contribution Keating made with One Nation was his gift to Treasury for the next crisis.
“So Ken [Henry], with the global financial crisis, what he was really doing was accepting the approach taken back in 1992, realising they’d been reluctant and dragged to it … this time it was the big cash payment which did really cushion the economy.”
But in 2020 this lesson might be much harder to apply and even Henry says the government should tread with caution, as the national accounts show households are more likely to save the money and less able to spend their cash due to COVID-19 restrictions and lockdowns.
“At the same time, the government has to be careful not to withdraw income support too quickly for those who have lost their jobs due to the public health measures,” he says.
It’s all about jobs
One of the most painful realisations from the ’90s recession was how hard it was for people to get back into work once they’d been out of the jobs market for a lengthy period of time.
“The longer people are out of work, distanced from their jobs, the less likely it is they’ll ever find their way back into work. It was a terrible lesson,” Henry says.
“If people are going to be out of a job, you want to keep them attached to their employment as much as possible … that’s why [JobKeeper] is a terrific initiative.”
Grattan Institute household finances program director Brendan Coates believes the jobless rate could have come down much more quickly in the ’90s than it did if the government had spent more quickly.
“There was a generation of older male workers who never worked again. They ended up on disability payments until they were old enough to retire,” Coates says. This makes getting job-creating projects off the ground a crucial focus for any government steering a country through a recession.
The One Nation plan included major infrastructure spending to get people back into jobs, including large rail projects such as the $110 million Melbourne-Sydney line upgrade, an $82 million Sydney-Brisbane upgrade and a $115 million Melbourne-Adelaide standardisation, as well as hundreds of millions of dollars on highways.
But Coates says it came “too late” to maximise the benefit. “Infrastructure didn’t get going until well into the recovery, about 1994 and 1995,” he says. “Big projects take a long time to plan and coordinate.”
On this particular point there is widespread agreement. Russell says the government faced issues in the 1990s to get clear projects lined up and this was, in part, due to issues with planning systems.
“Looking forward from this point you need to respond in a way that’s consistent with the gravity of the problem,” he says. “Given that we have such a shocking situation we’re dealing with now, it really does require a big response and it won’t work if it’s just modifying things at the margin.”
Independent economist Saul Eslake agrees it took too many years to get major infrastructure projects off the ground as “there were no shovel-ready projects”.It would’ve been better, in Eslake’s view, to have this spending upfront.
He says governments must find ways to act faster in future recessions, including before the official data confirms the downturn.
“Don’t wait for there to be two quarters of negative growth,” he says. “When you’re in a recession, particularly the early days, you have no idea how much you need to do.
“There is a 100 per cent probability you’ll either do too much or too little. The right mistake to make is to do too much or at least to say you’ll do too much,” he says.
“When you say you’ll spend $100 billion you don’t spend it on that day … you can always stop spending once it’s clear you’ve done enough.”
Timely, targeted and temporary measures
Stephen Koukoulas, a former economic policy adviser to prime minister Julia Gillard, says the slow progress on big-ticket infrastructure items was a major lesson.
“Arguably, that was one of the things [former prime minister Kevin] Rudd learned in GFC with the timely, targeted and temporary measures,” he says. These three Ts were prevalent in treasurer Wayne Swan’s 2009 stimulus package, which included immediate $950 cash payments to households and small capital works projects.
Koukoulas is supportive of the Morrison government’s approach to the 2020 recession so far, but he wants the spending to happen faster.
“They need to stop dilly-dallying or it’ll be a tepid recovery and unemployment will be high for several years,” he says.
“When you’re in the low point, don’t hold back. When you’re in the middle of the bushfires, worry about how much water you used later. Throw everything at this problem.”
Deloitte Access Economics partner Chris Richardson explains the 2020 downturn at the moment is much worse than the 1990s, and the Reserve Bank is unable to effectively cut rates any further in 2020 compared to much higher rates three decades ago.
“We are now more reliant on government than we were then,” Richardson says.
“Against that basic backdrop, I would say there needs to be a recognition that the war against the virus is a sprint, the war to get jobs back is a marathon. It takes big bucks,” he says.
He believes the government has acted fast so far during the crisis and is doing “beautifully” in terms of the three Ts with programs like JobKeeper. The issue facing policymakers now is that pandemics deviate from the recession playbook in significant ways.
When the spread of the virus eases, policymakers should see themselves back on more familiar footing in terms of economic challenges.
“As we’re moving out of lockdown the damage becomes more like traditional recession damage … this is where some of the lessons of the past are more applicable.”
Jennifer Duke is an economics correspondent for The Sydney Morning Herald and The Age, based at Parliament House in Canberra.