- Australia and New Zealand need to use fiscal policy as well as monetary policy to boost the economy.
- With inflation too low and unemployment too high, relying on monetary policy by the reserve banks is no longer enough.
- The low-growth economic forecasts mean that fiscal policy needs to be dialled up now.
You’re coaching your cricket team from the sidelines, and you’re getting clobbered. The opposition is scoring six after six off your quick bowlers. What do you do? Most coaches, seeing the ball land in the stands yet again, would not bring on another fast bowler.
But in economic policy that’s what Australia and New Zealand have been doing. We’ve been doubling down on a plan that’s gone nowhere, and not using the rest of the team.
The quicks, as you’ve likely guessed, are monetary policy delivered by the reserve banks. This hasn’t got inflation up to where we would like it to be, so we’ve intensified it to the point where we’re now looking for bowlers with unconventional bowling actions. We’re flirting with zero or even negative interest rates.
Meanwhile, the opposition openers have made an unbroken century and look well set, while our spin bowlers (fiscal policy) are still fielding in the deep. It gets worse: we’ve told them we’re not going to use them in the game, and we’ve been subbing them off.
Monetary policy needs fiscal policy mates
This isn’t, to put it mildly, an ideal coordination of fiscal policy from government and monetary policy from the reserve banks. If monetary policy can’t get inflation back to 2% on its own, then the answer is not to reach for ever wilder monetary bouncers, but to enlist fiscal policy to boost the economy and nudge inflation up. Monetary policy, as they say, needs mates.
But that’s not the only reason to bring the spinners on. Australia’s had the longest economic expansion of any developed economy, banging on for 30 years, and you’d think that the country would now be at full employment. It isn’t. At the time of writing, the unemployment rate is 5.2%. It can, and should, be lower. New Zealand has a somewhat better overall number – 3.9% – but within that the unemployment rate for Maori and Pacific people is about 8.0%. The Reserve Bank of New Zealand kids itself that “employment is around its maximum sustainable level”. It isn’t. Expansionary fiscal policy can help fix that.
Plus there’s the little matter of the immediate economic outlook. Every forecast is saying the same thing: risks tilted to the downside. It hasn’t helped that the economies in Australia and New Zealand are currently growing more slowly than previously: shocks from overseas would come at a bad time.
The conservative view from the International Monetary Fund (IMF) is to have some fiscal ammunition in your locker for when the manure eventually meets the wind redistribution device. I say, why wait? Dial up the fiscal settings now.
But our two governments have embraced a responsible longer-term fiscal approach, partly because it’s the right thing to do, and partly because they see votes in it for steady-pair-of-hands stewardship.
We’re thankfully worlds away from the venal American system. On one recent estimate, the gap between what the US politicians have promised in social benefits and the taxes they’ve raised to pay for them is – wait for it – US$239 trillion.
But there’s a point where responsibility drifts into inaction and, on both sides of the Tasman, we’ve reached it. In Australia, Josh Frydenberg is planning a cumulative federal budget surplus of some A$45billion over the next four years. In New Zealand, Grant Robertson’s going even harder with a cumulative planned NZ$14billion surplus. Multiply that by seven to get an Aussie-style equivalent, and that’s a stonking A$91 billion.
“There’s a point where responsibility drifts into inaction and, on both sides of the Tasman, we’ve reached it.”
It’s time to spend the war chest
We don’t want to go mad and relapse into the bad old days of pollies spending up big on promises during election years and putting an ever-larger bill on the never-never. We can still subscribe to the fiscal responsibility stuff. As the IMF stated in its latest report: “The principle of running budget surpluses in good times has been an important anchor for fiscal discipline in Australia,” and it’s true in New Zealand, too.
Yet we could tick all the responsible fiscal boxes and still be doing more than we are. With inflation too low, unemployment too high, and our international markets at the mercy of political charlatans, we shouldn’t be sitting on unused war chests.
So what should we spend them on? At the short-term-boost-the-economy level, it doesn’t really matter.
We’re in a Keynesian world here, and as economist John Maynard Keynes himself famously said: “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise... to dig the notes up again... there need be no more unemployment... It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
Send out the $1000 cheques ASAP
Ideally, long-term assets such as infrastructure and housing would head the list of what we spend money on. Australia has an impressive pipeline underway but could do a bit more, while New Zealand is still in the early stages of addressing its various infrastructural deficiencies.
‘Active’ labour market policies would also be useful: getting the unemployed and hard-to-employ groups into jobs through help for the self-employed and would-be entrepreneurs, wage subsidies, direct employment schemes, industry-relevant training, and follow-up support.
But infrastructure is slow to fire up, and close mentoring support isn’t a turn-the-switch option, either. So you also need something faster acting.
Here’s one. There’s a case for junking surpluses completely: at current borrowing costs, both governments can get money for virtually nothing, and maybe they should fill their boots.
But we don’t even have to go that far. Take that Frydenberg A$45 billion surplus. Bank A$20 billion for debt repayment: ticks all round from the ratings agencies. Then write an A$1000 cheque to every person in the country. Think we’d have any worries about the cyclical outlook after that?
And now the captain’s given the pill to Robertson. Robertson’s flighted delivery turns and bounces – bowled him!