One of my biggest fears about Jim Chalmers stems from the fact he is former Labor treasurer Wayne Swan’s protégé.
Swan made a bold commitment to get the budget “back in the black”. It never happened. As Swan’s former chief of staff, Chalmers may well feel he has unfinished business in the treasurer’s office. Sometimes a person may want to finish a job their idol could not.
For example, George Bush Sr beat back Iraq from Kuwait but never did regime change in Baghdad. When Bush Jr got into the White House, he found a way to finish that job, even though it was no longer the right goal. I’m worried Chalmers will be like Bush Jr, fighting the last war.
Swan handled the 2007-08 global financial crisis (GFC) beautifully and got the unemployment rate back down to 5% by 2010. But thereafter he drove hard to try to get to surplus, letting unemployment creep up in the process, as this chart shows.
It was, in my view, the wrong strategy. The economy worsened in 2011, 2012 and 2013, with weakening wages growth and rising unemployment.
Right-wing newspapers liked to contrast Peter Costello’s fiscal prudence with Swan’s GFC spending. The media held Swan to the standard Costello had set on the fiscal, even though the situation was different post-GFC.
Swan accepted the challenge head-on, wanting to be a good Keynesian in the bad times as well as the good. He focused on the budget’s bottom line as soon as possible, after the GFC’s worst had passed. As the next chart shows, Swan had a bit of a surplus fetish.
For example, “The four years of surpluses I announce tonight …” is how Swan’s budget speech began in 2012. It’s hard to overstate how significant surpluses were a decade ago: an unattainable, distant and unquestioned Good Thing.
“We have to be Keynesians on the way up,” Swan said at the time, referring to the idea that if a government spends to stimulate a weak economy, it should remove spending from a strong economy. But were we really on the way up? Was it a strong economy?
In my view, no. The European sovereign debt crisis was bubbling away and more Australians were joining the ranks of the unemployed. The right move was to consolidate the budget much more slowly.
Since Joe Hockey’s departure to the US, Australia’s surplus addiction has moderated. This has been useful. Fiscal policy can be important in helping the economy run properly, especially when the RBA is conservative. Speaking of the RBA, we can blame it for raising rates too much during Swan’s term, but it can’t take all the blame. It was cutting rates again by 2011, and Swan was still driving for that mythical surplus in 2011, 2012 and 2013.
When Labor was booted out in 2013, Tony Abbott and Hockey took the absurdity of the budget bottom line school of thought even further. Their famously stingy 2014 budget was their ruin. It was only when they were replaced by Malcolm Turnbull and Scott Morrison in 2015 that budgets considered the economy again, rather than the deficit.
Chalmers’ treasurership starts in a similar way to Swan’s, with a big crisis and a record pile of debt. Is he willing to sit on that big pile of debt throughout his tenure, worrying about things that matter more, like unemployment and wages? Or is he haunted by the long-ago ghost of Costello, the headlines in The Australian, and the troubling sense that a job remains undone?
The need to defeat inflation will create an additional spur to run tight budgets — budgets that cut spending, lift taxes and move towards surplus. As a result, I worry Chalmers won’t think enough about the labour market and will, like Swan, let the unemployment queues lengthen as he pursues the abstract goal of fiscal consolidation.
If the RBA overdoes its job and the economy begins to shrink, will Chalmers be willing to give up forever on his dream of surpluses, spending up to jolt the economy back to life?
Is he willing to let the next treasurer, or the one after that, be the one who delivers the first surplus in years?
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