Thursday, April 5, 2012

Memo Treasurer: We're not the toast of the G20

Treasurer Wayne Swan is out thumping his chest about Europe. First, he warns us that if we don't have a budget surplus in 2012-13, we could end up like Europe. Second, he tells us that Australia is a standout in the world economy, the envy of the world.

On Sunday, the Treas ascribed Spain's 23.6 per cent unemployment rate to lax fiscal discipline before the global financial crisis. Then yesterday, he confided that at the coming G20 meeting in Washington, ''there's not too many finance ministers ? who wouldn't trade places with Australia in a heartbeat''.

We keep hearing this, but is it true? Was Spain's collapse due to lax fiscal policy? Is Australia the country everyone else wants to be?

Take fiscal policy first. This is Swan last Sunday in his weekly economic note: ''If the events in Europe over the past 18 months teach us anything, it's the importance of budget discipline. Many governments ignored the necessary economic reforms over a long period, allowing their spending to blow out and their budgets to become unsustainable. We see the consequences of this today in the region's sovereign debt crisis.

''The failure to maintain fiscal discipline has undermined confidence and economic growth across Europe. This has led to lengthening jobless queues and unemployment rates that are two, three and even four times our own. In Spain, for instance, the jobless rate is nearly 23 per cent. Australia's continued strict budget discipline is our best defence against this uncertain global outlook.''

But hang on, Treas: did no one tell you that before the global financial crisis Spain was running even bigger budget surpluses than Peter Costello: 2 per cent of GDP in 2006, 1.9 per cent in 2007? Or that from 1996, Spanish governments of both sides more than halved its net debt: GDP ratio, from 60 per cent of GDP to 26.5 per cent?

Spain's crash was not due to a lack of budget discipline. It was brought on mostly by the collapse of a huge real estate boom, which has now turned into a savage bust.

That combined with all the factors that have sent Europe into recession: the big losses of European banks lending into US sub-prime housing and other risky markets; the contagion effects from Greece; and the vicious circle of falling asset prices, falling spending, falling employment and falling incomes and revenue, which is now becoming a vortex dragging it down towards a long depression.

Housing prices have slumped 22 per cent from their peak and are forecast to fall by 12 to 14 per cent more this year. Standard & Poor's forecasts that by Christmas, 25 per cent of Spanish home owners will have negative equity, owing more than their property is worth.

What's the lesson? Avoid booms. They tend to bust in damaging ways. But in Australia, officials are cheering on a mining investment boom, which one day will also bust, spreading its fallout all over our economy.

Spain's new conservative government plans to emulate Swan. On Tuesday it presented a budget that aims to cut the deficit next year from 8.5 per cent of GDP to 5.3 per cent.

Bloomberg reports that ministries' spending will be reduced by 17 per cent on average, with the foreign ministry cut by 54 per cent. Income tax and property tax rates have been hiked. But we saw in the 1930s that fiscal austerity in these conditions simply deepens the downturn.

Yes, there was fiscal indiscipline in Europe before the global financial crisis, but mostly by neglect. Greece was a Third World example of fraud, recklessness and incompetence, but it was unique.

IMF data shows that in 2007, of governments in 18 rich European countries, five (all in Scandinavia) were net lenders. Four, including Spain and Ireland, had brought their debt:GDP ratio to relatively low levels, between 10 and 26 per cent. (Ireland, too, was the victim of a property boom going bust.)

Eight others, ranging from Britain (38 per cent) to Italy (87 per cent), were guilty of fiscal complacency. Some stayed in deficit throughout the good years. Germany and France repeatedly breached the EU's Maastricht budgetary rules, which they themselves had written. Portugal, another crisis state, was among the offenders. And lastly, Greece was in a class of its own.

And how does Australia compare? The IMF figures show that, far from being a world leader in fiscal discipline, in 2007 our surplus ranked only 16th of the 34 rich countries as a share of GDP. Last year, we ranked 18th. That's no standout effort.

On the economic front, we are doing better than most European countries, worse than most Asian ones. Last year, our growth rate of 2.1 per cent put us just equal 13th of the 34 rich countries.

Around the G20 table, Swan will find that 13 of his 19 counterparts can boast higher growth than him. They include South Korea (3.6), Germany (3.0) and Canada (2.5), as well as all 10 developing countries.

Australia ranks better on unemployment, but even there, our 5.2 per cent rate is just the ninth best of the 34 rich countries.

Surely we lead in something? Yes: the OECD estimates our growth in unit labour costs last year was the highest in the Western world, at 5.9 per cent.

Maybe the Treasurer can wear that gold medal in Washington.