A poorly conceived crisis response

04/06/2009 - 00:00


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Most countries have taken the wrong approach to the economic crisis.

A poorly conceived crisis response

STATE Scene recently received an email with attachment carrying photographs of a lively protest in Chicago - Barack Obama's political stomping ground.

Angry demonstrators were objecting to the trillion-dollar debt being accumulated by the Democratic White House.

Here are some placard captions: "Read my Lipstick - No more bailouts"; "Read my teleprompter - no more bailouts"; "Why pay taxes when you can just print money?"; and "The real pirates are politicians in government."

Another, held by a mother with infant, read: "I'm not even two yrs old - and I'm already in debt."

Those words may yet ring loud around the rapidly de-industrialising and demographically stagnating debt-ridden Western world.

Indeed, that already in-the-red Chicago infant is destined to have to help repay, over an entire lifetime, debts now being chalked up for failing businesses such as General Motors and a number of mismanaged banks headed by scandalously overpaid grandees.

And growing numbers of Australians are also increasingly concerned about a similar fate for their offspring.

Moreover, it seems this has been noted since Prime Minister Kevin Rudd and Treasurer Wayne Swan refuse to publicly utter the "b" (for billions) word whenever quizzed on Australia's mounting debt.

However, not only are the Obama and Rudd-style stimulus packages set to become lifelong burdens, there's also the growing burden on the next generation of meeting the mounting cost of pensions with the baby boomer generation gearing-up to depart the workforce.

That, to vary that old cliché, is the jumbo on the verandah; the one politicians prefer not to speak about.

What they should be doing is highlighting this at every turn so taxpayers become fully cognisant of the inevitable coming implications.

Economics may not be an exact discipline. Demography, however, most definitely is.

Unlike estimates by Treasury's boffins, actuaries and demographers can provide stunningly accurate projections, which means our political bosses can know the size of welfare outlays for future generations.

True, not all leaving working life will become pensioners since some have made arrangements to self-finance retirement either because of higher earnings or wise investment decisions, including superannuation.

But many will join the growing queue for government cash called welfare.

Australia's average life expectancy has risen markedly over recent decades, now standing at 79 for males and 84 for females.

With male pensions presently paid from age 65 and females from 63.5, that's an average outlay to the state for 14 and 20.5 years respectively after retirement.

And there's no reason to believe this upward trend in longevity is set to turn.

Australia adopted the idea of payment of old-age pensions from Prussia, which pioneered these late in the 19th century.

Prussia's path so impressed colonial Australians that Section 51 (xxii) - "Invalid and old-age pensions" - was included in the constitution.

Prussia initially set the qualification age at 70 but lowered it to 65 in 1916.

When the national parliament adopted the Invalid and Old Age Pension Act, about 34,000 pensioners received 10 shillings ($1 now) a week, equivalent to 12 per cent of male weekly earnings.

The 2009-10 budget's coming pension boost puts this at nearly 28 per cent of average earnings.

And there are now 3.3 million aged and disability pensioners, carers, and veteran income support recipients in a population of nearly 22 million.

The cost for these one-in-seven recipients exceeds $30 billion annually, compared to an outlay of just over £88,000 ($1.76 million) a century ago.

There's no doubt about Mr Swan's claim that: "A gradual increase in the age pension qualifying age is responsible and necessary to help meet major social and economic challenges as Australia's population ages."

Clearly the Rudd government is on the right track in relation to this area of looming outlays.

But what of its so-called stimulus packages, was there another option?

There most definitely was.

Messrs Rudd and Swan could, for instance, have taken the one embarked upon by Poland's Prime Minister, Donald Tusk, which he outlined during a recent interview with the Hamburg-based weekly, Der Spiegel.

Der Spiegel: The global economic crisis has also hit Eastern Europe. Your government has not rolled-out any bailout packages worth billions. What are you relying on?

Tusk: The main reason for the global crisis is that people have been living on credit. So the way out cannot be that countries go even deeper into debt. In Poland we are also considering methods of state intervention. But I see no purpose in prolonging the credit madness for another two years. Some European politicians live in the belief that this could allow them to maintain prosperity for another few months.

Der Spiegel: And what is the Polish approach?

Tusk: We lived in a permanent crisis under communism for decades. We have overcome this by working very hard for 20 years. And we deeply believe that prosperity comes from work, fair competition, respecting private property, perseverance and solidarity. That is why we would like to emerge from this crisis as a country that remains true to democratic capitalism.

Der Spiegel: Where are the greatest risks for Poland?

Tusk: We are in a relatively comfortable position. Poland does not need international financial assistance. We are dealing almost exclusively with problems that come from abroad - exchange rate fluctuations and the associated credit problems, declining exports. Compared to what is happening internationally, Polish banks are in a really good position.

An editorial in The Washington Times (April 23, 2009) said: "In the midst of the global financial crisis, Poland's economy is forecast to grow by almost 1 per cent.

"According to business economists and The Economist magazine, Poland likely will be the only European country with a growing gross domestic product in 2009.

"Facing down the global economic crisis, leaders in Warsaw have slashed marginal tax rates, cut government spending and temporarily suspended some government regulations.

"On January 1, Poland cut its top marginal tax rate from 40 per cent to 32 per cent - and that's just a start.

"Last year, Prime Minister Tusk announced plans to move to a flat-tax rate of 19 per cent in 2010 or 2011."

Interestingly, Reserve Bank director Warwick McKibbin last month "warned global government spending to stimulate economies is being dominated by political agendas that will saddle future generations with debt and slow economic growth."

Messrs Rudd and Swan's fear of the "b" word suggests Labor polling has already detected that Australians are far from convinced they chose the right path to combat the global banking sector's near collapse.

Mr Rudd repeatedly stated before and during the 2007 election that he was an economic conservative.

He's now promoting himself as a social democrat, exactly what President Obama, that other big deficit stimulator, Britain's Prime Minister Gordon Brown, and Mr Rudd's Australian hero, Gough Whitlam see themselves as.

All the signs are that the slide in Mr Rudd's polling outcomes is because he decided to thread the social democratic "d" (for deficit) rather than the Tusk democratic capitalist path.


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