Market interference plays out long term

Given all the focus on the Reserve Bank of Australia, have we, perhaps, been distracted by the real cause of the problems that have beset the economy?

Using the blunt tool of interest rates, the RBA has sought to stem inflation of the kind many Australians have never really experienced.

The current inflation cycle can’t be pinned on a single factor, but the pandemic was clearly the root cause and no doubt those in charge of the treasuries around Australia have a great deal of responsibility when it comes to the official (over) reaction.

If interest rates are imprecise, then the fiscal side of the government’s toolbox is no less so.

Once let loose, stimulus can be just as difficult to control.

Back in the days of the GFC, when the global economy was in meltdown, Australia’s top treasury official Ken Henry famously advised the federal government to “go early, go hard and go households” with a $42 billion stimulus program.

The spending ended up well north of that and led to a number of scandalously wasteful and, in the case of the Home Insulation Program (pinks batts), deadly outcomes.

While the prospect of dole queues and breadlines can be daunting for any politician in power, it is worth noting that the aftermath of the GFC stimulus led to the creation of a taskforce to rein-in spending under its Building the Education Revolution program and, more alarmingly, a royal commission into the Home Insulation Program.

With the benefit of hindsight, the scale of the stimulus was unnecessary, mainly because our biggest trading partner, China, did not succumb to the GFC and its need for Western Australia’s resources propped up the nation.

My view, which I have published repeatedly, is that stimulus need only be the promise of financial commitment, it doesn’t need to actually require the spending.

People want confidence that the state will do all it can.

For instance, the much-critiqued RBA did not get to today’s interest rates in one go; it has stepped up the rate in fits and starts since May 2022.

There is no reason why stimulus can’t be handled the same way: introduced in batches depending on how the economy appears to be reacting.

That is the very opposite of Mr Henry’s recommendation.

While the circumstances surrounding the pandemic were different, it is clear the lessons from the GFC were not remembered.

With the whole economy deeply affected, as shutdowns and lockdowns occurred to varying degrees around the world and across the nation, it is understandable that federal and state governments felt they had to do something in order to keep the lights on (and people employed).

The federal government’s JobKeeper Program was a relatively good example of something that worked well despite some flaws from its hasty introduction, such as being too generous to casual workers.

The biggest problem was the government didn’t tighten up eligibility so only businesses that really needed it could remain on the drip after the first three months.

That made it wasteful.

Another good policy was having the Australian Taxation Office delay crunching small businesses for failing to pay GST and the like.

That was a good strategy learned in the GFC and carried forward to the pandemic.

But the unnecessarily strong stimulation of the housing sector has proved significant.

It is not governments suffering directly from this poor policy (yet) but the population as a whole, as the housing construction sector lurches from one piece of bad news to the next.

You know the market has gone very bad when major established businesses are facing collapse.

True, some of them may have been greedy and failed to remember the lessons of the past, but in the end, the longer term effect of the stimulus is self-defeating.

Let’s hope we can remember for next time that this stimulus has resulted in a loss of confidence in the residential building sector, which is bad for the economy and bad for jobs.