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Confidence Base Disappears under PM
letter published in The Australian Financial Review, 17 June 2010

Sinclair Davidson points out (“PM’s economic shambles”, Opinion, June 16) that, thanks to his analysis published on May 13, my former department, Treasury, where I was deputy secretary, was forced to publicly correct on June 2 the analysis included in the budget papers suggesting that stimulatory policies in 11 of the G20 countries had a significant effect on growth. The correction acknowledged that if 19 of the G20 countries are assessed (in aggregate) there was no statistically significant impact.

Since that correction there has also been a major change of views at the most recent G20 meeting about the advisability of using fiscal stimuli (sic). Now, many member countries see a need to reduce government spending/deficits despite the continued economic problems they still face.

Why? Because such action may be having more limited and sustainable favourable effects on private spending than predicted while at the same time adding to debt and contingent liability levels of governments whose spending (and promises) provide little or no improvement in productivity.

In short, the employment of Keynesian solutions is now being recognised as open to serious question because, inter alia, in many cases they create a potential debt problem.

In Australia there has been more confidence about the effects of Keynesian policies. Economist and commentator Ross Gittins, reportedly highly regarded by Treasury Secretary Henry, wrote on June 7 that “Keynes, not mining, saved us from a recession”. Gittins went on to accuse me of being a “smarty” purporting to know better than Treasury when I predicted in May 2009 more than a mild recession. Gittins’ comment drew on a Treasury address to the NSW Economic Society implying a similar view of my forecast.

I fully acknowledge that, by contrast with my advice to Treasurer Paul Keating before resigning in 1987 that then existing policies would result in a recession, my assessment on this occasion was too gloomy. But the very marked increase in Treasury’s forecast for 2009-10 (from a fall of 0.5 per cent to an increase of 2.0 per cent) implies either that its stimulus modelling was awry or it failed to take account of other favourable influences.

In my view, the most important failure has been to recognise the favourable starting point that reflected the budgetary, monetary and other reforms inherited by the Rudd government.

That provided a vital confidence base for Keynesian handouts. Even so, and despite the ongoing favourable outlook for mining exports (at least before the resources super profits tax), that confidence base is now rapidly disappearing under the Rudd government.

Des Moore
Director, Institute for Private Enterprise
South Yarra Vic

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