9
Though this be madness, yet there is method
in ’t
William Shakespeare,
Hamlet
Despite ending our first year in office facing an existential economic threat to the country, politically we found ourselves in a surprisingly strong position. According to the last federal voting intention Newspoll for 2008, taken between 5–7 December, almost exactly twelve months after we had been sworn in, the government was ahead of the Liberal–National Party Coalition by 59 to 41 per cent.1 This represented a 6.3 per cent improvement on our vote during our first twelve months in office.2 It had been a hard slog for all of us. My personal numbers were also looking robust. As of early December 2008, I was ahead in the preferred prime ministerial ratings by 66 to 19 per cent.3 My personal approval ratings were 70 per cent satisfied and 21 per cent dissatisfied.4 Turnbull’s were 47 per cent positive and 32 per cent negative.5 Despite the belief of many in the Liberal Party that Turnbull represented political salvation for their cause, the uncomfortable truth was that the Liberals had gone significantly backwards in the polls during the first three months of his leadership.
Political opinion polling was one thing; policy performance was another. And the lesson of politics was that, over time, the latter would become the primary determinant of the former. This meant we had to continue to deliver good government in increasingly bad times. Fortunately, there were some good times, too . . .
The thing I enjoyed most before Christmas that year was a brief visit to the Sydney Cricket Ground. We had made a financial contribution to the completion of the new Victor Trumper Stand, and as a cricketing ‘semi-tragic’ since childhood, there was nothing better than to be able to go to the SCG and talk about one of the greatest cricketing heroes of pre-Depression Australia and officially declare open a grandstand. Cricket had kept Australian spirits up during the Great Depression, and while I had no idea how our country would emerge from the Great Global Recession of 2008–09, it was important to remain fully engaged with the familiar, comfortable sounds and rhythms of the Australian summer.
Apart from government investments in the Victor Trumper Stand and, later, in the installation of night lights at the Bellerive Oval in Hobart, as well as attending Test matches whenever I could, there were a few other cricketing perks that came with being Prime Minister of Australia. The best of these occurred when a large contingent of the Australian Test team descended on my office in Parliament House in Canberra while on a promotional tour. Suddenly I found myself around genuinely important people – not politicians, but cricketers. The lads invited me to join them in the prime minister’s courtyard to test my skills with bat and ball. This was a childhood dream. And it all happened spontaneously! So spontaneously that I could see the blood visibly drain from the face of my senior media adviser, Lachlan Harris. No doubt he foresaw a prime ministerial cricketing disaster to rival John Howard’s bowling performance in Pakistan back in 2005. Howard, a cricketing tragic par excellence, managed to bowl a grubber which thumped its way into the turf barely a metre or two after leaving the prime ministerial grip before spluttering its way up the pitch, barely making it to the batsman. Not content to rest on his laurels, Howard then asked for the ball a second time and delivered a copybook rendition of his first delivery. The incident made an indelible impression on the Australian public memory and I’m sure it was flashing through Lachie’s mind as I took ball in hand with the somewhat intimidating Matt Hayden – Australia’s opening batsman – at the crease.
To Lachlan’s delight, and my own amazement, I managed to deliver an entire six-ball over on line, on length, fully deploying my well-burnished wrist-spinning technique (which of course failed to produce any spin at all). As for my skills with the bat that day, it seemed they hadn’t improved since I played for Yandina C back in 1973.
The other cricketing perk is to select a Prime Minister’s XI to play against the visiting Test side each summer in Canberra. Fortunately, a long-established committee – comprising people who actually knew what they were doing – provided recommendations for the prime minister of the day. Hawke and Howard had apparently fiddled with the recommendations a little, encouraging the selectors to give a particular player their ‘first go’. Keating, who had no passion for the game at all, or for sport more generally, sensibly had always gone with the committee’s recommendations. The result was that Keating’s success rate against visiting sporting sides was 100 per cent, Howard’s 57 per cent and Hawke’s 44 per cent. I decided to take the conservative route and follow the Keating precedent. Alas in my first summer as prime minister, the Prime Minister’s XI was easily defeated by the visiting Sri Lankan touring side, but during the second summer of 2008–09 my team managed to prevail against New Zealand. Dignity was restored.
After the Prime Minister’s XI match of 2007–08, the victorious Sri Lankans presented me with a bat signed by all members of the team. This would sit in the corner of my office in Parliament House, alongside a supply of tennis balls. John Faulkner and I developed a routine whereby when he came over to visit from the outer darkness otherwise known as the Senate, I would toss him one of the tennis balls before taking the crease at a neatly arranged pitch down the northern side of the prime ministerial office. Faulkner always managed a steady line and length, focused on my long-standing structural weakness with any ball delivered at full pitch around leg stump. There were three cardinal rules to the office competition that developed: the tennis ball had to be struck back neatly along the ground so as to not damage the furniture; we had to avoid lofting the ball so as not to take out the Lloyd Rees painting of the Derwent Estuary, which I loved dearly, on the far wall; and we could never edge the ball, as that would run the risk of hitting the Arthur Streeton paintings of Sydney Harbour that hung behind my desk. I’m pleased to report that in my occupancy of the office, no damage was done to either the furniture, the artwork or, for that matter, the marble table, which I would deliver intact to Abbott after 2013.
If the game in the office became too vigorous, we would move outside to the prime ministerial courtyard. The security guards would join in, together with any other member of the cabinet or ministerial staff who happened to be passing by on their way to or from the ministerial entrance to the building. This managed to bemuse a number of visiting foreign delegations as they wandered past. But it was great to have a bit of fun amid the day-to-day grind at the desk or locked in the cabinet room barely twenty metres away. I recommend it to all my successors.
*
That summer, while technically on leave, I worked on two major projects. One was a writing project. The other the much harder business of what we would do next in trying to keep the economy alive. This would eventually result in the second stimulus package, announced in February 2009. The writing project was about making sense of what had happened to Australia since the Lehman Brothers collapse. By this stage I had delivered addresses to the nation, the UN General Assembly and every major business group in the country on the origins of the GFC, the unfolding Great Global Recession, and what we in Australia were doing about it. But I believed it was time to locate the crisis and our response to it within the broader context of political history and economic thought. The result was an 8000-word essay published in The Monthly in February 2009.6 I spent nearly two weeks, off and on, working on it that summer at Kirribilli.
Apart from making sense of the crisis for a wider audience, both nationally and internationally, I was also trying to make sense of it myself. To me, decisions made no sense unless they were part of a broader analysis of the problems we were seeking to solve, and then located within a broader philosophical framework of the type of society, economy and politics we were seeking to build. It was only when I was confident of how the part related to the whole that I could fully commit to the task of political action and advocacy. That’s why it was important for me to sit, pause, read, reflect – and then to write. And there was only one time of year when this could be credibly done, and that was over the summer. For me, it was almost impossible to ‘switch off’ until I’d done this foundational work.
I put the argument as baldly as I could in the opening paragraphs of the essay:
From time to time in human history there occur events of a truly seismic significance, events that mark a turning point between one epoch and the next, when one orthodoxy is overthrown and another takes its place . . . There is a sense that we are now living through just such a time: barely a decade into the new millennium, barely 20 years since the end of the Cold War and barely 30 years since the triumph of neo-liberalism – that particular brand of free-market fundamentalism, extreme capitalism and excessive greed which became the economic orthodoxy of our time. The agent for this change is what we now call the Global Financial Crisis.7
I went on to diagnose what had caused the crisis, quoting George Soros’s famous remark that ‘the salient feature of the current financial crisis is that it was not caused by some external shock . . . the crisis was generated by the system itself’.8 I also referred to the remarks of the ‘great’ neo-liberal ideological warrior of the right and long-serving chairman of the Federal Reserve, Alan Greenspan. When asked by a congressional committee investigating the crisis whether he found that ‘your view of the world, your ideology, was not right; it was not working’, Greenspan replied disarmingly, ‘Absolutely, precisely.’ Thanks for telling us that, Alan, after thirty years of entrenched neo-liberal orthodoxy.
The irony was that it was the failure of neo-liberalism itself during the crisis that had caused its principal exponents to cut and run to the social democratic state, both domestically and internationally, to save neo-liberalism from itself. And then, having done so, to later blame social democrats for the cost and consequences of the resulting intervention, which had taken the form of budget deficits and higher public debt arising from a classic Keynesian response to the crisis. This took a breathtaking level of political and ideological hypocrisy from the right.
I was proud of the essay. I had sought to make it as comprehensive as possible, and I knew I had succeeded when it caused an eruption across the Murdoch media and their coalition partners, the Liberal Party. Not only had I chosen to publish a major political essay outside the pages of News Limited, I’d also waged war on the core ideological orthodoxy of Murdoch Inc in general and Rupert Murdoch in particular: that all markets were good, and all governments were bad – unless, of course, they did exactly what Rupert wanted. Meanwhile Turnbull, a scion of Goldman Sachs himself, acted as if his personal and professional integrity were under attack. Both Murdoch and Turnbull were right; I detested their ideological worldview.
One News Limited editor told me my essay was the straw that broke the camel’s back with the Murdoch empire. I had betrayed the implicit understanding that was supposed to exist between Murdoch and an ‘appropriate’ Labor government – one which was expected just to sail along with the prevailing centre-right economic orthodoxy, with a few genuflections to centre-left passions on the way through – although these should always be kept safely within the confines of social policy where no real violence could be done to deeply entrenched conservative economic interests. Subsequent, full-blown editorial hostility from the entire group towards the government suggested he was right.
*
On 28 January, a day after my return from an emergency session of the Pacific Islands Forum in Port Moresby, called to deal with the region’s response to Fiji’s continued military rule, the IMF would release its World Economic Outlook Update. The global economy had gone from bad to worse over the course of the Australian summer.9 The report’s opening line was stark: ‘World growth is projected to fall to 0.5% in 2009, its lowest rate since World War II.’10 This represented a downwards revision of about 1.75 per cent from the November 2008 World Economic Update.11 The IMF also advised that December saw global output and trade plummet, and that we could expect to see advanced economies have a 2 per cent contraction in 2009.12 And as if determined to state the bleeding obvious, the IMF also told us that ‘a pernicious feedback loop between the real and financial sectors was taking its toll’.13 I remember saying, ‘No shit, Sherlock, now there’s a piece of rocket science for you,’ as I read this with my staff.
Importantly, the IMF also told us that since the November update, its new and universally dismal projections had incorporated the impact of the ‘substantial fiscal expansion’ that G20 economies had already undertaken, and which were projected to be equal to about 1.5 per cent of GDP.14 In other words, negative global growth had already factored in the stimulatory work we had all already done. The collective fiscal balance across advanced economies was headed south at a rate of knots, projected to fall to -7 per cent of GDP in 2009.15 In other words, we were looking at a spectacular set of global budget deficits across all developed economies.
The IMF’s recommended set of global policy responses mirrored almost precisely what we had been doing over the past three months, both in liquidity support and deposit insurance mechanisms on the financial side, and monetary and fiscal policy stimulus for the real economy. Ominously, the IMF warned that on the fiscal policy front that ‘any delays would likely worsen growth prospects . . . and that fiscal stimulus packages should rely primarily on temporary measures, and be formulated within medium-term fiscal frameworks.’16 As we digested the IMF’s most recent report, it underlined our resolve to announce another stimulus package as soon as possible. Fortunately, we had crunched most of the policy work on this front already. We would take the new package to cabinet four days later, on Monday, 2 February.
What surprised me on reading the IMF report was that our stimulus measures in Australia added up to almost precisely 1.5 per cent of GDP equivalent and was therefore running at roughly the OECD average, rather than somewhere in advance of that. On 2 February, the cabinet was briefed on Treasury’s Updated Economic and Fiscal Outlook, or UEFO. The document told the sober story of what the IMF’s global projections meant for Australia in 2009–10.17 According to Treasury, even with the announcement that day of the Nation Building and Jobs Plan – which would add the equivalent of a further 4 percentage points of GDP – the economy was still only projected to grow by 1 per cent in 2008–09, followed by a 0.75 per cent in 2009–10.18 In other words, it would still be touch and go whether we could stay out of recession.
As for the budgetary impact, $40 billion had been wiped off revenue projections in the MYEFO document of late September 2008, and a further $75 billion of revenue write-downs had occurred in the three months since.19 We were now staring at a total of $115 billion in revenue loss across the forward estimates, or the equivalent of a staggering 11 per cent of GDP.20 Despite the fact our starting point for the 2008–09 financial year had been strong, both with a reasonable surplus and discretionary expenditure growth kept well under 2 per cent, with this further collapse in revenues we would still be forecasting a budget deficit of 1.8 per cent in 2008–09 to 2.9 per cent for 2009–10.21 This took our breath away. But compared with an advanced economy average budget deficit of 7 per cent of GDP over the same period, we were still in reasonable shape, relatively speaking.22 However, we could no longer defend the possibility of a budget surplus for the immediate years ahead. The global economy had rendered that idea dead and buried – not just for Australia but for every other developed economy as well.
This did not result in a jolly cabinet meeting. We were all aware the country was in deep trouble. As was the economy. As, therefore, was the government. We needed to do something that would give us a fighting chance to keep economic growth north of zero. Our $42 billion Nation Building and Jobs Plan – designed to support and sustain up to 90,000 jobs over the two critical years that lay ahead – would be the largest peacetime budgetary stimulus in the country’s history.23 It had five core elements:
All these measures were designed to help build the nation’s education, housing, energy efficiency and transport infrastructure. They could also be rolled out relatively quickly compared with large-scale infrastructure projects. But they would still need to be supplemented by a further measure of consumption expenditure if we were to make a real difference, which is why the government elected to provide a second series of stimulus payments to households, equivalent to $12.7 billion, about 25 per cent larger than the one delivered at the end of the previous year.28 This was about a series of cascading measures: as the previous year’s stimulus measures began to fade by the end of the first quarter of 2009, during the second quarter of 2009 the next stage of stimulus payments would kick in, by which time the school building, social housing and energy efficiency measures would begin to have traction on the ground from the beginning of the third quarter on. It was the best possible strategy that could be developed at the time.
The implementation task, of course, would be formidable, but I was determined to crack the whip and get it rolled out as quickly as possible. I was all too aware, however, of the pitfalls lurking in the implementation of these programs and in their administrative oversight. From the very beginning, therefore, I recommended to the government and the cabinet that we appoint a Commonwealth ‘Coordinator-General’ who would become responsible for the delivery of these spending programs to the states and territories. On Albo’s recommendation, we appointed Mike Mrdak, deputy secretary of the Department of the Prime Minister and Cabinet, to the role. Before any funds were delivered, we required each of the states and territories to appoint a similar central coordinating point within each of their own bureaucracies. We had to ensure that there was a single line of coordination and that all relevant laws and regulatory requirements of the Commonwealth, states and territories were adhered to on the way through, from public tendering requirements to occupational health and safety.
*
Tuesday, 3 February, would be a busy day indeed. It was the beginning of the parliamentary year. The first order of business was the annual commencement service, this time held at St Paul’s Anglican Church in Manuka. It was good to be in a familiar setting. Thérèse and I and our two oldest kids had been parishioners in the 1980s. In fact, for a couple of years I had acted as a server during the morning communion services. The Queen had visited there one morning and Jessica, aged four, had run forward to present the monarch with her own, carefully crafted posy of flowers. It had been a congregation of caring, supportive folks. It’s strange how familiar places visited decades later can provide a level of comfort and peace when you are in the midst of what feels like a raging tempest. That certainly was how I felt that morning. I remember nothing of the service whatsoever; I only remember the quietude of the place itself.
Then it was forth into battle. First it was the special briefing of the Labor Party caucus on what we were about to announce. I was concerned that even they would find it too much. I’d spent the previous two years drilling into them the virtues of fiscal and economic conservatism. Yet now – albeit in the face of a financial and economic crisis which came in at about nine on the Richter scale of ‘atypical’ events – I was about to deploy a textbook Keynesian intervention which might even have left the great man himself gobsmacked by its sheer ambition, audacity and scale. And I couldn’t say for sure whether it would all work. It looked sound enough, but what if it proved to be the equivalent of a ‘dead cat bounce’ and not the ‘hockey stick’ effect we were hoping for?
Our economic future remained murky. Despite the best intentions, despite the best planning, despite the best possible execution, if the rest of the global economy went to hell in a handbasket, we would still go under. I had done my best on this score by fighting for our seat at the global economic table, and at the G20 heads of government summit in Washington the previous November had argued the case for programmatic financial reform for the medium to long term, as well as coordinated fiscal and monetary policy stimulus for the near term. The Washington Declaration arising from the summit had been good on both counts, and most G20 economies had begun to act. Having the communiqué arrive at a mutual compact, reinforced by transparent mutual reporting, to avoid a global outbreak of protectionism had also been important. However, in the first months of 2009 we had no way of knowing where all these measures, both national and international, would actually land in the real economic world. We’d done our best. Only time would tell.
In the end, of course, Australia’s ability to stay out of recession would ultimately hang on two factors: first and foremost, our own aggressive stimulus strategy, carefully calibrated over the 2008–10 period; and second, China’s own stimulus strategy, which effectively put a floor beneath the collapse in Australian commodity exports and prices which had already begun to tear away at our growth numbers during the course of 2008.29 The precise proportionality between these two factors – our stimulus, and that of the Chinese – is once again impossible to model. But without both we would not have survived the global recession without sinking below zero.
Most of these factors, in one form or another, had been coursing through my mind over the weekend before we formally launched our $42 billion stimulus package. As I walked into the caucus room that morning I knew the fate of the government in large part rested in my hands. With Treasury support, I had driven the case for each of our stimulus measures as hard as I could. The team had come with me, some more willingly than others. Lindsay, rightly, had contested every course of action along the way, as any responsible finance minister should. Swan was not a significant policy contributor. And Julia simply kept her own counsel most of the time; the cabinet notes would reveal that she was not a major participant in the discussions as we developed the stimulus packages, apart from those in her own portfolio areas. She was, however, both publicly and privately supportive of the approach.
When I stood up to give the address in caucus that morning, the room was unusually silent. Everyone, even the most economically illiterate of our number, had read summaries of the IMF report that morning, which all pointed in the general direction of global economic doom. I presented the cabinet’s case to the caucus. I began by outlining the $14.7 billion school modernisation plan.30 Before I could go on any further, the room erupted in wild applause. I’d forgotten that this was the Labor Party. Despite all my injunctions over the years about the importance of conservative financial disciplines, there was nothing these guys liked more than a good spending program. The task of converting the caucus to the stimulus cause would not be as difficult as I had feared. They just wanted a list of all the schools in their electorates that would benefit from the program – and could they possibly get it before lunchtime?
Having met with God, the caucus and then the press gallery during the course of the morning, it was then time to confront the parliament with a full ministerial statement on the rationale, content and projected impact on the economy of what we would call the Nation Building and Jobs Plan. I had always been partial to the term ‘nation building’. Once again, this was a direct assault on the prevailing neo-liberal orthodoxy, which held that nations mystically and magically sprang out of markets. I had been a consistent advocate of the role of markets as the central organising principle of economic management throughout my political and bureaucratic career, but nations were built from something much bigger and more creative than the mechanistic operations of supply, demand and the business cycle. It was people who, through individual political agency, decided to form themselves into communities and, over time, into nations. It was people, through their political decision-making processes, who decided on the constitutional arrangements of the nations they formed. And it was people, at least in democracies, who through the agency of their legislatures formed the laws in which markets operated – just as it was the legislature which determined what to do when markets failed and when it was necessary for the state to step in.
But nation building involved a broader concept as well. Any economic history of Australia teaches us that the nation’s infrastructure, including education, health and social services infrastructure, had its origins in the state, through the agency of elected government. And this particularly applied to the nation’s economic infrastructure. Whereas we welcomed private provision or public–private partnerships, our underlying economic infrastructure had not simply emerged from the soil and sand through the agency of markets alone. Indeed, during the first century and a half of the nation’s settled history, it had almost exclusively been provided by the state, and in many cases through not-insignificant state borrowings. This was based on the unremarkable logic that until basic infrastructure was laid down, it would be difficult for the private economy to develop and flourish. So when we announced our Nation Building and Jobs Plan, this was the tradition we were drawing on. The Labor Party and Labor movement were proud of the term ‘nation building’.
Turnbull’s response to my ministerial statement of that day displayed his failure to grasp the enormity of the challenges the country was facing. He described our plan as ‘Whitlamesque’,31 apparently a level of damnation that required no further elucidation, notwithstanding the fact that Turnbull had been a self-confessed admirer of Whitlam for most of his adult life – until he had concluded that Labor Party preselection in a safe lower house seat was not possible, before descending on the seat of Wentworth to seek Liberal preselection instead.
On the stimulus strategy, Turnbull bizarrely argued that if people had been allocated payments it may well have been better for them to have saved them rather than spent them, which of course defeated the entire point, which was to boost aggregate demand at a time of economic crisis. He then argued that, instead of proposing another stimulus package, the government would have been wiser to consider bringing forward the tax cuts we were implementing from 1 July that year to 1 January. Once again, this appeared strangely ignorant of the almost universal consensus among economists that tax cuts were not the most optimal form of stimulus spending for the simple reason that they came in small bundles rather than a single large bundle of additional spending power, and therefore would have a delayed effect. Perhaps the most unusual aspect of Turnbull’s critique that day, however, was his attack on the school modernisation program. He argued that this would somehow ‘crowd out’ private sector investment across the economy. Malcolm seemed to have passed over the fact that there was no longer any private sector investment in the economy at all, let alone any that could be crowded out. He also seemed to suffer from the delusion that if the government invested in modernising more than 8000 schools across the country, the work would be done by the Australian equivalent of the Number One People’s Construction Corps, whereas in fact all the construction work on the ground would be done by local private contractors. Clearly the Liberals were playing for time. In the end, they would decide to vote against the Nation Building and Jobs Plan. Had their vote prevailed, Australia would have gone into recession. As it was, we managed to prevent Australia going into recession by the skin of our teeth. With Albo playing a large role, as he always did in the hardest of political negotiations, the plan was passed by the Senate on 13 February 2009.