The Politics of Stimulating the Economy – Lenore Taylor

Lenore Taylor is an award winning political journalist who has covered federal politics for twenty-two years. She is national affairs correspondent for The Sydney Morning Herald and a regular commentator on radio and television, including the ABC’s Insiders program. In her co-authored book Shitstorm – Inside Labor’s Darkest Days (MUP) – with David Uren – Taylor examines the Rudd Government’s handling of the global financial crisis in 2008-9 and the price of that strategy for the government. Lenore Taylor addressed The Sydney Institute on Tuesday 20 July 2010. The paper which follows is an edited transcript of that address.

THE POLITICS OF STIMULATING THE ECONOMY

LENORE TAYLOR

When Kevin Rudd, the former prime minister, launched our book Shitstorm: Inside Labor’s Darkest Hour – astonishingly it was only one month ago – he made the case that Australia, in successfully weathering the global economic crisis, meant that, unlike countries overseas, Australia was not talking about rising unemployment. We also were not talking about an unsustainable level of debt. Instead, we were getting on with talking about health and education and what to do with the proceeds of the mining boom. We were able to get on with these debates because we did not have to face years of recovery from recession. For his own part, Rudd was clearly breathing a sigh of relief a little bit too soon. He lost his job just three days later.

David Uren and I argue in our book that despite the Rudd Government’s comparative success in steering Australia through the global financial crisis, the seeds of most of its current political problems were also sown during that time. Most obviously, there were the mistakes made during the second stimulus package, particularly in the design of the $3.8 billion pink batts program and the $16.2 billion Building the Education Revolution program.

Secondly, we also argue that the economic crisis contributed to the sequence of events that led to the collapse of the Rudd Government’s climate change policies. The way that the Rudd Government mishandled that had a lot to do with the demise of Kevin Rudd.

Thirdly, we argue that the financial crisis allowed Kevin Rudd to continue with his way of doing business, his administrative structure – the centralisation of power, the sidelining of Cabinet, the personal involvement in decision making to a dysfunctional extent – for longer than he would have otherwise been able to. The resentment in the party and the cabinet built up and up. So that, when Rudd’s high levels of personal popularity amongst the voters fell away there wasn’t the support base left in caucus. The crisis continued that sort of decision making for longer than would have otherwise been the case.

On the first point, we talked to all the members of the kitchen cabinet, the Strategic Priorities and Budget Committee, which really made most of the decisions in the Rudd Government years. We discussed the atmosphere about them as they took those decisions in late 2008 and early 2009. They had realised, in late 2008, that they would need to act again in early 2009. They had realised that would probably mean taking the budget into deficit. For a Labor government, that would be a pretty big thing to do. Labor had a lot of history in that regard and it was a difficult admission.

You would recall that at that point, members of the Rudd kitchen cabinet were going through verbal gymnastics to not use the “D” word. In the end, they made quite an explicit decision that the political ramifications of rising unemployment would be far greater than allowing the budget to go back into deficit. It was unemployment that was occupying them when they were designing that second package. They saw the need for spending ideas to create jobs and the Prime Minister, in particular, wanted to know where the jobs would be created, in what geographic locations and in what sectors of the economy. The policies of that time were chosen to that end.

For example, with the pink batts program, advisors believed it would employ a lot of low-skilled people with minimal training. But these advisors had originally proposed a tax rebate so that householders could claim back some of the costs of installing their installing. That was rejected by the SPBC because it wouldn’t result in a fast enough take up.

The Department of the Environment had originally proposed a top down approach, where the program was put out to a couple of big companies to tender. That was rejected because it was feared the jobs might not spread out far enough through the economy. So the ultimate decision, which proved a fateful decision, was to design a scheme that effectively allowed most households to get insulation for free. From scores of small suppliers. That obviously paved the way for disaster. Unethical operators sprang up and the industry multiplied to 20 times its original size in the space of just one year. It overwhelmed the piecemeal federal and state regulations and efforts at auditing.

We ponder in the book whether some might have spotted the obvious design flaw in that scheme if it had actually gone to the broader cabinet for decision making. There were many ministers with more experience in actual service delivery than in the kitchen cabinet. We were also astonished to learn that the second package was not designed with a total spending figure in mind. It was constructed to get the outcome the government wanted in terms of job creation. The Prime Minister was totally preoccupied, everyone told us, with how many jobs each measure would create and how that would measure against the damage to employment that was being predicted by the Treasury.

So the ultimate figure of $42 billion for the pink batts package emerged like the supercomputer in The Hitchhiker’s Guide to the Galaxy which spat out 42 as the meaning of life. It was the answer that created the right number of jobs rather than a number chosen because it made up for a collapse in private sector demand, which was how the total spending figure in the first stimulus package was chosen.

On my second point, the Emissions Trading Scheme, it’s interesting to recall that the crucial, original decision on the ETS scheme design, was made in late 2008, in those same months when the government was first looking at the global crisis and confronting that economic issue. It was during that time that the resources ministers and economic ministers won some quite critical battles in the Cabinet sub-committee that dealt with that issue. They won, in particular, the battle about how the government intended to try to get the ETS through the Senate. That would only be with the support of the Coalition which, it must be said, at that time did have an emissions trading scheme as its policy.

But there was an explicit decision that they would not try to pitch a scheme that could go either way in the Senate – that could either be amended to win the support of the Coalition or perhaps the support of the Independents and the Greens. Now it’s true that the Greens/Independent route had a lot of other difficulties, and it’s hard to tell what would have happened had that option been left open.

At that stage, we should remember, it wasn’t yet clear that Family First Senator Steve Fielding would emerge as an avowed climate sceptic. And if you look at how he’s acted in the Senate, it’s usually with an eye on dealing himself into decision making. I think there was at least a chance that Fielding could have emerged as the person trying to broker amendments to maybe protect family electricity bills or whatever if a package went the other way.

Those decisions locked the government into Coalition support and left it vulnerable to the politics of what eventually happened. I would argue the crisis also strengthened the hands of those within the Coalition who were opposed to Malcolm Turnbull’s proposed course of action of doing a deal with the government on the ETS. So, as we argue, the backdrop of the crisis contributed to the ETS which was a big part of the government’s political concerns.

On the third point, we argue that the crisis allowed Kevin Rudd’s decision making style or what Robert Ray has described as the Nelson’s column system of government. John Howard had a pyramid, but Rudd’s way was a Nelson’s column with Rudd on top and nobody else below. And that continued for longer because of the crisis. And the crisis could be used to justify extreme secrecy, or the need for speed. This is why the full Cabinet only saw the content of that first stimulus package after all the press releases had been typed up and were ready to go.

I’m sure that, after the election, more stories will emerge about the dysfunctionality of the Rudd office. Already ministers, even ministers who were supportive of Rudd’s direction and his policy ideas, talk about endless meetings of the SPBC from which no decision emerged which were left with the Prime Minister to consider for a final position. All this took forever and forever.

When I went back to the decision to delay the Emission Trading Scheme, that was the picture that emerged. And it was from that point where Kevin Rudd’s personal popularity began to plummet. There was endless discussion and endless debate but no decision, until there was a crisis and a decision was forced on them. I really do think that had the government not had 18 months of its term taken up with crisis management, such problems would have been ironed out a lot earlier. There would have been ministers who said, “This has to stop.”

Another issue we discovered in researching the book was that Treasury had conducted secret workshops in 2004, at the height of the boom years, on how it should advise a future government which was facing the prospect of a recession – what policy advice the Treasury should give. Treasury felt it had been out of the loop with decision making on policy response in the 1990s recession. It wanted to make sure that didn’t happen again. They came away from the workshops with the advice they gave to the Rudd Government about going very hard, going very quickly and directing money to households.

Treasury was clear that the big infrastructure projects the Keating Government had tried to fund were too slow, and that the money would come into the economy too late to stimulate the economy. In fact, the Keating stimulus came into the economy as it was growing again and was actually more of a hindrance in economic terms. But if Treasury were to hold a workshop in the next couple of years, and look back at this crisis, there would need to be more advice about the design and policy implications of infrastructure programs like pink batts and school halls. Possibly advice about how much money you can practically spend in a very limited period of time. Certainly advice on how to administer, or properly administer, stimulus going through the states.

The political price of steering the nation through the recession has been very high. In our book, as we follow the decision making, that’s quite clear. It’s been high for Labor, it’s setting the tone of this election campaign. And it was certainly higher for Kevin Rudd than he ever imagined. When Kevin Rudd said, on television last March, that he was facing a political shitstorm, he really didn’t know the half of it.