The December quarter national accounts showed that the Australian economy is almost certainly headed towards a recession – that is, two consecutive quarters of negative growth. What is occupying the minds of our political leaders, therefore, is whether the recession will be short and shallow, or long and deep.

A lot depends on the success or otherwise of the two-stage $52bn stimulus package being launched by the Federal Government, and sadly I feel that this immense quantity of expenditure spending will fail to achieve its objectives.

The economic theories of John Meynard Keynes sit behind the notion that during times of weak private demand, government spending should be increased rapidly to prevent the economy falling into a hole. Indeed, Keynes went as far to suggest that high unemployment could be avoided by paying one group of people to walk along digging holes, while another group followed behind, filling them up. A real life example of this occurred during the Great Depression when men without jobs were paid to alter the course of the Yarra and reinforce its banks (a happy consequence of which
is the riverside bike path so many Melburnians now enjoy).

In 2008/09, Keynesian ‘pump priming’ has become distinctly fashionable again, as governments around the world increase budget deficits and borrow money to hand to consumers (eg $900 for those earning under $80,000pa here) and favoured industries (Cars, cars, cars) in an effort to prop up spending (too much of which, on once cheap credit, propelled us into this mess). Those who question or criticise the wisdom of such spending are accused of lacking compassion for the soon-to-be unemployed. And the difficult issue of how the massive borrowings necessary to fund the handouts will be repaid is tactfully ignored until ‘the crisis has passed’.

Unfortunately for all the reborn Keynesians amongst us, the aforementioned December quarter GDP figures suggest that as much as 80% of the money handed out to consumers was saved rather than spent – an entirely natural reaction in uncertain times. Another potentially perplexing issue for the Government is the attitude of the Reserve Bank, whose decision in March to leave interest rates on hold suggests that inflation fighting, rather than recession busting, remains its main priority. If rates don’t start falling again soon, Kevin Rudd may soon regret the decision by his predecessor, Paul Keating, to make the RBA entirely independent from Cabinet.

Finally, the Australian Government is proposing to ramp up its borrowing requirements (to $200bn) at exactly the same time most other administrations around the world are attempting to do the same thing. Soon everyone will be trying to procure funds from the few nations which still save money – ie China and, to a lesser extent, Japan. Given this heightened level of demand for fresh capital, the suppliers of scarce debt will start exacting an increased price, meaning that global interest rates will head North once more. And the deleterious impact of this on Government finances could well outweigh any positive impact the $52bn stimulus package might generate.