13 Myths about the Rudd Government’s GFC stimulus

In 2008-09, the Rudd Government faced the deepest global recession since the Great Depression of the 1930s. Although every other developed country on earth went into recession, Australia was saved largely through a targeted economic stimulus strategy that supported Australian jobs.

The Liberal Party, led by Malcolm Turnbull and then Tony Abbott, played politics by opposing the stimulus. They’ve made a lot of wild claims over the years to justify that mistake.

MYTH 1: The Global Financial Crisis (GFC) was no big deal for Australia.

REALITY: The GFC spark­­­­ed by far the deepest global recession this side of World War II. Advanced economies shrank by a combined 3.4% in 2009. The number of unemployed people worldwide rose 19 per cent to 34 million people between 2007 and 2009. Every developed country other than Australia went into recession.

Source: Reserve Bank of Australia

MYTH 2: The Rudd Government’s stimulus was too big.

REALITY: At around 5% of GDP, Australia’s stimulus was ranked around the middle of the pack for size. The OECD has warned that Australia often needs to stimulate its economy more than other countries during crises, since we have a much smaller government sector. This means other countries, like those in Europe, have “automatic stabilisers” that Australia doesn’t have.

Source: ILO

MYTH 3: The Rudd Government’s stimulus didn’t really affect unemployment.

REALITY: Unemployment peaked at 5.8% in July 2009. Treasury estimates that, without the stimulus, unemployment would have been around 7.3%. This means the stimulus saved 210,000 Australian jobs and prevented countless small businesses going under.

Source: OECD

MYTH 4: Governments should never allow deficit budgets.

REALITY: All governments aim to maintain fiscal balance on average over the course of the economic cycle. When economic conditions are good, governments should run surpluses. But when they are bad, responsible leaders borrow to stimulate the economy to protect their citizens. As economist Saul Eslake said in 2008, “a temporary deficit is appropriate and responsible in these circumstances”.

Source: ABC

MYTH 5: Australia took on too much debt during the GFC.

REALITY: Our government emerged from the GFC with among the lowest debt and lowest deficit levels in the developed world. In 2010, government debt accounted for 42% of GDP in 2010, compared with 90% in the UK, 126% in the US and 207% in Japan. Australia also maintained AAA credit ratings with the three major ratings agencies. Before taking office, the Liberals claimed they would start reducing debt immediately, but net debt has more than doubled since then.

Source: OECD

MYTH 6: The Rudd Government stimulated the economy too early and went for too long.

REALITY: The OECD says Australia’s stimulus was especially effective because of “the speed with which it was introduced”. With clear warning signs of a coming recession, Treasury advised the government to “go early, go hard and go households”. If we had waited, it would have been too late. Most of the stimulus was rolled out quickly and it petered out as the economy recovered.

Source: Budget Papers

MYTH 7: The stimulus cash payments to households were mostly saved, not spent.

REALITY: The cash payments were focussed at people on modest incomes – families, veterans, pensioners and carers – as they were most likely to spend quickly and the economy growing. According to Deutsche Bank, the stimulus payments boosted retail sales by $7.5 billion and helped save about 115,000 jobs in early 2009, including 40,000 jobs in retail. Retail trade in groceries, restaurants, household goods and clothing all trended up every month in 2009.

Source: Deutsche Bank

MYTH 8: The Rudd Government wasted money by sending stimulus cheques to dead people.

REALITY: To stimulate the economy quickly, the government issued $900 tax rebates to working people who paid income tax in 2007-08. In some cases, those people had tragically died, so the money was given to their grieving survivors. This was welcome support for many families who had lost an income-earner during economic hard times, including people affected by Victoria’s Black Saturday bushfires. This was similar to the Howard Government, which also issued broad tax bonuses during its government.

MYTH 9: The Rudd Government’s $16.2 billion school modernisation program was wasteful.

REALITY: An independent Implementation Taskforce received only 332 complaints across a total 10,492 projects, describing the lack of complaints as a “testament to those involved”. Overall the scheme built around 3000 libraries, 3000 classrooms and 4500 other facilities at only a small cost premium. This program supported construction businesses running throughout the downturn, supporting around 120,000 jobs.

Source: Australian National Audit Office

MYTH 10: Homes fitted with insulation during the stimulus were more likely to catch fire.

REALITY: A royal commissioner appointed by Tony Abbott found the exact opposite – the 1.1 million homes that were insulated during the stimulus were actually less likely to catch fire than other insulated homes. “The occurrence of fires does not appear to have been an issue of particular concern, other than to the media,” the commissioner found. Four workers were tragically killed after contractors violated workplace safety laws. This was unacceptable, so the program was closed and those bosses were prosecuted.

Source: Royal Commission

MYTH 11: Experts have been critical of Australia’s stimulus.

REALITY: Australia’s stimulus was praised around the world. The OECD said the stimulus was “among the most effective” in the developed world; it “helped to avoid a recession” and also “had a pivotal role in boosting overall confidence” in the world economy. The International Montetary Fund praised the “targeted and temporary” stimulus for working to “cushion the impact” of the global recession. Former World Bank chief economist Joseph Stiglitz, a Nobel Prize-winner, said it was “one of the best-designed Keynesian stimulus packages of any country in the world”.

Source: OECD

MYTH 12: What about the report by economist Tony Makin that’s often cited by News Corp commentators?

REALITY: Tony Makin’s analysis, sponsored by the Minerals Council of Australia, was comprehensively rejected by Abbott’s own Treasury department as confused and based on a flawed model. Another analysis by Australian National University academics said Makin’s approach set an impossible test for the stimulus: “If deficit and debt are taken to be overriding considerations, one cannot avoid concluding that Australia’s GFC response was anything other than a policy overreaction.” Ross Gittins, as Economics Editor at the Sydney Morning Herald, says Makin’s views put him in the “small minority of economists, even the academics”.

Source: Reserve Bank of Australia

MYTH 13: The stimulus didn’t fund lasting road and railway infrastructure.

REALITY: Labor delivered record infrastructure investment, doubling the roads budget and building or repairing 4000km of railway track around the nation. Stimulus funding ensured projects like the Hunter Expressway in NSW, new Regional Rail in Victoria, the Ipswich Motorway upgrade in Queensland and the Majura Parkway in Canberra.  This investment also supported around 15,000 jobs each year, peaking at around 18,000 jobs.

Source: Budget Papers