So, how does this crisis look against our past crises?
There is a lot of talk of this current crisis being unprecedented. It’s not comparable because by definition all crises are different, but it’s not true to say we haven’t had this degree of government support before. Even if we do a superficial comparison with the past three big economic crises for Australia, we find the expected debt to GDP ratio is not unprecedented.
- The Global Financial Crisis - 2007 to 2008
In 2008 and 2009, government support for the economy was $52 billion, or 4 per cent of GDP. Net Federal government debt went from negative (where the government has more assets than outstanding debt) and kept rising as we funded the persistent budget deficits.
It took us more than 10 years after the financial crisis to return the annual budget to balance, and the plan was to start paying back that debt from 2020/21.
- World War II - 1939 to 1945
Australia’s debt to GDP ratio went from 40 per cent in 1939 to 120 per cent in 1945. It took 15 years to reduce that back down to 40 per cent, outstanding debt was still 8 per cent of GDP in 1974. Debt repayment mostly reflected cuts to government spending and high inflation.
- The Great Recession - 1930 to 1939
Over a period of three years, Australia’s gross debt doubled and peaked at 215 per cent of GDP, but the policy errors were big. As Dr David Gruen writes in his 2009 Colin Clark memorial lecture, the 1931 ‘Premiers’ Plan’ was agreed with a representative from the Bank of England, Otto Niemeyer. The plan introduced 20 per cent cuts to government spending, and increased federal and state taxes, on Niemeyer’s recommendation to focus on reducing the interest payments Australia owed to the British banks. (In other circumstances it might have actually been John Maynard Keynes who came out to Australia, which would have led to a very different outcome, but more on that later).
“The Premier’s Plan was hailed as a success, but this verdict has not stood the test of time,” Gruen writes. “Viewed from a modern perspective, with recognition of the importance of supporting aggregate demand when private sector spending is in retreat, Australia’s policy responses to the Great Depression appear counterproductive, and certainly not supportive of recovery.”
Today, we are seeing that support for aggregate demand – which is investment and consumption – as well as support for the financial system.