Command economy

IT has taken Kevin Rudd less than 12 months in office to declare "the economic equivalent of a national security crisis": a proclamation to boost his authority, justify policy reversals to beat recession and transform public expectations.

Rudd has never felt more in command as Prime Minister. He is torching the image of him as a cautious, review-addicted policy wonk. During the past week Rudd has taken a new guise as a crisis manager responding to events, in touch with world leaders, projecting calm and acting decisively.

It is more than a performance. In private, he radiates a new confidence. This has been his best week in political terms, though the wisdom of his decisions will be judged through time.

Understand what is happening here: Rudd is boosting the economy ahead of the downturn. Australians are being showered with good news now, with the bad news yet to arrive. Australia is cutting interest rates and boosting households from the budget to combat the expected decline in activity, profits and investment and the ugly spectre of rising unemployment and household hardship while prices stay high.

For the public this is the phony war phase. The Rudd Government displays a touch of crisis euphoria: the reversion to Keynesian methods beloved by social democrats, sanctioned by the Treasury and a convenient gift that briefly solves Rudd's political problems with pensioners and households. It is the phony glow that cannot last.

The equivalent of the national security crisis Rudd proclaims is, however, different in Australia as opposed to the US and Britain. The task facing George W. Bush and Gordon Brown has been to salvage their banking systems with bailout packages to recapitalise banks, underwrite lending and buy toxic debt.

Because Australia did not have the same banking crisis, Rudd has been ahead of the curve and he has moved faster on economic policy to prevent a recession in this country.

Rudd's response has been shaped by three factors: the Reserve Bank's dramatic October 7 change in "the balance of risks", the new International Monetary Fund forecasts about the global downturn and a warning from the Treasury that Australia faces a significant growth slowdown.

In particular, Rudd was influenced by advice Treasury secretary Ken Henry gave the emergency meeting in the cabinet room last weekend when they canvassed a fiscal stimulus: "Go early, go hard and go households." This is Treasury's conclusion from earlier, less successful packages -- notably the Keating February 1992 One Nation stimulus -- that came far too late.

Rudd acted on each of Henry's precepts. Australia is moving early with its stimulus in one-off payments from December 2008. It has gone hard; the $10.4billion package is equivalent to 1 per cent of gross domestic product, yet because it is squeezed into seven months its actual impact is closer to 2 per cent of GDP equivalent. And it has gone households, with the winners being pensioners, seniors, carers and families who should have a high propensity to consume.

Henry told ministers to expect a nine to 12-month lag for the central bank's interest rate cuts to have an effect. This means Rudd and Wayne Swan have constructed a stimulus in two steps: a fiscal stimulus to mid-2009 followed by a monetary stimulus. The monetary stimulus will gain momentum from expected further Reserve Bank cuts in the cash rate.

Beneath the speed of this week's decision beats a visceral determination: Rudd has no intention of becoming a recession PM in his first term. This is the entire meaning of his action.

The pledge from Rudd and the Treasurer is that they will do "whatever is required" to save Australia's growth. They are desperate to ensure the first Labor Government since 1996 does not preside over a recession, a fate that John Howard and Peter Costello avoided for the previous 11 years.

In the US and Britain, by contrast, the debate is about the severity of their recessions.

As Prime Minister, Rudd works more closely than did Howard with the two pivotal economic officials, Henry and Reserve Bank governor Glenn Stevens. Rudd's dialogue with Henry is intense at meetings and on the phone. He wants to establish a trusting relationship with Stevens and has held talks with him at Kirribilli House.

There have been a good number of four-way phone conferences: Rudd, Swan, Henry and Stevens.

As a dour anti-inflation hawk, Stevens sent an electric jolt through the Rudd Government on October7 by cutting interest rates by one percentage point and declaring that Australia's demand and output "could be significantly weaker than earlier expected", with inflation likely to fall faster. He said there had been "a material change" in the balance of risk to the economy.

Rudd and Swan operate on this new balance of risk. They have the firmest advice to this effect. The threat is recession, not inflation. Sitting on a $22 billion surplus, they would be fools to err on the side of caution, only to find Australia was mugged by recession. This was Rudd's point: he could wait and "watch the data unfold" or act on the data to hand.

Some Liberal MPs think Rudd has gone too far, too fast. In truth, Rudd has acted on the balance of economic and political risk, and anybody who thinks Howard, if still in office, would be sitting on his hands is dreaming.

The Government did not act on precise Treasury forecasts. The situation is too fluid. This is the reason for Rudd's national security crisis analogy. Rudd told parliament on Wednesday "the basis of the economic advice lies in the IMF public report on the state of the global economy".

The factors the four ministers involved -- Rudd, Swan, Julia Gillard and Lindsay Tanner -- considered were the IMF's advice that advanced economies would grow at only 0.5 per cent in 2009, that this would be the weakest performance for a quarter-century, advice that China's growth was being revised downwards by two percentage points and declining business and consumer confidence at home. The IMF forecast for Australia is 2.2 per cent growth for 2009, but the Government fears this is too optimistic.

Swan at the IMF and the Group of 20 meetings in Washington was struck by the rapid extent to which high-growth emerging economies were being affected. So grave was the crisis that some nations did not send ministers to the G-20 meeting.

"The judgment we reached was that Australia might be sailing too close to the wind," Rudd told colleagues later, explaining his decision. Swan told parliament the purpose was "to get ahead of what is occurring internationally". Opposition Leader Malcolm Turnbull backed the package but queried the data on which it acted. "Of course we support the package," Turnbull said at week's end. "But he (Rudd) has become so impossibly vain that anyone who asks any question about it is seen as being opposed to it."

Moving to the essence of his argument, Turnbull said: "If you really thought growth was going to be 2per cent plus next year, I don't think you'd be spending $10 billion in the fiscal stimulus. The Government must believe that growth is going to be less and possibly a lot less. What we've sought to find out is what are the assumptions they're working on?"

The Government wanted a hefty stimulus and decided that 1 per cent of GDP was appropriate. The irony, long forgotten, is that this was the exact stimulus that Treasury initially wanted (but didn't get) for Paul Keating's One Nation package 16 years earlier.

The differences are illuminating. Keating's One Nation stimulus came 15 months after Australia went into recession in November 1990. It was a structured stimulus spanning four years with a net impact in the first year of 0.5 per cent of GDP.

In this sense it was more modest than Rudd's highly compressed stimulus. At the time of Keating's package, the budget was deep in deficit, unlike Rudd's huge surplus that is now being run down.

Rudd and Swan stressed this week that the budget will remain in surplus after their stimulus. But the new forecasts will not be published until the mid-year review in November.

The past week has given Rudd what Keating says he needs, a strong narrative. That narrative is saving Australia from the recession engulfing many other nations. If the global downturn is modest and Rudd achieves this goal, his authority will be enhanced as PM and Australia's remarkable 17-year growth cycle will gain fresh lustre.

In the interim, Rudd pushes a complex series of political and policy plays. In policy terms he became the bankers' Prime Minister last weekend. After talks with the bank chief executives and the regulators, Rudd unveiled last Sunday a three-year government guarantee for depositors and a guarantee for bank wholesale term funding (that finances our huge current account deficit). The aim was to grease the wheels of the financial system and keep credit flowing.

For the next several days, any banker you met had only praise for Rudd as a financial statesman. Having delivered for the banks and for the financial system in spades, Rudd then did a political sidestep at the National Press Club on Wednesday and went populist. If anybody thinks Rudd is a one-dimensional politician, they are badly mistaken.

He does populist morality with the self-righteousness of a choirboy. Warning about "extreme capitalism", Rudd proposed that capital adequacy requirements for financial corporates be geared to executive rewards. That is, the capital requirements should be set steeper for companies that encourage risk taking by higher pay. How it works nobody knows. But it is hard to imagine a more popular idea right now.

Proceeding to another point in his triangulation strategy, Rudd, with Swan's backing, has launched a global campaign to rewrite the rules of international finance. Rudd brands this a new Bretton Woods, the conference that set the monetary order for industrial countries in 1944. He is deadly serious. It is one of the first items in a long list when, as he hopes, he speaks with Barack Obama, as US president-elect. Meanwhile Rudd's friend, British PM Gordon Brown, has seized this mantle as part of his "back from the dead" domestic political revival.

A final observation: During the past decade we have been subject in this country to a relentless polemic from many so-called intellectuals about the Americanisation of Australia. These are people, essentially, who do not understand how Australia is run.

The message from this crisis is that there is an Australian model. It is not the American model and it is superior to the American model. It has been crafted during the past generation by the Hawke, Keating, Howard and now Rudd governments.

It is an Australian response to globalisation that is impressive and that should mean Australia is less damaged by the coming crisis than many other comparable nations.

More reports -- Pages 20, 26, 27, 28 and 30