Finance minister of the year 2011: Swan confounds his domestic sceptics
Australia has struck it rich, and lucky, as it has used its natural resources to benefit from the China spending boom. But the careful stewardship of its treasurer, Wayne Swan, has played a key role in making it the best-performing economy among the world’s richer, developed nations. Not that he is likely to get much credit at home, as Eric Ellis reports.
Finance minister of the year 2011 Wayne Swan
BLESSED WITH, AND industriously exploiting, a natural resources bounty pointed at China that would embarrass Croesus, some Australians will find it strange that Euromoney has chosen their treasurer, Wayne Swan, as finance minister of the year.
The less charitable might even recall the words of Donald Horne, in his 1964 book The Lucky Country, which read: "Australia is a lucky country, run by second-rate people who share its luck."
Swan would probably be among the first to admit that he has indeed had some luck. But his work as treasurer is acknowledged by Euromoney as much for what didn’t happen to Australia on his careful four-year watch – economic Armageddon in the trail of the 2007-08 subprime meltdown, which he confronted in his first year in office – as for what he positively did, positioning Australia to power through the new crisis looming from abroad.
"The fiscal rules that we put in place to deal with the global recession when we moved to stimulate the economy were ahead of the rest of the world," says Swan, in an interview from the kookaburra-chorused back verandah at his home in Brisbane.
"These were the sorts of rules that were ultimately adopted by the G20 in its summits through 2009, this whole notion that you needed an exit strategy. At the time we moved to stimulate, we put one in place and we’ve been applying it vigorously. It’s not happening anywhere else in the world."
As a result, Australia is one of only three OECD economies not to fall into recession since 2008, alongside Poland and South Korea. And it seems well placed to repeat the feat as the worsening euro crisis and US funk spread their infection. After two decades of growth, Australia’s sustained expansion has been the most impressive performance of any member of the developed rich countries club.
That’s all very well, but is Swan a worthy recipient of the award, in this era of booming Brics and roaring Tigers emerging to trump the sputtering west?
Former ANZ chief economist Saul Eslake of the University of Melbourne think-tank The Grattan Institute knows the 57-year-old Swan well, and offers a qualified yes.
"Swan is certainly after glory," says Eslake, "but for his party, not for himself. He’ll be thinking how this gong will improve Labor’s chances of winning the next election, seeing it in intensely political terms as will, of course, his political opponents."
That political capital might be useful, given that there’s every possibility that by the next time Euromoney considers the global field of finance ministers, Swan won’t be among them. The longevity of the minority Labor-led government of prime minister Julia Gillard – Swan is deputy prime minister – depends on the whim of three independent MPs who face a voter backlash in their own constituencies, because they backed Labor into power last year.
And none have been impressed by Hookergate, allegations that Labor backbencher Craig Thomson, who chaired a key parliamentary economics committee, paid for prostitutes with his union’s credit card, as Labor bailed him out of bankruptcy with party funds. With a two-seat majority and a 15-point deficit in opinion polls, Labor can’t waste a single seat, lest it trigger an early election it will certainly lose.
"Oh, I think Australians recognize that we did really well during the global financial crisis and the global recession," he says.
"Australians do understand that we were almost alone among the developed economies to not go into recession. That’s the thing I’m most proud of.
"When we moved to stimulate the economy (in 2007-08), given the nature of the debate in Australia, it was controversial and vehemently opposed by our political opponents. As time has proven, the fact is we did keep Australia out of recession, we had one quarter of negative growth and avoided it in the subsequent three. We took a well-thought-out, well-executed set of plans to stimulate the economy.
"And it worked, so we didn’t go into recession and we didn’t suffer the capital destruction and the skill destruction that we saw in many other countries, and it’s given us a really great foundation to approach the Asian century and the resources boom that comes with it, because we are going into that from a position of strength."
If only Australians saw it that way. Through their gloomy prism, things are grim, and they’re pointing fingers at the government. Indeed, during this 20th anniversary of the collapse of the Soviet Union, there’s something of Gorbachev about Swan and Labor – hailed abroad by everyone from the IMF to the OECD but loathed at home. Or perhaps it’s a little like what sport-obsessed Australians are world renowned for. They hate it when the referee intervenes in an epic battle. Sport is best contested when the umpire is invisible, which usually means he’s doing a good job. But Australian umpires, like their politicians, aren’t to be praised, no matter how well run the contest. Elections elsewhere are fought on the economy, and Australians are the thankless lot who bounced the conservative Howard-Costello team from office after 11 years, while the booming economy was at the peak of its powers.
Surrounded by the consumer baubles that wealth brings, grumpy Australians don’t seem to appreciate how good they’ve had it. A crippling drought recently broke, Australian incomes are up, and unemployment and inflation are down. As Glenn Stevens, governor of the Reserve Bank of Australia, the country’s central bank, recently noted, China’s boom has provided Australia’s "biggest gift" since the 1850s’ gold rush. But as Stevens also remarked: "It seems we are, at the moment, mostly unhappy".
Indeed, Australians are anchored deep into the bottom third of that quirky Happy Planet Index that measures national fulfilment and personal wellbeing, as disconsolate about their lot as Sudanese, Nigerians and Americans, who’ve more to be glum about than multi-home-owning, wine-swilling, yacht-sailing Aussies globetrotting with their muscular currency, of which they possess much. (Welterweight-sized Australia is the world’s 51st biggest country by population but a heavyweight 10th on the global tally of millionaires, minting as many billionaires as France.) Even economically embattled Greeks and over-politicized Palestinians are apparently more content than Swan’s dejected lotus-eaters.
Australian despondency is confirmed by leading consumer confidence indicators measured by the University of Melbourne and Westpac Bank. Australians are as depressed about the economy as they have been since the last time they were in recession, in 1991.
No matter that Australians are wealthy – since coming to office in 2007, Swan has helped G20 member Australia become the world’s 13th-biggest and sixth-richest economy – democratic, peaceful and living in spacious, sun-drenched splendour. And no matter, either, that Australia occupies second slot (behind Norway) on the UN’s Human Development Index. Or that its six biggest cities rank no worse than 36th in Mercer’s benchmark liveability index. And that all of this polish will likely buff up even brighter because Australia occupies the temperate flanks of the world’s most economically active region, plundering huge deposits of precisely the stuff booming Asia needs.
But far from being the optimistic land of plenty that Australia is perceived as from the depths of the trans-Atlantic, Australians enter a third recession-free decade cloaked in obstinate melancholia. For all his deft management of the economy, Wayne Swan, in his fourth year as treasurer, seems powerless to convince them otherwise. Australians must be hard to please?
"No," says Swan dismissively. "We’ve had 20 years of continuous economic growth and I think that reflects great credit on the judgement of Australians. Now, from time to time, people will be disgruntled, people will have issues, we’ve got a cautious consumer, we’ve got the impact of the high Australian dollar, we’ve also got the impact from the withdrawal of the stimulus, felt all at the same time.
"But Australians are just as entitled to claim credit for the fact that the country’s been growing for 20 years than any of the people who’ve been in elected office."
So if things are so good under Swan, why are Australians so miserable? Why are Swan and his government colleagues so despised, when they helped protect Australia from, indeed save it from, the chaos that ravages the trans-Atlantic economies looking longingly down under from afar?
"Precisely because the worst things didn’t happen, Australians assume that it couldn’t have been that bad then," says Saul Eslake. He says that for Australians the continuing crises in Europe and the US that Swan has shielded them from is all a bit "‘well, what was all that about? Now we’ve got all this debt and there wasn’t a recession, the financial system didn’t collapse, we didn’t have a housing crash, so what was all the fuss about?’ It’s damned if you do, and damned if you don’t."
Critics argue that little of that is Swan’s handiwork. He was lucky, they say, to inherit a strong set of numbers from his Liberal (meaning conservative) predecessor, Peter Costello. "Unlike Obama, Swan inherited a good in-tray," says Eslake. "He was left a surplus, was left an economy in good shape, albeit overheating somewhat, with negative public debt. And the fortuitous relationship with China had nothing to do with him.
"But any objective observer would say that Swan had a good financial crisis, with a greater set of challenges facing him than Costello ever had. Swan’s response to the crises in the broad macro sense can’t be faulted.
"Nonetheless, he listened to good advice. And you could argue that even before the onset of the financial crisis, though I’m not 100% convinced of this, he would say that he sniffed that things were amiss, in the lead-up to his first budget in May 2008, and he decided against aggressively cutting spending."
So Swan called the GFC, as it’s known in Australia? That would be news to Australians.
"I’m not saying that," says Eslake, "but he got a sense and certainly there were people saying that when he made his first trip to the US in April 2008 for IMF and World Bank meetings, where he took soundings and came back with a sense that all was not right.
"He didn’t see the financial crisis coming but he made a judgment not to go ahead with cuts in government spending that had been planned for their first budget, for which he was criticised. That decision looks good in hindsight, after the crisis.
"And then, when the world started to go pear-shaped, the advice from (then secretary of the Department of Treasury) Ken Henry was ‘don’t do what we did last time, but learn from the mistakes of the 1991 recession’ – and he did.
"His go-early, go-hard, go-household strategy worked in the broad, notwithstanding that some individual programmes within the stimulus package were very poorly conceived and executed."
Paul Keating, the Labor prime minister from 1991 to 1996, agrees. The measure of any finance minister, he says, "is whether they are capable of divining either a new order for their economy or a decided step change in the functioning of the current one". Swan’s measure, he says, was "his ability to comprehend danger and act decisively to minimise it."
Keating says Swan did two important things after the Lehman Brothers collapse in 2008: "First, he underpinned the Australian banking system by guaranteeing all deposits, while providing the guarantee of the Commonwealth of Australia to the country’s major banks to facilitate the rolling of their international term funding. This obviated the need for massive asset disposals.
"Second, he moved fiscal policy rapidly into a high gear, to provide a stimulus by way of government demand in the face of a marked contraction in private spending. The scale, speed and modality of that stimulus made all the difference to activity within the Australian economy, whereas in other economies, finance ministers were either too slow to act or, when they did, acted by half measure. If the proof of the pudding is in the eating, Wayne Swan’s treasurership brought Australia through this profound crisis."
Eslake says: "Also in Swan’s favour... he hasn’t done the sort of stuff Costello did, interfering with banks’ pricing of interest rates. And he’s supported the Reserve Bank’s independence – it wouldn’t have been popular for a politician to be supporting the central bank raising rates as quickly as it has done. Whilst Swan didn’t go out and celebrate, nor did he interfere. And he provided political backing for the Reserve Bank.
"He’s become almost anal in his insistence that the budget be in surplus by 2012-13," says Eslake. "I think he’s overdone it but at least he’s imposed discipline, to make sure they’re heading in the right direction."
"You can’t be Keynesian on the way down and not be Keynesian on the way up. I’m insistent on that"
(Swan bristles at this criticism, arguing that "you can’t be Keynesian on the way down and not be Keynesian on the way up. I’m insistent on that.")
Eslake says: "We forget now, but the [$42 billion] stimulus package was crafted to be temporary. There were no permanent tax cuts or permanent spending increases in it. It was well designed from a macro point of view.
"Some of the other decisions that were taken at the time, such as guaranteeing the overseas wholesale borrowings of the banks, were absolutely critical, absolutely the right ones but it wasn’t necessarily obvious at the time. The decision to guarantee domestic deposits was silly but it didn’t do any harm.
"The scheme under which the government propped up finance from major banks to motor vehicle wholesalers [known to Australians as Utegate, a political disaster that sank Malcolm Turnbull as opposition leader when he aired bogus emails implying corruption in government ranks] was broadly right.
"Some of Swan’s schemes were poorly implemented, and the Murdoch press has won the battle of public impressions in portraying them as a colossal waste but the truth is that maybe 2% of them were wasted.
"But in terms of getting money out across the whole country quickly, they worked. Again, you can say with the benefit of hindsight that the government did too much. But at the time you could’ve done too little too late and scramble to catch up, or you could do too much. And the right mistake to make was to do too much too soon."
His finest hour?
So does Wayne Swan see the crisis as his finest hour as treasurer?
"It was a really important moment for the country," he says. "The country rallied behind it, Australians worked together through that period and the results are all there, as far as I’m concerned. It reflected well on the government and really well on the people.
"My belief is that we wouldn’t be in government now if it wasn’t for what we did to respond to the global financial crisis and the global recession."
He says "our record in dealing with the crisis" is what put Labor back in office after last year’s hung election.
"We had a hard campaign where everything that could go wrong did go wrong but the thing that went for us was that we dealt effectively with the crises."
Back in government, Swan says he’s "determined not to shirk the really important decisions that are required" to maximize the opportunities in neighbouring Asia. Such as a scheme to tax carbon emissions, the divisive battleground that could decide the next election and "just a very tough debate," as Swan describes it. Labor adopts the action-now, true-believer position on climate change whereas Tony Abbott’s opposition Liberal Party successfully plays the no-more-taxes, climate-change-sceptic card.
"How can we sit here in Australia," Swan argues, "with the highest emissions per capita in the developed world, and yet stand internationally and lecture China that they’re not doing enough if we are not doing enough ourselves?"
With Australia a big exporter of fossil fuels such as coal, Swan says making the country more carbon-efficient "is the only way we can set the economy up for the 21st century. We don’t think you can be a first-rate economy unless you’ve got a substantial amount of your energy coming from cleaner energy sources so we’ve got to achieve that transition. If we are not seen to be doing the right thing, we’ll quickly face trade barriers internationally for products that are still required to be used. You can’t get a bigger structural reform than carbon."
What keeps Wayne Swan up at night?
"I’m pretty concerned about what’s going on in Europe and the US," he says – he observes this through his iPad. "It’s a situation where political gridlock has led to policy gridlock. We need credible fiscal plans to deal with their deficits and their debt, credible to markets and a clear way forward. The Europeans and Americans need to set a very clear and firm course.
"Look, 2011 isn’t 2008. It’s a mistake to see everything through the prism of what occurred last time. I don’t believe events are yet at the stage of 2008. But if policymakers don’t get ahead of the game, you can see us sleepwalking into something inherently dangerous."
"We didn’t go into recession and we didn’t suffer the capital destruction and the skill destruction that we saw in many other countries, and it’s given us a really great foundation to approach the Asian century"
Ahead of this month’s World Bank and IMF meetings, Swan recently joined the finance ministers of Canada, Singapore, South Africa and the UK on the Financial Times op-ed pages in addressing the world’s "crisis of confidence" where "the biggest barriers are political not economic, so what is needed is political leadership and courage. More short-term fixes without serious medium-term commitments will only weaken confidence further.
"If they’ve got a plan, and they’ve got faith in it, then they’ve got to get out and back it and clearly communicate it, ahead of the game, not behind it. The most important thing is for the leaders in Europe to actually demonstrate they are serious about their plans and get on with implementing them, and that means giving markets some faith that these plans can and will be delivered."
These are fighting words internationally, but also ones that betray what Eslake regards as one of the domestic failures of Swan’s treasurership.
"He’s not been able to make any political capital out of what I regard as a good economic performance," says Eslake. "He’s not been able to make a political virtue out of this whereas Keating and Costello would have, and did.
"Part of the treasurer’s job is to do good economic policy but an equally important part of the job is to sell it. The public doesn’t buy that good economic policy is good politics.
"Swan hasn’t been a spear-carrier for reform, whereas Keating and Costello, and Keating more so, would argue in Cabinet and outside to the public for good economic policy even if it wasn’t popular."
Eslake says Swan played a deft hand during the party coup on fellow Queenslander and prime minister Kevin Rudd last year. The Rudd assassination, as it’s known in Australia, was engineered by backroom apparatchiks of the powerful Australian Workers Union, the country’s biggest trade union, furious that Rudd’s floundering campaign to secure a controversial new tax on Australian miners made him unelectable.
For his part, Swan describes the bitter resources tax debate, pitting the government against the might of huge billionaire-led mining houses, "as bloodier a political battle than any that’s been seen in this country for a long, long, long time." It cost Rudd his prime ministership and yet, notes Eslake, "Swan was the political architect of the tax and he came out of it as deputy prime minister." It doubtless helped that Swan is a former AWU member, and a factional heavy in an AWU-dominated Queensland Labor Party, where Swan cut his political teeth in Brisbane through the 1970-80s.
"Yes, I did survive it," says Swan, "but I reject emphatically the notion I haven’t been a spear-carrier for reform." He says people like to view reform in a 1980s-90s’ context in Australia, when there were big and obvious economic monoliths to break down.
"Well, you can only deregulate the dollar once, you can only bring down the tariff wall once, you can only do enterprise bargaining once... you know it’s a funny thing in politics, but long-term reforms sometimes take a while. In our modern political cycle, everyone judges everything on a 24-hour or six- or 12-monthly timeframe.
"It’s about getting the settings right to maximize the fantastic opportunities that are coming out of Asia, not just in resources but also in demand for all of those growing middle classes right across the region. That’s why we got stuck into the resources tax in the first place, to get some revenue which would help us meet the structural adjustment needs of the rest of the economy that’s not in the fast lane of the mining boom, and give more Australians a stake in that boom."
Swan, says Eslake, has too much of a background as a Labor apparatchik to be seen as a reformer. "Good treasurers argue for what’s right and are hauled back by their prime ministers on the grounds of what’s politically possible or feasible," he says. "Swan puts more emphasis on the latter than the former. Because of his background as a political numbers man, he is far more conscious of the political do’s and don’ts and I think that holds him back from being this spear-carrier for reform."
Eslake cites the upcoming October tax reform summit as an example of his self-checking political limits. "He probably doesn’t want it but it was part of the power deal with the independents so he has no choice. There’s more attention as to what’s off the agenda than on it – you’re not allowed to talk about the GST, you’re not allowed to talk about negative gearing, or the taxing of the over-60s... big things. It’s sort of like don’t talk about the war."
As for the [current] Take Two of the global financial crisis, Eslake says: "Australia is in a good position to weather it for the same reasons it was in a good position to weather the last one.
"It’s not entirely Swan’s doing but we’re still in a good fiscal position, not quite as good as before but still better than any other developed economy. We’re in a position to cut rates, which is the Reserve Bank’s concern but Swan hasn’t argued against it and we still continue to benefit from China. Again, that’s not his doing but he hasn’t done anything to complicate the relationship."
Although Swan is deputy prime minister and is a party faction leader in a key state, he is not nakedly ambitious for Gillard’s job as Keating and Costello were for Hawke’s and Howard’s. Indeed Swan says he has no interest at all in being prime minister. He simply likes being treasurer.
"It’s not often in life you get a chance to make a difference, and to get a job like this so you’ve got to make the absolute most of it," he says. "The thing that I enjoy most is when I’m wandering around the place and people come to me and say ‘well if it wasn’t for what you guys did with the stimulus, my business would’ve hit the fence’.
"One of the challenges in life is to explain to people that something could’ve happened to them but didn’t. It is a lot harder to explain, but we know we made a difference, and that’s the main thing, making a difference."