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Australia's Peter Costello Criticizes Government Approach To Crisis

CANBERRA -(Dow Jones)- Australia's Labor Government has used the wrong policy approach in trying to combat the impact of the global financial crisis, Peter Costello, the treasurer in the Liberal-National coalition government from 1996 to 2007, said Monday after formally resigning from the House of Representatives.

Moreover, the prudential regulations put in place in 1997 have helped quarantine Australia from the global financial crisis, indeed the crisis never happened for local financial institutions, he told reporters.

Costello said that the government's midyear budget review, due to be issued later this year, will show that the Treasury Department overestimated the impact on Australia of the global financial crisis and this in effect will undermine any justification for the government's current approach.

"The automatic stabilizers would have stimulated the economy," he said. " Monetary policy was the appropriate instrument that needed to be adjusted because interest rates were too high in any event and should have been cut."

The government adopted a fiscal stimulus that was essentially a "low quality spend" that gave money to taxpayers that ultimately produced nothing of substance, he said.

Australia was the only developed economy to avoid recession during the global financial crisis. Much of that is credited to the government's A$67 billion in fiscal stimulus and the Reserve Bank of Australia's 4.25 percentage points in rate cuts.

"Australia didn't have a financial crisis. The United States did, the United Kingdom did. Australia didn't. No bank failed in Australia. No bank needed capital. No bank had to be nationalized. No bank even made a loss," he said.

The Australian government's revised budget forecasts for 2009/10 are due before the end of the year. These are expected to show strong improvement in the economy and a smaller forecast budget deficit.

-By Ray Brindal, Dow Jones Newswires; 612-6208-0902; ray.brindal@dowjones.com

(James Glynn in Sydney contributed to this article)

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