Conditions in the Australian economy are of growing concern. Economic growth has been buoyant, driven by the export of resources to rapidly growing economies like China and India. However, a recession has developed in the United States, following the sub-prime mortgage crisis and the associated financial instability, and this could have ripple effects internationally. The Australian government's own budget estimates suggest that unemployment is likely to rise over the year ahead. Meanwhile inflation is rising, driven particularly by the rising price of imported oil.
Are the economic policies of the Rudd government coping with these emerging problems? Is the government also addressing other long-standing needs - to redress economic inequalities and restructure the economy for ecological sustainability? These challenges require a shift away from the neoliberal policies that have put most reliance on market forces and restricted the possibility of more progressive longterm policies.
The principal economic initiatives so far were those announced in the Federal government's budget last month. Wayne Swan has projected large budget surplus, despite delivering the major tax cuts to which Labor committed at the federal election. A surplus like that tends to reduce spending in the economy. It results in less government expenditure on infrastructure, education, health, social services and environmental policies than most of us would favour.
The budget also made some government payments subject to a means-test, producing predictable howls of concern from upper-income people who can well afford to meet their own expenses. The reduction in the threshold for the Medicare penalty tax is also significant, although the government didn't remove the general 30% tax subsidy for private health insurance funds, as the Greens have advocated. Other aspects of the budget looked reasonable at first sight but, on closer examination, turn out to have less progressive outcomes in practice. Education spending is a case in point: the electoral commitments to better public education funding was welcome but has not translated into funding commitments that reverse the long-term trend to greater austerity, as one of the articles in this issue of OPTIONS demonstrates.
Wayne Swan emphasised that the main economic goal of the budget – other than delivering on the promised tax cuts – was fighting inflation. The problem of rising prices warrants attention because of the adverse impact on people's standard of living. Inflation is only up a little though, indeed surprisingly little when the higher price of imported oil is taken into account. Budgeting for a big surplus does not get to the heart of the problem. Nor do the Reserve Bank's hikes in interest rates. Both policies tend to depress the level of spending, either through targeting consumption or investment. Tight monetary policy is particularly problematic. It is the heavy blunt instrument in the armoury of economic policy, causing much social damage when rising interest rates impact adversely on house purchasers and business investors.
The recent inflationary surge is not caused by wage increases. The wage share in the national income is at a record low. Petrol price rises are the more obvious culprit. Unfortunately, they have become the focus for a particularly unenlightening party political stoush. Opposition leader Brendan Nelson has been trying to embarrass the government with his advocacy of a subsidy on petrol prices. This is blatantly opportunistic. A 5 cents per litre subsidy would have no appreciable impact on the rising petrol prices, which are bound to rise by much more than that over the months ahead. Oil is a depleting resource. What needs to be done is to pave the way for patterns of consumption and production that do not depend so heavily on oil and its derivative products. That would mean more investment in renewable energy sources. It would mean substantial improvements in public transport facilities, so that people have options to switch away from car use. That is where the policy action needs to be.
It is also important to prepare for the prospect of a recession. A good feature of the federal government's budget was the establishment of investment funds that could use the projected budget surpluses over the next three years for expenditures on health, education and transport infrastructure. Those funds could be a significant buffer against rising unemployment, as well as redressing the neglect of public investment by the previous government. But the expenditures may need to be brought forward to provide a boost to job opportunities if the economy starts to slide. The government must also be pressured to change the composition of the boards that control the funds. The selection of investment projects cannot be left to businesspeople: the labour movement and the broader community must be strongly represented.
The growing economic difficulties make fundamental re-thinking imperative. Capitalism is an inherently unstable system, with a short-term profitability focus that ignores long-term investment and social needs. Australian capitalism, although currently buoyant, is over-reliant on extractive industries. So it is important to develop policies for more stability and sustainability. Currently, the worst case scenario is for a return to the 'stagflation' conditions that existed in the 1970s and 1980s. Dealing with this prospect brings into sharper focus the need for policies to manage the longterm transition to a more sustainable and equitable economy.
Source: Australian Options, Issue 53, Winter 2008, pp. 2-3.