The government is now arguing that the recession will not be as bad for Australia’s workers as first thought. We are told there is evidence of “green shoots” of recovery—for example a 25 per cent rise in the stock market since March. But there are serious doubts about this outlook.
Labor is chancing that the recession will be mild by international standards. This is a huge gamble. If we accept official forecasts, a million people will be out of work in two years—but even this could be an underestimate.
Defending the federal budget in May, Treasury boss Ken Henry predicted that the economy would idle for the next year-and-a-half then recover to annual growth of over four per cent for the following six years. Unemployment would peak at 8.5 per cent.
But Henry contradicted himself by noting that the crisis will be worse than earlier recessions: “As the IMF has recently pointed out, financial crises and synchronisation are both associated with recessions that are longer and deeper, and that exhibit a weaker recovery.”
In other words, although the global recession is the worst since the 1930s, peak unemployment will be lower than following the 1980s recession (10.4 per cent) and the 1990s recession (10.9 per cent). This is contradictory logic—the recession will be worse but fewer jobs will be destroyed.
Labor has defended this outlook, pointing to signs of recovery in Asia. It also says that Australia’s banks are secure and well-regulated, that the housing sector is stable and that decisive action has been taken, through the stimulus package, to counteract the global financial crisis.
There may be truth to some of these claims—for example Australia’s banks are probably less “exposed” to the toxic assets that nearly destroyed the banking sector in America and Europe. But a more critical look at its assumptions is needed.
The so-called “Asian recovery” is based on the Chinese state’s massive spending program. Much is being made of ongoing Chinese economic growth. But this is driven by massive government spending on “fixed assets” such as bridges, rail and state-owned factories. As world trade collapses thousands of workers in export industries are still being sacked.
State investment can stimulate growth but it also entrenches problems of profitability. Most of the rise in fixed assets represents the production of the “means of production”, raising levels of investment per worker and putting downward pressure on the rate of profit.
It is also an over-simplification to argue that Australia “relies” on China. Trade and investment flows with Japan, Europe and the US are all important—and all these regions are stagnating.
Secondly, the claim that the housing sector is stable is based on the extension of the first-home buyers’ grant. But this is unlikely to reverse asset price deflation as the recession deepens. House prices fell nationally by about 6.7 per cent in the year to March.
However much prices fall, working class living standards will be squeezed. Falling prices undermine older workers who may have borrowed against the value of their home. Paradoxically, rising rents will cut the disposable incomes of younger workers. And anyone with debt who loses their job will face real hardship.
Finally there is the stimulus package. Apart from one-off cash handouts, the government has responded with longer-term infrastructure spending.
Like governments in Europe and America, this is expressed as a new economic orthodoxy that rejects free market excesses. Despite the talk, most of the spending will be on highway upgrades in regional areas—$8.4 billion was announced in the budget and an agreement was reached with the states to provide $26.4 billion (plus $5.3 billion from state governments). The rail component of the infrastructure spending is about satisfying mining industry complaints about low productivity in the transport sector.
These policies will not create the jobs needed to counteract the recession. Workers are instead told to accept wage freezes or shorter hours to prolong their jobs.
Because capitalism moves through cycles of booms and bust, some sort of recovery might be possible down the track. But the scale of the collapse in global finance, trade and production means it is likely to take much longer than in previous post-recessionary periods.
Things are set to get worse for workers and the government’s forecasts underplay the risky situation it is in.
By Tom Barnes