Communist Party of Australia

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Issue #1605      August 7, 2013

Crisis: The plan to make the people pay

The official election campaign is up and running with the big day set for September 7. The scene was set by Treasurer Chris Bowen last Friday with a mini-budget statement signalling the end of the mining boom and the economic “challenges” that lie ahead. “Challenges” is political spin for “crash” or “recession”.

Bowen, who had already lined up with the extreme Right in his callous and inhumane treatment of refugees as Immigration Minister, is now attempting to outdo the Coalition with a neo-liberal, austerity program. Just as the economy is heading towards recession, Bowen in his new role as Treasurer has produced a contractionary, pre-election mini-budget.

It is not the pre-election budget of the good old days with sweeteners for the electorate. Far from it. Bowen is determined to prove to the ratings agencies and big end of town that Labor can make the “tough” decisions required for “sound economic management”, even on the eve of an election. It remains to be seen whether it backfires or delivers a few votes. It should, however, bring in a few more corporate dollars in political donations.

Over the past 18 months to two years Treasury has repeatedly written down forecasts of taxation revenue from individuals and companies as well as the rate of growth of the economy.

The latest write-downs in the Treasurer’s statement follow less than three months after those in the May Budget and are quite dramatic considering the short space of time.

“Lower than expected nominal GDP growth has had a major impact on expected tax receipts and other revenue, which have been revised down by $33 billion over the forward estimates,” Bowen said.

Bowen’s latest forecast (supplied by Treasury) is now 2.5 percent economic growth in 2014-15, down from 3.0 percent. In May, the unemployment forecast was 5.7 percent (700,000) for 2014-15; this has been revised upwards to 6.25 percent (close to 800,000). (Double those figures for a more accurate estimate of un- and under-employed.)

But this does not prevent Bowen making another round of over-optimistic forecasts and talking up the economy: “Australia’s economic fundamentals remain strong and the outlook remains positive, with solid growth, moderate unemployment and contained inflation.”

To address the “challenges”, the government has announced “$17.4 billion of responsible savings decisions to provide a pathway to expected surplus in 2016-17.” “Savings” is spin for “spending cuts”. It sounds softer and more responsible.

Most of the measures in the statement had been previously announced. They include four six-monthly increases of 12.5 percent in tobacco excise; a tightening of fringe benefit tax exemption for company provided cars; and bringing forward the start of the emissions trading scheme.

The new big item was a 0.05 percent levy on all new bank deposits up to $250,000 to go into a special fund to cover customers when banks or other deposit-taking institutions collapse.

Shades of Cyprus?

The banks went through the motions of objecting to the levy and wasted no time in announcing they would just pass it on to their customers. The 0.05 percent amounts to $5 on savings of $10,000 and $50 on a $100,000 deposit – in effect being taken out of people’s potential savings as the banks reduce interest rates by that amount.

“… what we’re doing is building a fund over time to make sure we’re protecting investors, mum and dad investors, people with bank accounts, if anything goes wrong with their bank,” Bowen told David Koch in an interview on Channel 7’s Sunrise program (2-08-2013).

“It’ll be quarantined from the rest of the Budget and just put aside in case there is ever a need with a bank getting into trouble in Australia – bank, a building society or a credit union. It hasn’t happened in Australia for quite a while, but we can’t be complacent. The Reserve Bank, APRA [Australian Prudential Regulatory Authority], ASIC [Australian Securities and Investments Commission], have all suggested to us that this is a good idea.”

There has been a general assumption by the public in Australia that bank savings are guaranteed by the government, or at least the government would come to the rescue if there was a crash. This has not always been the case. Savings in the Commonwealth Bank and the state banks prior to their privatisation were government guaranteed.

During the global financial crisis the government provided banks and credit unions with indirect assistance, by introducing a scheme to guarantee deposits up to $1 million, later reduced to $250,000. This reduced the likelihood of a run on banks if the public became worried by developments.

The levy is an indicator that the government is not prepared to fund future bailouts, possibly believing it does not have the resources to do so. After decades of privatisations it has considerably fewer assets to draw on and fewer sources of regular income from assets such as the Commonwealth Bank, Telstra, airports, etc, since their sell-off.

The funding of this protection, out of the pockets of people’s savings has strong parallels with Cyprus where people’s savings were raided to bail out the banks. The difference at this stage is the amount being put aside is relatively small, but it still sets a precedent, that people pay to guarantee their own savings, not the institutions that profit from and lose their money.

It will take some years before the fund can build enough savings to be meaningful in a financial crisis.

Up to now banks have been required to hold a certain level of reserves to cover emergencies. It begs the question as to whether a certain percentage of those reserves should be held by the government to cover crashes.

Australia joins a number of other countries in setting up a central fund for bailing out savings institutions. It is clear that the OECD, IMF and other international bodies are concerned about the stability of the global financial system.

Crisis looming

Europe is by no means out of the woods. The harsh austerity measures imposed in Greece, Cyprus, Spain and elsewhere are highly contractionary. Sacking thousands of public servants, halving pensions, reducing wages, etc, not only drives people into poverty, but means they have far less to spend. Sales go down, businesses go bankrupt and more workers are sacked.

What happens when the loans come up for renewal or can’t be repaid? More austerity measures?

The Australian media have raised concerns about the recent decline in the rate of growth of the Chinese economy and the stability of its shadow financial system. While such concerns are highly speculative, they do reflect concerns about the stability of the financial system that are felt in Treasury.

With unemployment on the rise, and thousands of workers being sacked every week, the economy needs stimulating, not contractionary austerity measures. The people on the receiving end of these cuts need more money in their pockets, not less.

The government is preparing for a crash in the economy which has all the makings of a crisis of overproduction – as in more goods and services available than can be purchased. This is not because they are not wanted or needed; it is because people do not have enough money to purchase them.

Its response is a dose of austerity, of contractionary measures with the aim of shoring up profits, regardless of the consequences for people. It might help profits in the short-term but it will also help to bring on a recession and even deepen it.

A dose of austerity

To not make these cuts, “would be to accept a policy of excessive austerity that would exacerbate, not mitigate, the economic challenges Australia faces and it would hurt businesses, households and the nation’s future prosperity,” Bowen claims.

So we are being given a dose of “austerity”, but not “excessive austerity”. It depends who you are. If you are a single parent, a pensioner, on the dole or homeless, the failure to raise incomes and increase funding for public housing and health services, amounts to “excessive austerity”.

This is the major flaw in the economic statement, that it is not expansionary, and in particular, does not increase the incomes of those most in need.

As for bank deposits, the best protection would be through the creation of a government guaranteed and owned People’s Bank with a strong social charter and non-speculative investment in social projects and public infrastructure.   

Next article – Editorial – Humanity and courage shine

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