Australian economy resting on shaky foundations

The first few months of 2011 have seen many parts of Australia hit by floods, fires and cyclones. These disasters have ravaged entire towns and forced many people to start their lives again from scratch. While some of us were lucky enough to escape the worst of the extreme weather, it seems that almost no one will be able to escape the economic impacts of these disasters.

Julia Gillard is pushing to introduce a levy and budget cuts in order to raise $1.8 billion to help pay for the reconstruction, while Tony Abbott wants a full $2 billion worth of budget cuts instead. Either way once again ordinary people will end up footing the bill.

It is certainly the mood of all working people that the government should intervene with financial aid to victims of these disasters. However, it is not the case that the only way to fund this relief is through taxing ordinary people or cutting funding to public services.

Last month, mining giant BHP Billiton announced they made a record $10.5 billion in the last six months – the biggest ever half-year result in Australian history. On the same day Treasury announced that Labor’s backdown on the proposed Mining Super Profits Tax will lose $60 billion in potential government revenue over the next decade!

Clearly $60 billion would go a long way, not only in reconstructing disaster areas, but implementing proper safeguards across the whole country to minimise the impact of natural disasters in the future.

Alongside these proposed cuts to government spending in 2011 will be a slowing economy. It is estimated that Queensland’s coal and agricultural exports alone have collapsed by $7 billion. Even the Treasurer Wayne Swan has said that the economy is likely to shrink in the first quarter of 2011 for the first time since the global financial crisis.

Consumers have also been very cautious with their spending of late with retail trade and building activity at their lowest levels since 2008. When all these issues are looked at together it is not ruled out that Australia is on the verge of entering a technical recession.

Unfortunately it is not just domestic pressures that pose dangers to the Australian economy. Australia has a two speed economy where the larger states of New South Wales and Victoria are sitting in the slow lane and the mining states of Queensland and Western Australia are the main drivers of growth.

Australia is unique in the sense that it is heavily dependant on exporting raw materials to China and other Asian markets. While this has helped Australia avoid the worst of the world economic downturn up to now, it also makes the economy very exposed to any slowdown in Chinese growth.

Some commentators are suggesting that the rate of growth has already begun to slow and that official figures are inflated. While China’s economy has grown by around 10% for more than a decade, given the low base from which it is starting and the uneven development of the country, a drop to 5% growth would feel like a recession in real terms.

The social implications of this, in a country where almost half the population lives on less than $2 a day, would be widespread. Already the mass of workers and the poor in China are suffering with inflation currently hovering around 5% and rising. Food prices alone went up 8% last month.

But one member of China’s central bank monetary policy committee told reporters recently that the “biggest danger” in China is real estate prices. China’s property market is dangerously overheated with residential properties in many major cities being sold at values that exceed 20 times disposable income. The central government has made numerous attempts to stop further speculation but these have been largely unsuccessful.

As the Sydney Morning Herald correspondent in China, John Garnaut, said “Nobody knows for how long the deep structural problems in the Chinese economy can persist before the costs come home to roost”.

China is currently wrought by a number of economic and social contradictions and there is the potential for a sharp economic setback in the short to medium term. If this was the case commodity producers in Australia would be hit hard and the flow on effects to the rest of the economy would be severe.

Australia will not be insulated from world economic crisis forever. Workers and young people need to prepare for the likelihood of a downturn. At the same time we need to build a political and economic alternative to the broken system of capitalism.

Advertisements