Inflation, Labor’s Obsession with Austerity and the Need for Democratic Control

By Nick D.

In July, the International Monetary Fund (IMF) released their World Economic Outlook Update which they titled ‘Gloomy and More Uncertain.’

According to this report, inflation is set to rise to 6.6% in rich countries and 9.5% in poor countries. Using data from the Reserve Bank of Australia (RBA), the inflation rate in Australia will reach over 7% this year – the highest in over two decades. In making this announcement, RBA governor Philip Lowe was quick to reassure us all that it is “not as high as it is in many other countries.”

Already, the cost of basic necessities, particularly food, housing and energy, is putting immense pressure on the poor and sections of the working class. At the same time, the declining power of trade unions – especially since the Australian Labor Party’s (ALP) introduction of the Prices and Incomes Accord policy in the early 1980s – has meant that wages will remain well below inflation. According to the Australian Council of Trade Unions (ACTU), “a worker on the average annual income of $69k will have experienced a $2350 pay cut”, due to the current inflation.

Paul Keating and Bob Hawke’s Labor government signed the Prices and Incomes Accord with the ACTU 40 years ago.

The RBA, and capitalist class in general, have tended to shift the blame for rising inflation and the cost of living crisis. In particular the Chinese government’s response to the Covid-19 pandemic and the Russian invasion of Ukraine are highlighted. However, it is questionable how much impact these actions – both carried out by governments that Australia and its rich country allies are hostile too – are really having on Australia’s economy.

When domestic factors are raised, such as by Treasurer Jim Chalmers, they are chalked up to the need to “untangle and unclog supply chains in the economy.” Given the importance, yet general mystification of inflation, it is important to have a clear understanding of its causes and who it ultimately serves.

What is Inflation

Inflation refers simply to a rise in the price of goods and services. It is measured, such as in the RBA report above, using a ‘consumer price index’ (CPI) which indicates the price for a typical basket of goods and services over time. Notable periods of inflation in Australia were during the Korean War in the 1950s and at the end of the post-WW2 ‘economic boom’ during the 1970s.

The causes of inflation are quite straightforward. In Marx and Engel’s classic work Wage, Labour and Capital, they explain that the price of a commodity is determined, “by the competition between buyers and sellers, by the relation of the demand to the supply, of the call to the offer. The competition by which the price of a commodity is determined is threefold.”

This ‘threefold’ competition that determines the price of a commodity is between 1) sellers and other sellers 2) buyers and other buyers, and 3) sellers and buyers. The relationship which causes the price of a commodity to increase is competition among buyers. As Marx and Engels summarise,

“If…the supply of a commodity is less than the demand for it, competition among the sellers is very slight, or there may be none at all among them. In the same proportion in which this competition decreases, the competition among the buyers increases. Result: a more or less considerable rise in the prices of commodities.”

In other words, when there is a real or perceived scarcity of consumer goods, capitalists respond by increasing the price. The logic here is that consumers must compete amongst one another (bidding up the price further) to purchase the commodity. Why is this the case? Because under capitalism, the market is taken as the most efficient and democratic mechanism for determining prices.

The reason capitalists push up their prices in the first place is simple: to maximise the rate of profit. As we are seeing today, when capitalists from one important branch of industry (such as petroleum) push up their prices, other capitalists, who use petroleum then respond by increasing their prices. This causes a rise in the general price of goods and services.

This continues until people can no longer afford to purchase commodities. This, according to the dominant economic logic, will eventually bring the prices down because the demand will be reduced.

The ALP’s Response

According to most mainstream economists and ideologues, inflation is caused by an oversupply of money in the economy. The fix is therefore simply: impose austerity measures. The way to do this is to prevent wage increases, cut government spending and hike interest rates. All of these measures are aimed at reducing, by force, the supply of money and, for that reason, the demand for goods and services, thereby forcing producers to reduce their prices.

Interest rate increases are well under way. After promising that they will stay low, the RBA decided in early July to once again hike interest rates, putting increased pressure on people who are already struggling to meet mortgage repayments.

Since taking office in May 2022, the chief mode of operation of the ALP has been to impose austerity. This is most typified by their constant insistence on getting the ‘budget under control’ – a cover to avoid large-scale spending to address the massive social and environmental crisis we are living through. A month after taking office, Chalmers was already making it clear that given the “serious fiscal restraints,” there would be no real efforts to address declining standards of living. On 27 July, he called a press conference to explain that,

“We’ve got to make sure that everything we do ticks more than one box – cost of living relief but also has an economic dividend… There are a range of good ideas out there about other things that we might contemplate, but we are intent on being responsible economic managers.” 

When asked about imposing ‘deeper spending cuts’ in line with the IMF’s recommendations Chalmers said, “our task is to responsibly trim spending that’s not providing an economic dividend and redirect it in ways that does [sic] provide an economic dividend.” Chalmers also made the same speech in Federal Parliament on 28 July.

As ‘responsible economic managers’ the ALP have also been quick to dampen expectations for real wage increases. This is evident in their supposed dismantling of the Australian Building and Construction Commission (ABCC). In an interview with the ABC, Deputy PM Richard Marles stated,

“This [the ABCC] is a body which was very politically driven, which was focused on, you know, whether or not people were wearing stickers on their helmets. What there should be is the same laws across the entire industrial relations system, applying to every single worker. It’s not a matter of focusing on a particular segment and singling them out. It’s really important that we have tough laws that are there, which make it clear the circumstances in which people are able to take industrial action and in which they’re not, and make clear the consequences when people don’t take industrial action in an authorised way.”

Put simply, the ALP intends to replace ABCC – which targets members of militant unions such as the CFMEU for things like wearing union stickers on their hard-hats – with a situation in which all workers are equally subject to punitive, anti-union measures.

The existing anti-worker industrial legislation – which prevents workers from taking strike action at any time outside officially sanctioned enterprise bargaining agreements (EBA) bargaining period – is amongst the most restrictive in the world. The ALP have made it clear they have no intention of winding it back.

Alternative Sources of Revenue

There are a range of steps that the ALP could take today if they are indeed so worried about the federal budget. The most obvious is to drastically cut military spending. The Australian government is set to spend $48.6 billion on defence in 2022-2023 – a 7.4% increase.

They could also scrap the AUKUS deal – a military alliance between Australia, the UK and the US, announced in September 2021. As well as massively increasing military tensions in East Asia and the South China Sea, the AUKUS deal includes the building of nuclear-propelled submarines in Australia which will cost well over $100 billion.

To put this ludicrous spending into perspective, the estimated cost of just one submarine is about the same as 560 schools, 40,000 houses or 33,750 new jobs. Scrapping AUKUS would have the bonus effect of reducing the possibility of complete nuclear annihilation.

Another option open to the ALP is to stop subsidising fossil fuel companies. In 2021-22, the Federal Government will spend $10.5 billion on fossil fuel subsidies. When combined with the subsidies dished out by state and territory governments, this amount totals $11.6 billion. For comparison, only $9.7 billion was spent on public schools by the Federal Government in the same period. 

While they’re at it, the ALP government could impose an immediate wage reduction for all politicians. As it stands, the base annual salary of a sitting member of parliament or senator is $217,060 – close to triple the average wage of a registered nurse.

Jim Chalmers, who supposedly feels for workers “living pay cheque to pay cheque,” makes $396,093 annually while Anthony Albanese, the leader of Australia’s supposed ‘worker’s party,’ rakes in $549,250 a year.

Democratic Control

All of these measures – cutting defence spending, ending fossil fuel subsidies and slashing politician’s salaries – are examples of what the ALP could do today as an alternative to the austerity they are currently imposing on the mass of the population. In the long term however, they will never solve the central issues facing the working class.

This is because under capitalism, production is organised according to one key principle: the maximisation of profit for the capitalist owners. This means that when there is a perceived scarcity, prices are hiked up to ensure that the profits captured by the capitalist class are not negatively impacted.

While an inflation rate of 2-3% is generally favoured by the capitalist establishment, anything beyond that presents them with too much uncertainty and increases the potential for outright social conflict. As a result, the state – whether flying the flag of Labor or the Liberal-National Party – responds by ruthlessly restricting workers’ ability to purchase goods and services.

This situation can only be described as a dictatorship of capital – a tiny minority dictates how the economy is organised while the rest of us, the majority, have no say in the matter.

The only real solution is to overthrow this dictatorship and impose a system of democratic, workers control over production and distribution. Such a system would not be organised according to the dictates of profit – but according to the needs of the population.

We will only achieve this through revolutionary struggle. This is indeed a massive task, and it may seem far off, but the longer we stay idle the longer we will have to put up with this rotten, failed system.

Our tasks are immediate, and we must begin organising and rebuilding. If you want to be involved, get in contact with Red Ant today! In the words of Karl Marx, we have a world to win!

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