Us or them: Who pays for the pandemic?

May 30, 2020
With permission of Alan Moir,

The Australian economy is set for a significant slowdown in response to the emergency actions taken to minimise the spread of COVID-19. The federal Treasury predicts the jobless rate will climb to 10% by the end of the year, and remain high for years to come.

The Australian Bureau of Statistics (ABS) unemployment figures show the unemployment rate in April rose from 5.2% to 6.2%. At the same time, the participation rate (the proportion of people employed or “actively” looking for work) collapsed from 66% to 63.5%.

In other words, while more than 13.7 million people were either working or looking for work in March, that number fell by around 500,000 to 13.2 million in April. And while official unemployment rose by about 100,000 in April, more than 600,000 fewer people had a job in April than had work in March.

The apparent discrepancy in the figures can be, at least, partly explained by the fact that the federal government has suspended mutual obligations for those receiving the JobSeeker payment until the beginning of June. The ABS only counts people as being unemployed if they are actively looking for work. This means that, while up to 600,000 people may have joined the dole queues in April, official figures will not register that until later in the year.

The scale of the collapse in employment only becomes apparent when we consider the fall in hours worked from March to April. Almost 164 million fewer hours were worked in April, compared with March.

The size of the economic slowdown was measured by Greg Jericho in the May 17 Guardian Australia. “In March, 86 hours were worked on average by everyone over 15,” he said. “In April this dropped to 78 hours — lower than even during the 1980s and ’90s recession, when fewer women worked and a smaller percentage of the population was over the retirement age.”

Impact on economy

Retail sales increased by 8.5% in March, according to the ABS, largely the result of supermarket panic buying and food retail rose by 24%. At the same time, spending in cafés and restaurants, and on clothes and shoes, collapsed by more than 22%.

The Housing Industry Association has predicted that new dwelling starts will collapse by 30%, causing 500,000 construction workers to lose their jobs. The expected collapse in immigration, along with a big reduction in overseas student numbers, is being blamed on the coronavirus shutdown.

The pandemic is only deepening a downward trend: engineering and residential construction have been in decline for more than a year.

However, it has not put a dent in Australia’s mining exports. Mining was considered an essential service and continued even at the height of the lockdown. Indeed, Australia’s iron ore exports have risen. Australian Mining gleefully reported on May 27: “Brazil’s worsening COVID-19 crisis and the reduced shipment of iron ore from the South American country have led to a surge in global iron ore prices on the back of resilient demand from China”.

“Fortescue [owned by billionaire Andrew ‘Twiggy’ Forrest] achieved a record iron ore shipment to China during the March quarter, shipping 42.3 million tonnes, a 10 per cent increase on the 38.3 million tonnes shipped in the prior corresponding period", it continued. “BHP also indicated plans to grow its iron ore export capacity in Port Hedland in Western Australia by 14 per cent — from 290 million tonnes per year to potentially 330 million tonnes per year.”

Overall, the value of Australian exports of metal ores rose by 32%, or more than $3.5 billion in March alone, according to the ABS.

Not all in it together

Not all Australian businesses are doing it tough.

While some sectors, notably cafés and restaurants, clothing and apparel, have taken a big hit as shown by the large numbers of people losing their jobs, some exports like fossil fuels have increased. The value of coal, coke and briquettes exported from Australia in March increased by $274 million to more than $4.8 billion, according to the ABS. Export volumes of liquefied natural gas are expected to increase significantly — by more than 6 million tonnes over the next year.

The economy also recorded a trade surplus of more than $10 billion in the month of March alone. For the March quarter as a whole, the trade surplus was more than $19 billion, a rise of more than $5 billion from the surplus recorded in the December 2019 quarter.

The continuing strength of fossil fuel and mineral exports will act as a counterweight to the weakness of the consumer market. National accounts figures for the March quarter, to be released by the ABS in early June, may even suggest that the economy grew in the first three months of the year (or, at the very least, that any contraction was very slight).

Any sign of economic resilience will undoubtedly be seized upon by Prime Minister Scott Morrison as an attempt to justify his government’s handling of the pandemic, even as hundreds of thousands have lost their jobs.

JobKeeper, JobSeeker and the looming crisis

On March 30, the federal government announced that it would double the rate of the dole or JobSeeker to $1100 a fortnight. It also introduced JobKeeper payments for private firms whose income had been severely affected by the pandemic, paying employers a $1500 a fortnight subsidy for all workers they kept on the books.

At the time, Morrison said that the subsidies would last for only six months, with the JobSeeker rate reverting back to around $40 per day in September.

The JobKeeper subsidy has its limitations: it doesn’t apply to temporary workers, government employees, international students or most casual workers. The government revealed on May 23 that more than 3.5 million workers are receiving the subsidy. It also acknowledged that it had overestimated the number likely to take up the JobKeeper subsidy by more than 3 million, meaning its cost had been overestimated by $60 billion.

Rather than extend the timeline for the subsidy, or expand eligibility, to cover more workers, the government has doubled down on its determination to end the subsidy in September. Yet while Morrison may want to withdraw the extra spending then, the looming political crisis may make that difficult.

According to Sydney Morning Herald economics editor Ross Gittens spending is needed to get the economy going. “Obviously, what’s needed to reverse the cycle [of declining spending, leading to falling output] is a huge burst of spending”. He added: “But there’s only one source that spending can come from: the government. The smaller public sector has to rescue the much bigger private sector and get it going again.”

Government subsidies, expected to be paid between July and September, could amount to 25% of Australia’s GDP, according to Danielle Wood from the Grattan Institute, as quoted by the ABC. “All of that is expected to come out by the end of the year under the current timetable — that would leave a very significant hole in the economy and potentially put us back into negative economic territory,” she said.

Wage freeze will make matters worse

The pandemic has significantly destabilised the economy, particularly that part that employs a large share of the workforce, including retail, education, arts and recreation, construction and hospitality. Lower spending, combined with a collapse in immigration and overseas student numbers, equates to fewer jobs and greater unemployment, particularly in these sectors.

Given the decline in the private sector, spending by those employed in the public sector becomes increasingly important.

The public sector employs more than 2 million people, making up 16% of the workforce, according to the Centre for Future Work (CFW). Cutting the wages of public sector workers — including nurses, firefighters, teachers and others — such as the 12-month pay freeze announced by the New South Wales government, will act as a severe dampener on demand.

Any cut to public sector wages is likely to lead to a similar fall in the private sector, the CFW argues. The result could be a deflationary spiral, deepening the impending recession. “Knee-jerk arguments that freezing or reducing labour costs can somehow restore economic confidence and preserve employment (even as entire sections of the economy effectively shut down) are not credible,” the CFW said. A serious decline in wages across the board, could lead to a collapse in prices, leading to deflation.

“Deflation causes consumers to further defer purchases (as they await even lower prices in the future); it causes the real burden of debts to explode; and it wreaks havoc with investment expectations and intentions. Deflation is typically associated with depression — and Australia already enters this downturn perilously close to it,” CFW said.

Public spending key

The only measure which will prevent the economy falling into deep recession, even serious depression, is high levels of government spending.

Sustained wage subsidies, higher unemployment benefits, public investment in renewable energy, public transport, public housing and other socially beneficial projects are needed now, more than ever. Public sector job cuts and wage freezes will only make matters worse, increasing the scale and length of the downturn.

Increased public spending will raise public debt. However, economic growth will reduce the size of the debt as a proportion of GDP over time. With interest rates at historic lows, now is the time for the government to borrow. Shifting the burden of taxation from wages to profits will also increase the fairness of the system.

The alternative is for Morrison, along with state governments, to withdraw subsidies, cut wages and send the economy into a serious downturn, for which working people will pay the price for years to come.

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