Government austerity programs – A recipe for financial disaster

Posted: September 27, 2011 in Uncategorized

Anna Pha

Central bankers and finance ministers gathered in Washington last week for meetings of the International Monetary Fund (IMF), the World Bank and G20 (20 of the largest economies). They met amidst warnings from IMF head Christine Lagarde that without “bold and collective action” the world’s major economies risk slipping back into recession. With the US and the European Union still attempting to recover from the 2007-08 global financial crisis and subsequent economic crisis, all eyes were on Washington hoping for solutions to stave off the almost inevitable recession or depression.

Russian Finance Minister Alexei Kudrin, US Federal Reserve Chairman Ben Bernanke, and European Central Bank President Jean-Claude Trichet.

They failed dismally. Their “solutions”, including the IMF’s will only deepen the crisis and create more misery and hardship for millions of workers around the world. The only hope remains in the rising struggles and resistance of trade unions and other organisations and community around the world, including in Australia.

Earlier signs of economic recovery during 2009 and 2010 have not held up. The US economy remains deeply recessed as do a number of countries in the European Union (EU). Bailing out Greece is one thing. But when Spain, Portugal, Italy and others are added to the list, fear and panic set in.

The austerity measures being imposed by the European Central Bank, IMF, World Bank and other financial institutions will only deepen the crisis and create more hardship for the people. Their aim is to save the financial institutions and further the neo-liberal aims of economic and social restructuring of society. Unemployment is of concern only to the extent that it creates social unrest and a questioning of the capitalist system.

Saving the finance sector

The G20, self-anointed leaders of the global economy, issued a communiqué expressing concern with the “fragility” of the financial system and turbulence on currency and stock markets. They made a commitment to “take all necessary actions to preserve the stability of the banking systems and financial markets as required”.

“Central banks will continue to stand ready to provide liquidity to banks as required.” That was the key question for the G20: protecting the financial system, not national economies or the people, let alone the planet. There was not a single concrete measure to create jobs, boost employment or prevent more sackings.

The IMF took the classical neo-liberal line of budget cuts and private sector take-over of government responsibility – a recipe for higher unemployment, cuts in essential services and higher prices.

Lagarde called for strengthening private sector finances so that there could be “a domestic demand switch from the public to the private sector” (speech given at Jackson Hole (USA) on 27-08-2011).

Attack on labour

In other words, reduce government spending and strengthen the profit-making hand of the private financial and corporate sectors. The austerity measures being imposed on Greece as a bailout condition will continue to be pursued by governments across Europe, in the US, Canada and Australia. These include cuts to social welfare spending, mass sackings of public servants, wage reductions and privatisation. At the same time governments will continue to cut corporate tax rates making it even more difficult to balance budgets.

The other arm of IMF and World Bank policy is an all out offensive against labour. Lagarde spoke of greater “labour market flexibility” which has the aim of deunionisation and replacement of collective bargaining by employer-dictated, individual work contracts. By weakening the trade union movement, governments and employers seek to destroy the unity and hence capacity of the working class to defend wages, working conditions and jobs.

It is no accident that governments – social democrat and conservative – are increasingly resorting to more repressive and undemocratic measures to suppress working class resistance.

They fear the massive opposition, the millions who have taken to the streets in Europe against the austerity measures being imposed. They include the many public servants who are fighting back to defend their jobs, wages, pensions and health services which are threatened by austerity measures, as seen in the streets of Athens and at the recent public sector rally in Sydney.


Budget-slashing austerity measures are counter-productive. They will only deepen the crisis with lower wages, rising unemployment and higher prices. The result is a crisis of “overproduction”. It is not overproduction in the sense of what people need or want, but in the sense that they do not have the means to purchase those goods or services.

Much of the debt experienced by governments comes from bailing out the banks and other financial institutions, putting them back on their feet.

These are the financial institutions that set off the global financial crisis in 2007 and subsequent economic crisis, that were bailed out by governments, and are now dictating economic policies that will (if not prevented) result in further suffering for workers and plunge economies around the world into a deep recession or depression.

Where is the evidence that these loans could not be wound back gradually by other policy means? None has been presented. But there is another approach, one that does not suit the financial institutions or transnational corporations.

Pro-people, expansionary policies

Governments should be spending more, not less. The Australian government recognised the need to take stimulatory measures during the crisis in 2008-09. The situation is, if anything, far more serious now than then. Wayne Swan, the “world’s greatest [neo-liberal] treasurer” is in denial mode, blinded by mining boom statistics and a slave to the demands of international finance capital. Booms are finite, even mining booms pumped by high demand from China and India will eventually burst.

No wonder the banking magazine Euromoney gave him its 2011 Finance Minister of the Year award. Drowning in neo-liberal accolades, Swan as usual didn’t miss an opportunity to remind the Australian electorate and the world that the Australian economy is “one of the developed world’s strongest”. It did little to reassure the millions of unemployed and low paid Australians feeling the pain of a largely recessed economy.

The growth figures for Australia’s economy are misleading, with the mining and financial sector hiding the crisis afflicting manufacturing, retail, tourism, education and other areas. Much of Australia remains in recession and corporate sackings and closures show no sign of abating.

Australia was lucky in escaping the worst of the global financial crisis and subsequent economic crisis. The government’s stimulus packages and bank guarantees played a role, but the key contributing factors were high demand for Australian resources from China and elsewhere in Asia and investments by workers’ superannuation funds. The nine percent (of wages and salaries) compulsory superannuation guarantee ensured a steady flow of income for investment in stock markets and private equity.

Australia needs a government prepared to adopt policies in the interests of ordinary working people and the planet. There is an urgent need for stimulatory job-creating programs, expansion of the public sector, re-regulation of the financial sector, an increase in the age pension and other welfare payments and real wage rises.

Australia’s budget deficit and government debt are relatively small. The obsession with returning to a budget surplus is an excuse to slash government spending, wind back what is known as the welfare state and increase the role of the private sector.

The government has the capacity, but not the political will, to raise spending by 10, 20 or 50 billion dollars. It could do so by increasing corporate taxes; introducing a super-profits tax on the finance and mining sectors; slashing its $30 billion a year military spending; abolishing the $4 billion plus private health insurance rebate; and wiping out the fossil fuel subsidy to the mining corporations.

But that would require a different type of government, one that represents the interests of working people and small farmers and businesses.

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