A world in economic crisis

Australia – 1970s redux – approved wage rises another prelude to stagflation

Posted in Australia by Aussie on June 3, 2011

Yet another sign that Australia is about to hit a period of prolonged stagflation.This time it is the awarding of a wage rise worth more than $19 per week for those on the minimum wage. You can read about this decision here, and here. This wage rise is yet another repeat of the 1970s under the Whitlam Government when Australia experienced a number of the symptoms relating to what is known as stagflation:

1. cost-push inflation

2. high interest rates

3. high unemployment

The interest rates are being kept steady by the Reserve Bank, however, since the major banks borrow from overseas in order to make loans for their customers, it is more than likely that they will be unable to contain interest rate rises, especially when the cost of their borrowings also rise.

On top of that, the government is running a budget deficit which means that they have to borrow funds from the limited available resources, thus squeezing out available capital to businesses. This is a repeat of the situation in 2008 because the source of the problem has not been remedied. To put it bluntly, no amount of stimulus, which also involves Government spending money that it has not received via Taxation receipts, causes a spiral or an exacerbation of the situation. Any stimulus will not be able to drag Australia out of the doldrums.

The wage increase is very high, and this will add to the cost burden of most companies. Since most states in Australia also have a tax on employment called Payroll tax there will be a further shedding of jobs, leading to higher, not lower levels of employment. On top of that employers are being hit with a double wage whammy which will hit retailers very hard.

The obvious response to a 4% wage increase is that retailers are going to reduce the hours of casual staff. This in turn will reduce tax receipts for government, which in turn will create an even bigger demand for private sector funding of government services.

The obvious response should be that Government should be cutting back on its spending e.g. the NBN rollout should be postponed, and the BER program should be brought to an end, plus Government should work on reducing the number of its employees via redundancies.

The policies of the present Federal Government in Australia are an overwhelming disaster, and with families being hit rather heavily via tax increases, as well as increases in utilities due to the Watermelon pushing of stupid things like wind power, a once bubbling economy (it was not in trouble in 2008 and we did not need a stimulus) is now going belly up.


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