How we can respond to the cost of living crisis

Lisbeth Latham

Throughout late 2021 and 2022, we have seen rising inflation pressures both in Australia and internationally. The growth in inflation, whilst initially dismissed as a serious problem, has now triggered sharp increases in interest rates by central banks globally combined with a significant rise in capital and governments blaming inflation wage growth and warning against the “danger” posed by efforts by workers seeking to maintain their purchasing power via wage rises - an action which has been blamed for driving the current inflationary pressure.

What is causing inflation?
While there is generally a range of pressures at any given time to increase the cost of goods and services, the current increases reflect an intersection between different world events. These are primarily:

• the continued disruption of a range of global supply chains, many of which have their origin in China, due to the impact of COVID on manufacturing, transport, and distribution networks. 
• The disruption range of food production areas has been disrupted by extreme weather events, where crops have been wiped out or damaged, which has driven up some food prices. 
• The ongoing war in Ukraine and the economic sanctions imposed on Russia in response have caused significant disruption in Russian gas exports and Ukrainian grain exports. 

All of these factors have placed upward pressure on the costs of goods.

However, a more significant factor has been the decision by a wide range of companies to boost the price of their goods to a level substantially above any underlying rise in costs. This is reflected in a wide range of companies experiencing massive growth in profits substantially above their growth in turnover - suggesting that the primary driver is deliberate price gauging by these companies in a context where they believe they can shift blame for price rises to external factors.

Interest rates
Globally the response of central banks to inflationary pressures has been to move to reduce the money supply by raising interest rates. While for certain sections of the economy, such as in stock market speculation and the housing market, this will undoubtedly result in an effective reduction in spending that will not necessarily disrupt the economy - for most working people these rate rises are likely to cause potentially catastrophic disruption, that will not only be individually devastating, as a consequence of rising mortgage repayments in the context of significant and widespread mortgage stress, and the inability to afford basic costs of good.

Stagnant wages
Wages in advanced capitalist countries prior to the current crisis had largely been stagnant during a period of low inflation, this stagnation has been exacerbated by the current inflationary pressure. Wage stagnation has been a result of: 

• Hostile industrial relations regimes that have weakened the power of workers and their unions whilst limiting the restrictions on employers deploying power; 
• An aggressive approach to bargaining and wage setting by employers as a consequence of historically low-profit growth 

In Australia, the problems of enterprise bargaining under the Fair Work Act - which has seen record low wages growth in the past decade have been raised by both the ACTU and the ALP as a basis to amend the Act, most notably to enable unions to engage in multi-employer bargaining and have access industrial action during such bargaining, currently, workers are prohibited from taking industrial action in pursuit of a multi-employer agreement.

The introduction of improved multi-employer bargaining will have the potential to improve the bargaining power of those workers who have been historically excluded from enterprise bargaining, however it is important to recognise that the legislation excludes more than 2 million workers employed in smaller workplaces from this bargaining pathway. In addition, the passing of amendments is unlikely to help boost the wages of many workers in the short term, particularly not quickly enough to address the current cost of living crisis. This is due to a number of factors but most significantly: 

• Bargaining is not a quick process; 
• The legislation won’t magically overcome the low level of union density, which is compounded by low levels of workplace organisation in the majority of sectors; 
• Many workers are already covered by agreements that have yet to expire and will deliver a decline in real wages over their remaining lives of those agreements 

As such we need to explore ways in which to address the cost of living crisis outside of wage fixing. The most obvious solution would be to create a universal income supplement that would be received by all. This would able to be more rapidly adjusted than wages, and by making it universal it ensures that other groups outside of wage setting systems, such owner operators and those on government pensions, also have their purchasing power maintained. However, the creation of an income subsidy should not be seen as counter to the existing push to increase pensions to the poverty line, but instead as an additional supplement to that.

Limiting price rises
However, simply seeking to maintain working people’s purchasing power will be insufficient to deal with the current cost-of-living crisis. As increased purchasing power is likely to drive costs up in at least some sections of the economy. This is not because these mechanisms are necessarily inflationary - they aren’t - but instead, the maintenance of purchasing power would allow owners of capital to seek to increase their profits by absorbing this increased ability to pay. To ensure that we aren’t just boosting profits to sections of capital, there will need to be strict limits to increases in costs to those caused by actual inflationary pressures rather than gouging. While this is widely discussed in relation to power and fuel prices, there is no need for these companies to be compensated for their profit not rising as much as they could - indeed their significant profits should instead be properly taxed to help fund the income supplement. In addition, governments should act to freeze both rents and mortgage payments - both need to be frozen to ensure we don’t see mass defaults in the residential housing market - which would further open this market up to vulture capital buying houses cheaply in any depressed housing market, particularly in a period when working-class home buyers will face significantly higher borrowing costs.

Paying for an income subsidy 

A major argument against any such increase in social spending will be the state of the federal budget, particularly in the wake of the significant social spending during the earlier period of the pandemic, after all as Theresa May sad, “there is no magic money tree”. 

However, the reality is that there are significant sources to improve the treasury’s revenue situation. 

The first of these is to not go ahead with third stage of tax cuts which were originally legislated by the former Morrison government. These cuts primarily benefit high income earners and if stopped would retain an estimated extra $238B in government revenue over the next ten years.

Secondly, is to recognise, as John Christensen and Nicholas Shaxson have put it “there is a magic money tree or trees: one version of which would be “tax havens, multinational enterprises, and the mega rich””. Research by the Australian Institute indicates that five of the six major gas exporters paid no tax on $138 billion in revenue in the past seven years. This reflects the ongoing and problem of large corporations avoiding their tax obligations, a problem which requires, like in other countries, further tightening of a broad range of regulations. In addition, Australia should also look at imposing windfall taxes (that is higher taxes) on any profits that are being expanded as a consequence of them taking advantage of the current inflationary pressure, rather than look at increasing the subsidising fossil fuel companies to compensate them for limiting the extent of their profiteering.

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