Social protection the first priority for economic policy
As speculation mounts about the possibility of an early budget announcement--and with it, a potential early Federal Election--debates about the Government's social and economic priorities have intensified. In this post by Dr Veronica Sheen, we take a look at the importance of social protection and the example of how the Greek economy responded to austerity measures.
With the Australian federal budget due to be delivered in May by the Turnbull government, there is the usual round of pre-budget lobbying in the months leading up to it. I have done many budget submissions in former policy roles in NGOs so know the process very well.
One strong voice about the direction of the budget, comes from the Australian Chamber of Commerce and Industry (ACCI) through its head, Kate Carnell. The ACCI position is that Australia needs to cut spending especially in social services and income support. And further if we don’t, according to ACCI, we may be heading down the path of economic crisis of Greece or Spain. This point was taken up by the CEO of the Grattan Institute, John Daley, in an article in the Conversation. Daley argues, as does the ACCI, that there is a major discord between spending and revenue which is creating a significant problem with public debt over the long term with the potential for an outcome for the economy along the lines of Greece.
In this vein, I was intrigued to hear what the Chair of the National Bank of Greece, Professor Louka Katseli had to say about the Greek debt crisis and the remedies imposed on it by the Troika (EC, ECB and IMF) at a recent London School of Economics seminar. Professor Katseli is certainly an eminent commentator on economic policy by any measure and like Yanis Varoufakis has held a ministerial post in Greece while bringing a high level of academic expertise to the table.
The analysis of Professor Katseli as revealed in the LSE seminar is broadly consistent with that of Varoufakis but adds further depth and insight into the background to the Greek crisis – and the responses to it. Her analysis exposes the weaknesses in the case for fiscal rectitude (essentially austerity) as advocated by ACCI and the Grattan Institute for Australia.
But for a start, it is incorrect to attribute the source of Greece’s fiscal problems to ‘overspending’ by invoking a parallel, albeit a loose one as these organisations do, with Australia. The fundamental weakness in the Greek economy and the growth of its huge debt, according to Professor Katseli, was generated over the very long term by lack of investment in the tradeable goods and services sectors which ultimately led to a massive current account deficit.
The external debt problem was then exacerbated late in the 1990s with Greece’s entry into the Eurozone. With the Greek economy essentially made up of very small businesses there was little capacity for improved competitiveness through price cuts as would be the case for the large firms with their huge product markets which dominate the economies of northern Europe. But the Troika’s debt repayment demands were based on the northern European model rather than the Greek model. And as part of the Eurozone, there was no capacity in the Greek economy for currency devaluation as a means of improving competitiveness.
The cuts in public spending--the austerity measures--which were the essence of the loan repayment deals brokered with successive Greek governments by the Troika, meant a drying up of financial liquidity in the economy (spending power) which supported many businesses. As a result, 250,000 small businesses closed down in 5 years after 2009, unable to cover fixed costs and make a basic profit. This meant a heavy contraction in the economy. Wages fell by 40% and pensions by 70%. Unemployment of course greatly increased from 7.3% in 2008 to its current level of 25% as a result of the small business closures and massive retrenchments in the public sector. Greece’s GDP fell by 25%, which has meant the public debt to GDP ratio rose from 120% in 2009 to 200% in 2015. Austerity has caused the economy to crumble not regenerate.
Katseli endorses the point made by Varoufakis in an article for the Monthly last year, there were also serious problems of the democratic accountability 0f the Troika. This is a very troubling aspect of the austerity measures imposed on Greece.
The most compelling argument that Professor Katseli makes however – and one that is too seldom heard in economic policy discourse – is that social protection must be the foremost consideration in any debt reduction strategy. In her own words:
it is not enough or sufficient to think about fiscal consolidation or debt restructuring. But you really need to put at the core of the agenda social policy and to have an effective social protection system which is prerequisite for sustainable public finances…You really need to combine fiscal adjustment with social policy.
As it stands, 44% of the Greek population are now at risk of poverty as a result of a 32% reduction in household disposable income and of course the massive increase in unemployment. There has also been a rise in extreme poverty and even starvation – what has been described by some as a a humanitarian crisis. Social protection isn't a sideline issue for economic policy, it is actually the most important dimension of it.
So as the advocates of public spending contraction in Australia in the name of balancing the books have their day in posing the Greek crisis as a potential risk for Australia, they should equally consider the price of the austerity measures both on the economy and the population. Social protection comes first.
This post originally appeared on Dr Veronica Sheen's blog, and is reposted here with permission of the author.