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Cost of living crisis revisited

By Tristan Ewins - posted Wednesday, 27 August 2008


The aim of this opinion piece is to build upon previous work (See “A revolution in the transport economyOn Line Opinion article).

There are many aspects to Australia’s “cost-of-living” crisis. And it is a crisis felt most acutely by Australia’s poor and vulnerable. From housing, to welfare, to the transport economy, it is a crisis that is experienced in many varied forms.

And it is a crisis that extends also to the rising cost of utilities such as water, and the failure of wages - especially in the case of those on minimum and low incomes - to keep pace with inflation.

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My previous article considered the transport economy, and how it impacts on this crisis. This article will begin by considering the impact of private infrastructure and essential services on Australian citizens and consumers: especially in the instance of “PPPs”. (Public Private Partnerships)

Private infrastructure, utilities and essential services

Private infrastructure and essential services comprise yet another burden for which consumers are paying the price.

Mobile phone tower networks comprise one of the worst examples of duplicated private infrastructure. In this instance, under the aegis of competition, there resulted an explosion in the infrastructure cost to the broader industry.

Meanwhile, the fibre-optic broadband network embraced by Federal Labor is being proposed in the form of a part-private monopoly. Without the benefits of competition or of a natural monopoly what is to protect consumers from abuse of such overwhelming market power?

“Public Private Partnerships” (PPPs) have been supported by Labor governments in fields as diverse as roads and water.

Some of us - despairing of the situation - may very well ask: will the tendency ever end?

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The PPP model also fails for a number of other reasons:

First, even the most secure business interest cannot obtain credit as efficiently as government: especially in the case of Federal government borrowings. In Victoria, for example, the cost of the City Link road tolls were twice as high as they would have been if the tollway had been financed by public borrowings. Public Private Partnerships are also often adopted by government under the guise of “privatising risk”, “capturing” the skills of the private sector, or avoiding public debt.

The debt argument is a furphy. Displacing debt “off the books” - so that it is met by the public in their capacity as consumers - can cost several times more in the long run than had such projects been financed with public debt in the first place.

And any skills from the private sector can feasibly be “captured” through competitive tendering, without any need for private ownership or wasteful private finance.

Furthermore - in fields as diverse as health, education, ports, roads, rail, communications - if a PPP fails, governments are held responsible, and they inevitably have to “pick up the pieces”.

In the worst examples government is expected to intervene so as to limit competition and guarantee a market for the private operator.

In the case of transport infrastructure this has involved the closure of roads; and has even assumed generous compensation should transport alternatives (e.g. public transport) be developed.

And the outcome of private infrastructure is similar to that of a “flat tax” - and such a burden is especially onerous for the poor and vulnerable.

The consequence of all this is an inflammation of the broader cost-of-living crisis, and greater burdens upon citizens in their capacity of tax-payers and consumers.

Setting the scene for water privatisation in Victoria

Now, consumers in Victoria are being asked to foot the bill for a massive “PPP” in the form of a desalination plant in Wonthaggi. The project has been estimated at a capital cost of $3.1 billion. Columnist, Ken Davidson, poses the question of how a “desalination plant with water costing six times the cost of dam water compete?”

The answer is simple. Even when the plant provides far more supply than there is demand, consumers will be fleeced in return for “security of supply”. One outcome of the process will be a doubling of the price of water over the next couple of years. And in the face - potentially - of dramatic over-supply: “Victorian taxpayers will be slugged about $550 million a year irrespective of whether the water is used or not.”

Alternatives, such as systematic “grey water harvesting” from showering and laundry, have been ignored, as has the option of a water pipeline from Tasmania.

Treated grey water treatment systems, in particular, can be so effective as to be suitable to wash cars, flush toilets, use in the garden, and use in washing machines.

The pipeline option, meanwhile, is estimated to cost approximately $2 billion to build, and could provide “Melbourne with 350 gigalitres of water a year”. This at a cost of about $300 million a year.

So regardless of environmental concerns, in the case of the desalination plant, the option of the Tasmanian pipeline would prove to be almost twice as cost-effective - without even considering “grey water harvesting”. And surely further subsidisation of “grey water harvesting” must remain a serious option.

Public Private Partnerhips are costing Australian tax payers and consumers billions: the consequence of inefficient private financing and bad judgment, and arguably exercises in favouritism the legitimacy of which must be called into doubt.

The cost to tax-payers and consumers for wasteful private infrastructure is palpable: and has a heavy impact on Australia’s cost-of-living crisis.

Public provision of essential infrastructure, however, in the form of natural public monopoly, can provide a cost-effective framework around which the broader economy can thrive.

Further aspects of the cost-of-living crisis: housing, wages, welfare …

For years the Howard conservative government neglected the crisis in housing affordability. If anything, policies such as the “First Home-Buyers Grant” exacerbated the crisis as the program attracted regular abuse.

Research shows that at least 300,000 Australian families are facing “severe” levels of mortgage stress, and “face a significant chance of defaulting on their home loan”. Such was the influence of the housing bubble that, even with unremarkable rates of interest, “over the past 10 years” houses became “nearly twice as expensive relative to income”.

Further studies have shown that about half the typical family’s after tax income was “swallowed up” in mortgage payments. Meanwhile in the rental market vacancy rates have hovered at around just 1 to 2 per cent.

What is worse, some families slip through the cracks, often struggling on exploitation wages, or with mental illness and/or trying to survive on welfare. For these the trauma of homelessness is a brutal reality.

There is an obvious, desperate need for expanded outreach services and public housing. But in Melbourne alone, public housing has declined to less than 4 per cent of housing stock.

With the impending global downturn, though, impetus is building for a correction in the Australian housing market. Some suggest price drops of up to 20 per cent, while others believe devaluation of about 10 per cent across Australia over the next year. Such a correction could be catastrophic for those who took out exorbitant loans without much or anything in the way of a deposit.

Australian Property Monitors (APM) General Manager, Michael McNamara recently commented that such people: “may find themselves in a situation very soon where they're sitting on negative equity”. Despite this very real crisis confronted by investors, however, there still remains a need to expand housing supply, boost vacancy rates, and provide affordable housing for those most in need.

Immediate public investment in quality public housing - perhaps in the vicinity of $8 billion over the current term of the Rudd Labor Government - could address the homelessness crisis, and provide a structural basis for a long term correction in the housing market - including rental.

Final concerns: wages, welfare and the cost of living

Australian Bureau of Statistics (ABS) figures, drawn over the 12 months to July 2008, show that: “petrol prices increased by 8.7 per cent in the three months to June.” The price of milk rose by 12.1 per cent, cheese (up 14.2 per cent), bread (up 6.8 per cent) and poultry (up 11 per cent)”.

In the 12 months to March 2008, meanwhile, electricity rose 10.5 per cent, and bank fees went up by 7.6 per cent.

Variable interest rates of Australia’s banking oligopoly, in particular, have been rising well above official RBA (Reserve Bank of Australia) rates. The banking sector should be expected to exercise social responsibility - especially in the face of probable economic contraction.

While bank share value has declined, bank profits are still strong. In August, for example, the Commonwealth Bank registered profits of almost $4.8 billion. All in all, this raises the question as to whether the Rudd Government ought to consider the re-establishment of a public sector bank to provide real competition and counter profit-gouging and collusive practices.

Beyond this, industrial relations and minimum wages, as well as tax and welfare reform must be at the heart of any effort to respond to the cost-of-living crisis.

Overall, the wage share of the economy declined from 70.6 per cent of GDP in 1999 to 66 per cent in 2007 - representing over and above $2,000 a year.

This year the Australian Fair Pay Commission (AFPC), ruled in favour of an increase of only $21.66 a week for low-paid-workers, which does not even keep pace with inflation. The ACTU had called for a minimum wage increase of $26 a week.

But Margarita Windisch, writing for Green Left in July 2008, argued that “To cover the real cost of living increases for low-income workers, the minimum wage needed to be increased by 6 per cent, or $31 per week”.

Clearly, there is a need for wage justice especially for the low paid: and increases in the overall cost-of-living need to be met with welfare reform - not just “some time in the future” but immediately.

The compassionate and just response to inflation is not to impose wage restraint - especially for the low-paid - but rather ought to involve tax reform, increasing the relative share of burden in combating inflation for those most able to afford.

Accompanied by such tax reform, greater wage justice - and a greater wage share -should be secured for those on middle, minimum and low incomes. Enabling workers to bargain collectively must be part of this strategy - including acceptance of the legitimacy of pattern bargaining.

Complementing such strategies, Australia’s tax free threshold should be raised and means tests relaxed for those on low incomes.

Finally, in the face of the cost-of-living crisis, there is a strong case to be put that full pensions should be raised to 30 per cent of Male Average Weekly Earnings (MAWE) (up by 5 per cent of MAWE or more - to $646.16 a fortnight).

Australia’s cost-of-living crisis demands a variety of responses by government.

Some problems - such as the cost of petrol - are embedded structurally now in the world economy. Only investment in alternatives will ease demand for oil. But tax and welfare reform, and reform of industrial relations - can spread the burden more fairly.

Meanwhile, investment in public housing stock could increase supply, bringing housing back within reach of ordinary Australian families, and also for the poor and vulnerable.

A revolution in transport infrastructure, and in the adoption of hybrid and electric vehicle technology - can provide better value and efficiency even while reducing greenhouse gas emissions.

Finally, abandoning “Public Private Partnerships”, and turning to public debt financing and provision of infrastructure, can provide better value and fairness for consumers and taxpayers. This, in turn, would impact positively upon the cost-of-living.

We are not helpless in the face of the cost-of-living crisis. But times such as these demand decisive action by government. Let’s make our voices heard: it’s time for action - now.

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About the Author

Tristan Ewins has a PhD and is a freelance writer, qualified teacher and social commentator based in Melbourne, Australia. He is also a long-time member of the Socialist Left of the Australian Labor Party (ALP). He blogs at Left Focus, ALP Socialist Left Forum and the Movement for a Democratic Mixed Economy.
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