Is there a ‘need’ for austerity? What the figures show

Since the outbreak of the international financial and economic crisis, “austerity” has become the proclaimed goal of governments over most of the developed capitalist world. Governments have been sticking to this goal even when it leads to their own demise, as in Greece and France. Voters who dare to toss out austerity governments are lectured by the “experts” that no good can come from doing so.

Many voters are unswayed by such arguments because they know that much of the government debt that austerity is supposed to reduce exists only because of the vast sums of money that governments in the United States and Europe handed out to endangered banks that were “too big to fail”. Why, they ask quite sensibly, should they suffer a reduced living standard in order to keep bankers living the good life?

And there is no denying that the trillions of dollars given away to bankers and other capitalists are the immediate reason for the extent and intensity of the current governmental austerity drives. But that is not the end of the story. For example, the Australian federal government recently brought down what most commentators described as an austerity budget even though there was no massive bank bailout here, and the Australian economy has probably suffered less from the international crisis than any other developed economy.

Part of neoliberalism

In fact, if we take a broad overview, capitalist governments began a general turn toward austerity nearly 40 years ago, spurred by the international capitalist recession of 1973-74. This was part of a ruling class shift from Keynesian to neoliberal policies, when the former proved ineffectual against the ’73-74 crisis.

While capitalist politicians can come up with quite varied arguments for the policies their bosses want them to implement, a constant theme of neoliberal politics is that governments can’t afford to provide many of the services that citizens previously demanded or even expected: economic stagnation is blamed on governments taking too big a share of the economic pie, thus supposedly “crowding out” capitalists’ investment. (Less ideological arguments are also advanced: for example, that a particular country is ageing and therefore a smaller percentage of the population is engaged in production.) Four decades of constant propaganda have made many neoliberal ideas seem like common sense to large numbers of people. Probably the most common argument against any proposal that would improve the lives of working people is that the country “can’t afford” it.

Constantly repeated propaganda is needed to enforce that idea because it is not true. Many of the things that Australia or other capitalist countries supposedly can’t afford today were things that they managed to provide in the past: free or inexpensive tertiary education, adequate unemployment insurance, subsidised medical care and similar benefits associated with the “welfare state”. For instance, the Whitlam Labor government, elected in 1972, brought in a shorter working week, wage rises and paid maternity leave for federal public servants, free tertiary education and numerous social reforms, at least some of which cost money. There was no real concern about whether the country could “afford” these reforms.

If a country could afford something in the past but can’t afford it today, there are fundamentally two possible explanations. One is that the country has become poorer. The other is that the money that used to pay for this something has been put to some other use.

Are we poorer?

Have Western (developed capitalist) societies become poorer in the last 30 or 40 years? The relevant figure is per capita gross domestic product: if a country’s income has doubled but its population has tripled, then of course it can’t afford to provide as much to the average citizen. Fortunately for those of us who don’t have the academic training or the time to conduct the necessary investigations in several dozen countries, there is a 2009 publication of the US Bureau of Labor Statistics that provides GDP per capita figures for 17 countries from 1960 to 2008. (The countries are the USA, Canada, Japan, South Korea, Singapore, Australia and 11 countries in Europe.) The figures are for real GDP — that is, they are not distorted by inflation. Furthermore, the prices are converted to purchasing power parity, which means that they give a better picture of what people in the country are able to purchase with the average income.

In not one of the 17 countries was 2008 real GDP per person lower than it was in 1960, 1970 or even a decade ago. Real GDP per capita in Australia in 2008 was 2.58 times its level in 1960. In 1972, when the Whitlam ALP government was elected, real per capita GDP was 52% of its 2008 level. Why can’t Australia afford free education now, when it could afford it on half the current average income?

In the USA, where social welfare cutbacks have been even more severe, there is even less economic excuse: 2008 real GDP per person was 2.76 times the 1960 level. Similar or larger per capita increases occurred in all the countries covered in the publication. Greece and Portugal, the countries supposedly most in need of austerity, are unfortunately not among the 11 European countries listed. But the two next most likely candidates for imposed austerity, Spain and Italy, both produced well over three times as much per person in 2008 as they did in 1960.

Clearly, then, the supposed need for austerity is not based on a country, as a whole, becoming poorer.

Where has the money gone?

Why, then, are countries “unable” to afford social welfare that they formerly were able to afford? The reason is that money that used to be devoted to social programs has been diverted to other purposes, the main one being increasing the wealth of the ruling class. There are two main aspects to this: increased income and reduced taxation.

Over decades, the neoliberal attacks on working people have been remarkably successful in increasing the incomes of the richest layers. The situation in the United States is summarised by Salvatore Babones in an interesting article on the Truthout web site. From the Great Depression low point of 1932, in the next 40 years “the average American worker’s income more than doubled in real terms (adjusted for inflation)”. Their bosses didn’t do nearly as well: “... the average American CEO in the 1970s earned about 4 percent more [in real terms] than the average CEO did in the 1930s”.

Babones describes what looks like a version of the “salami tactic” used by the top layers of the US ruling class. Gradually, more and more layers were excluded from the benefits of economic growth. The first shut out were the bottom 80%: “From the mid-1970s through the mid-1990s, most of America's economic gains went to the top 20 percent of earners. College-educated professionals flourished while working-class America stagnated.”

From the late 1990s, another 15% were thrown off the gravy train: “Census Bureau statistics show that, between 1999 and 2007, average incomes stagnated for every group below the top 5 percent”.

Adequate statistics for post-2007 were not available, but Babones believes that the only layer currently improving its situation is the “superrich” — the 0.01% of the population, about 15,000 people, who have incomes above US$5.5 million per year. The US economy has been growing at about 2% a year, he points out. “But executive pay in the United States rose an average of 22.8 percent in 2010 and 13.9 percent in 2011, according to a tally from the AFL-CIO. There are no reported statistics for top banker and investor pay, but hedge fund and private equity managers make even more than most CEOs.”

In Australia the statistics are not as detailed, but the picture is similar. For nearly three decades from 1950, the income share of the wealthiest Australians steadily declined. The highest 1% had 9.08% of all income in 1951; this reached a low of 4.61% in 1981. The richest 0.5% received 6.23% of total income in 1951 and 2.83% in 1981. For the highest 0.1%, the corresponding figures were 2.53% and 0.96%. (The share of the next layer down, the top 5%, also declined, although not so dramatically, from 18.87% to 15.15%.)

Then the pattern reversed: the people with the highest incomes took a steadily increasing share. This growth was quite regular, except for 1988, which was an exceptionally good year for the rich, their share of total income reaching a level that wasn’t equalled again for a decade or more. 2006, the year before the opening of the international economic crisis, was the high point for Australian capitalists (2007 was almost as good).

And the wealthier they were to start with, the more they increased their wealth. In the quarter century from 1981, the top 5% increased their share of total income from 15.15% to 21.91%, a 45% increase. The top 1% went up to 10.06%, more than doubling their percentage share (an increase of 118%). The top 0.5% got 7.38% of total income, 160% more than their 1981 level. And the richest 0.1% got 3.65% of the total, nearly 4 times their share in 1981. (The figures are from the World’s Top Incomes database.)


As the rich have been increasing their share of total income, they have also been decreasing their taxes. An April 2011 article by Judd Legum on the Think Progress web site, quoting US Internal Revenue Service figures, reported: “In 1995, the richest 400 Americans paid, on average, 29.93% of their income in federal taxes. In 2007, the last year for which the IRS has released data, the richest 400 Americans paid just 16.63%.” More than 150 of these richest 400 paid tax at a rate of between zero and 15%; in 1995, only 12 of the 400 did so.

Legum also noted: “In 1995, the combined income of the richest 400 was just over $6 billion. By 2007, the combined income of the richest 400 was almost $23 billion.”

But if the United States provides the grossest example, reduced taxes on the rich are general throughout the developed capitalist countries. Here is a concise summary from a June 2011 publication of the OECD: “In the mid-1980s, many OECD countries had top marginal personal income tax (PIT) rates in excess of 65%. Today most top rates are below, and in some cases substantially below, 50% (average top PIT rate in 2011 was 41.5%).”

The same publication went on to note that corporate taxes have also declined: “Similarly, top statutory corporate income tax rates in the 1980s were rarely less than 45%. In 2011, the OECD average rate was below 26%.”

While these tax reductions for the rich are part of a neoliberal program going back three or four decades, the OECD document notes that the changes are ongoing. Since 2000, the top marginal personal income tax rate has been reduced by 7% or more in 12 OECD countries, while the average OECD corporate tax rate dropped from 32.6% to 25.4%

There’s more. Many countries tax income from share dividends differently from ordinary income. In those countries, “[T]he top marginal tax rate on dividends in OECD countries was reduced by 8.1 percentage points between 2000 and 2011, from 49.1% to 41.0%”.

Robin Hood in reverse

Is it possible, however, that there is an element of truth when governments say they “can’t afford” to provide some social benefit that they previously provided? Perhaps the increasing exemption of the ruling class from most taxes means that governments have smaller revenues than they used to have?

No, ruling classes are almost never that foolish. They know that they need a strong state apparatus to prevent the rest of us from overthrowing them. So, even as they have been reducing the taxes that they pay, they have been increasing total government revenues. According to the OECD document quoted above, nearly all OECD governments have increased their revenues, as a percentage of GDP (the only exceptions are the formerly nationalised economies of Eastern Europe, which have slightly decreased their governments’ share). Between 1965 and 2008, according to the OECD, these member governments increased their share of GDP by between 1.4% (United States) and 18.6% (Spain).

The absolute figures for government share of GDP are also interesting. For example, if you believe the capitalist media, Greece’s problems are mainly due to Greeks not paying taxes. But while it is undoubtable that legal and illegal tax evasion by the wealthy occurs in Greece, someone is providing revenue to the Greek state. In 2008, its revenues represented 32.6% of GDP — substantially more than in Australia (27.1%) or the USA (26.1%).

As capitalist governments have lowered taxes on the rich, they have increased them on working people. Value added tax (called GST in Australia) is one mechanism for doing this. According to the OECD, the average VAT rate rose from 16.7% in 1990 to 18.0% in 2010. That is not a huge increase, but the same document reports that the average “share of VAT as a percentage of GDP has risen from 5.3% to 6.5%”. This difference in the increases probably reflects an expansion of VAT to items of working-class consumption that were previously not covered.

Other methods are also available. A recent paper by Peter McDonald and Rebecca Kippen, both from the Australian National University, documents various ways in which Australian income tax rates have been increased on those with lower incomes. “In the past 25 years”, they write, “the average tax rate on an income of one quarter of average weekly earnings has increased from 1 per cent to 5 per cent”. For someone on an annual income of $16,000, they calculate, the changes mean an annual loss of almost $600.

McDonald and Kippen provide some striking statistics: between 1984-85 and 2004-05, the average income tax rate in Australia increased for everyone on average weekly earnings or less, and decreased for everyone earning more than that. The decrease in tax was greatest for the highest incomes. The increased tax rate was greatest for the lowest incomes (those on 25% of average weekly earnings).

For the last three to four decades, governments in Australia and throughout the developed capitalist world have been waging a vicious class war against everyone except their masters. From a wealthier economy, they have been taking less from the rich and taking even more from us. Governments actually have more in hand than they did several decades ago. The specifics of what they are doing with it vary from country to country — if only in the types of weapons being purchased — but one thing is certain: they aren’t giving it back to us.

Direct Action — July 9, 2012