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Chapter 1: What is the main topic discussed in this episode?
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There's three things that I'm really worried about and Australian Super worries about. One is productivity. One is inequality. And the most dominant for me, the most pressing is housing.
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Why do we only try to control inflation with interest rates? What if the government made everyone pay a bit more super or increased the GST instead so the financial pain is spread more evenly across the population? Today, independent economist Chris Richardson on the latest rate rises and the other options for controlling inflation. I'm Sam Hawley on Gadigal land in Sydney.
This is ABC News Daily. Chris, we've had three consecutive rate rises this year. So the three cuts we had last year have disappeared, which is pretty hard for home borrowers, isn't it?
It is, absolutely. They have been sweating this for a long time. Australians have some of the biggest borrowings as families in the world relative to our incomes.
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Chapter 2: Why does the Reserve Bank control inflation through interest rates?
And interest rates, in effect, suck money out of the economy. This is, you get less in your pay packets and more goes into super to be tucked away for the future. It's just another way of having some pain now, reducing our ability to spend today.
So it's like deferring pay. You'd increase the required super contribution when inflation is high and then what, bring it back down when inflation drops. Is that actually a possibility? Could that actually happen?
Oh, it absolutely could. And what we are essentially talking about is saying that, well, maybe we can spread this pain differently. In Australia, home borrowers tend to think that they are feeling the bulk of the pain, and that's true partly because we have such big borrowings as a nation, partly because our mortgage rates jump up and down every time the Reserve Bank does something.
And the underlying question is, well, you know, how can we spread that burden a bit differently, maybe less falling on those with a mortgage and more in superannuation? We're talking about more falling on wage earners. Now, in many cases, that's going to be the same people, but in some cases not.
So Chris, manipulating super contributions, it could be used as a tool to control inflation instead of interest rates. Now, another potential tool could be increasing the GST, right?
Oh, absolutely.
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Chapter 3: What alternative methods could be used to manage inflation?
You would temporarily increase what is essentially a tax on shopping. And again, what we are saying is still paying, you know, you're still trying to reduce the amount of money getting spent in Australia to bring it more in line with what the economy can produce. That's what would drive inflation down.
But instead of relying very much, as we do at the moment, on the shoulders of those with a mortgage, or we talked about the superannuation contributions that shifts it onto the shoulders of wage earners, you could use the GST and shift it onto the shoulders of shoppers. But what you can't get... is something that removes the pain.
A lot of the discussion, people keep saying there must be a better way, but in the back of their mind, I suspect they're all thinking, well, is there a way to do this without pain? No, we can shift the pain around. But sadly, a fight against inflation is a fight that involves pain.
How would that work? Would you, what, increase it by 0.25% the GST?
Well, and again, it depends on how big the inflation fight is. And the GST comes with the initial complication that it would simply push up prices further, obviously, though the Reserve Bank would ignore that in terms of setting interest rates. Mm-hmm.
But how much you shift interest rates or how much you take away from that response and put it into more money going into super or more going into GST and hence the prices that you're paying in supermarkets and elsewhere, that would simply depend on how big an inflation fight we have.
Right. Okay. And also, of course, raising the GST would really impact lower income families more than others, I suppose.
Yeah.
Yeah, and that side of it, when you're talking about super contributions, you are picking wage earners. But some people, of course, obviously have higher wages and salaries than others. When it comes to the GST, you would be more notably hurting the less well-off. which is a reminder of why the Reserve Bank always says, well, it wants to fight inflation because inflation hurts the poor the most.
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Chapter 4: How do rising interest rates affect Australian households?
It has an impact on those people who have to spend. They face higher prices and that hurts the poor the most.
All right. So if not then raising the GST, why, I mean, maybe this is a silly question, but why can't we just then increase income tax when inflation is high and bring it back down when it's under control?
We absolutely can. Those are different shoulders, basically. The personal income tax in Australia is The top 20% of personal taxpayers pay about 60% of all personal tax. So if you're raising the GST, you're hitting those on low incomes. If you're raising income tax, you're hitting those on high incomes.
Super is more broadly across wage earners and, of course, the existing way, interest rates, is affecting borrowers. There's a bit of a temptation, I suspect, for everybody to think, well, I would prefer the lever that is used is the one that affects me the least.
Yes, of course. All right. Well, what about just clamping down on government spending? That is also an option, isn't it, to control inflation? Just explain that.
I would describe it as too much money chasing too little stuff, too much demand relative to supply. And governments have an impact on demand too. If they spend more, well, that affects inflation. If they tax more, that affects inflation in the other direction. So what governments do, state as well as federal, and the other day the RBA governor specifically called out the states, has an impact.
Yeah, sure. And Michelle Bullock, the governor, she's also warned ahead of this week's budget that will be delivered by Jim Chalmers to be very careful about what he hands out.
So all I'm saying is that the extent to which government make up the shortfalls for households by giving them more money, it makes it harder to dampen demand.
Yes, she does make that point. Now, to be clear, you can have governments giving us handouts of some kind. So, for example, the cut to petrol taxes that we have at the moment, governments can do that without having an impact on inflation. because what they've done there is to give us some money that we will spend and hence tend to put up inflation. They can just take some money out.
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Chapter 5: Did the Reserve Bank make a mistake by cutting rates previously?
I think in a world which is more shocking in every sense, the last boring year of your life, Sam, was 2006, and it's been a bit of a white-knuckle ride ever since. In a world with more shocks... I'd be quite happy to see a bigger bumper bar instead of an average two and a half percent, maybe three or three and a half percent.
And there would be little, it doesn't do away with the problem, but it might help us smooth some of those problems.
Well, Chris, of course, the government isn't actually looking for different tools right at the moment to control inflation other than interest rates. And it is sort of convenient for any government, isn't it? Because the independent reserve bank has to make the decision.
Absolutely. And to be fair, I think the way we do it is not perfect, but it's probably, you know, those moves in interest rates are probably the best way to fight it. Okay. To also be fair, governments prefer it. You know, as you say, it gives them a fall guy or fall girl, you know, and they sort of pretend it's got nothing to do with us. And sometimes it doesn't have anything to do with them.
And sometimes it does.
So history shows us, does it, that interest rates, it's the best way to deal with inflationary pressures. Even though, of course, sometimes the RBA does get it wrong and that can be pretty painful.
For sure. And we may want to widen the shoulders a little. We might... in particular, want governments to be more aware of an inflation fight or a lack of inflation fight in their decisions. But by and large, I wouldn't particularly change the way we do it. And I have to tell you, there's no magic wand.
I mean, each of these things we've gone through is talking about some sort of pain to win the fight against inflation.
All right, so what do you think? With rates rising again and a lot of households in a fair bit of financial pain, is it worth at least having this discussion and considering alternatives? Do you think at any point in the future this could actually change this system?
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