Sharing the financial pain of fighting inflation

THE governor and board of the Reserve Bank of Australia have been delegated the responsibility of controlling inflation. The tool they use is modifying interest rates, which has a disproportionate impact on those who can least afford it.

Philip Lowe’s statement on February 7, when the cash interest rate went to 3.35 per cent, was that there is more pain to come. Hopefully, the interest rates will not climb to the levels of a few decades ago when mortgagees were commonly paying interest at up to 18 per cent to remain in their homes.

Interest rate increases do cause discomfort and, in some cases, anguish. Homeowners struggle to meet mortgage payments. Small landlords who have borrowed in an attempt to build their long-term wealth pass on the increases to their tenants.

However, as Lowe points out, outof-control inflation will cause serious uncertainty and even more pain. It is critical to keep inflation under control and to avoid a serious recession or even depression. Such an outcome would have an even greater impact on those who can least afford it.

The political advantage of using interest rates to control inflation is that governments can blame the governor and board of the Reserve Bank if inflation or high interest rates become a political issue.

Consecutive treasurers have managed to keep the issue at arm’s length, by contracting the Reserve Bank to manage inflation effectively through the use of variable interest rates.

One of my colleagues has suggested an alternative, albeit one that seems politically unpalatable. Temporarily use a variable GST “to soak up the excess liquidity that is supposedly causing all the trouble, instead of simply giving all the excess money to the banks”.

The government could expand the GST to cover all those currently exempt items that are predominantly purchased by “rich” folks… they could then “periodically adjust the rate up or down by whatever is needed to keep inflation in check”. In this way, the broader community would “contribute to the solution rather than it just being imposed on those who have to borrow money from the banks”.

The winners through the current process seem to be the banks and their shareholders. The CBA has just announced a half year profit of more than $5 billion. This must really stick in the craw of those who have been told that the bank has no choice but to raise interest rates in a manner consistent with the Reserve Bank.

The advantage of using a variable GST system is that the impact will not be so targeted at mortgage holders and, consequently, at renters. Any adjustment must be a temporary move. Why not use the GST as a variable instrument in much the same way that the Reserve Bank uses variable interest rates?

The GST does need reform. Political compromise was necessary when introduced by John Howard. The Democrats at the time held the balance of power in the Senate. They settled on the idea of making a series of exemptions on basics such as food. This looked good from an idealistic perspective and has been made to work.

GST exemptions have added a substantial administrative burden on many small businesses and a large bureaucracy was created to deal with the red tape. A simple system with no exemptions would have been much more effective. For those on welfare, who were the aim of the exemptions, the social service payments could have been increased accordingly.

A further suggestion as an alternative to the Reserve Bank model is having “the government look at a levy on all bank transactions and make the banks responsible for collecting it”. A quite small levy is likely to achieve a significant impact on inflation.

However, the flipside is that a variable GST or a levy on banks could also impose a significant administrative burden on small businesses. Keep in mind that the current system of fluctuating interest rates also has a significant administrative burden. Every system has administrative burdens that ought to be minimised. Although these ideas may seem politically unpalatable, one option would be to expand the role of the Reserve Bank. Instead of having just one tool to deal with inflation, they could at least have the three: variable interest rates, variable GST and a levy on banks. No doubt there are more options.

Michael Moore is a former member of the ACT Legislative Assembly and an independent minister for health. He has been a political columnist with “CityNews” since 2006.