Time for Some Fiscal Policy in Australia
Talking with a friend today. The topic of interest rates came up, as they do in any recent conversation within the Australian context.
My friend asked a poignant and sensible question, “why doesn’t the Government adjust the rate of the Goods & Services Tax (GST)?” It is a broad-based consumption tax. If consumption is getting out of hand and creating an inflationary spike, then why not add a disincentive to consumers by raising the price of consumption?
With interest rates variations it’s the mortgage belt who carry all the pain. They represent about 25% of households. Yet rising interest rates enrich those with existing savings, enabling greater consumption. Wouldn’t it be better to share the load equitably across any and all of those who spend?
The downside to this strategy is that the GST is regressive. It hits everybody with the same cost. For those with lesser incomes, the proportion of income the tax takes is greater. It’s not an equitable solution, because now low income earners are bearing a greater proportion of the pain.
From a political point of view, it’s easier to blame the independent Reserve Bank for pain and suffering. Why place the crosshairs on your own government by changing fiscal policy? “Monetary policy delivered by the independent Reserve Bank, that’s who to blame!”, is the relieving Government cry!
Whether it’s the GST, or a more equitable adjustment to the broader taxation platform, the Australian Government needs to do something. Since its election, the Albanese Labor Government seems content to sit on the sidelines, apart from some modest targeted tinkering. It withdrew funding for some capital works projects, that at least in WA have now been funded by the State Government, so that attempt at withdrawing money and inflationary pressure from the system didn’t work. Some modest efforts to encourage growth in housing supply have been delivered.
Small target strategy, however, seems to remain the prevailing preference in Canberra.
I would like to see the Government take some real, tangible action. Let’s look at negative gearing. Let’s look at tax breaks that make no sense. Let’s recalibrate towards equality and away from the neo-liberalist agenda.
I elect a government to do things: not to watch the RBA use its only blunt instrument.
Get to work, Labor.
Keane on the RBA's Approach to Inflation
I’m happy to see pressure mounting on the RBA. Not so much even for the decision to lift rates, but on it’s myopic approach to analysis. The economy has changed; it has become more integrated, and duopolies and oligopolies rule the Australian markets. A fundamental lack of competition is allowing the growth of profits, and the RBA currently seems unwilling to accept this as a line of thinking.
Bernard Keane, writing for Crikey, knocks it out of the park on the Reserve Bank of Australia’s approach to inflation.
It’s hard to choose a few highlights from Keane’s article; the entire piece is worthy of reading.
The RBA wants to wish the entire profit-inflation debate away, seemingly enraged at the suggestion that gouging by firms with high levels of market power is a greater spur to inflation than the traditional villain: greedy workers demanding pay rises driving a wage-price spiral.
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the OECD weighed into the debate, devoting a section of its latest global economic forecasts to the issue. Its data specifically on Australia shows unit profits massively outweighing unit labour costs as a source of inflation.
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this bout of profit-driven inflation comes at the end of a near-decade of wage suppression, and a historic shift — especially since 2017 — from wages to profit share of income nationally. Merely preserving, let alone strengthening, profit margins in a period of high inflation perpetuates that shift from workers to business.
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Neoliberals have a blind spot when it comes to market concentration: the core idea that unfettered markets work more efficiently than highly regulated markets means a relative antipathy to effective competition laws designed to protect the very mechanism by which markets work efficiently.
Neoliberalism Gives Again
The “party” that is neoliberalism has been giving our society gift after gift.
We’ve had corruption and self-interest at the highest levels, as PwC executives had their snouts in the trough on both sides of the consulting equation, giving legislative design advice to government then flipping that information and advising their corporate customers on ways around said legislation.
We’ve had executive wages grow exponentially over recent years, irrespective of their performance, or that of the company they lead. (Hi, Alan Joyce of Qantas!) We see executives engaging more consultants and labour-hire at the expense of full-time wage earners.
We’ve had companies making extraordinary profits, helped by government supports such as JobKeeper (Harvey Norman excelled at this one.)
Yet workers have not benefited from the neoliberalism party. They’ve just had to buy the drinks then clean up the mess the next morning.
Workers have seen their share of the economic pie decrease over time. From ABC News in March 2019:
In the two years preceding 2019, Australian workers received the lowest share of total economic output since the 1950s - less than 47% of GDP. This is a decline of 11% since the 1970s. Corporate profits have increased 10% in that same time.
Wage stagnation—which is one of the design outcomes of the neoliberalist agenda—is another problem. The economy might have a high level of headline employment, but due to low levels of worker organisation (unionisation has been demonised for years) combined with individualised contracts and wages that are set for multiple years in advance, workers can’t leverage the high rates of employment to broker a better deal for themselves. The cards are stacked against them.
Today, we received another gift courtesy of the neoliberalism inherent in our economy. The Reserve Bank of Australia has determined that what our economy needs is yet another interest rate rise. Never mind that this generation of Australians are facing the highest home prices of all time, and that as a share of household income, mortgages are eating more than has historically been the case.
Canceling Netflix and not getting Uber Eats once a week is not going to make a dent in the additional mortgage repayments required of a household. Where is the extra money to be found? Surely we are nearing the point where the RBA is expecting people to find blood from a proverbial stone.
I predict a major economic calamity for Australia, and it’s not going to be pretty. My only hope is that it destroys whatever credibility neoliberalisms might have. At least then, something will have been gained from the misery.