For those mortgage holders hoping Australia’s easing underlying inflation rate might lead the Reserve Bank (RBA) to back off on interest rates, Thursday’s booming job numbers might have allayed their optimism.
It’s a sad situation when debtors greet greater job opportunities with mixed feelings. But in our present inflationary crisis, they know the RBA wants to see less money flowing into Australians’ pockets, and subsequently into shop registers, before they’ll loosen their credit leash.
But must we put them in such an unenviable, snookered position for the greater good? Must we sacrifice so many younger mortgage holders and renters, an unprecedented number of whom are under financial stress and suffering cash flow difficulties, on the altar of lowering prices?
Prices are boom(er)ing
Some mortgagee pain is indeed the inevitable price of investment. Interest rates are an important tool in taming inflation, and even in the best-case inflation scenario they’ll need to shoulder a few hikes — their capital gains will undoubtedly compensate.
Australia’s bank balance sheets were once dominated by business loans; now they’re significantly outweighed by mortgages. This means on top of slowing wages and increasing relative unemployment, rate hikes now disproportionately clobber those who don’t own their houses outright — a growing proportion of Australians, given our barren housing landscape blocks their escape routes. Conversely, outright owners profit from higher interest payments at unprecedented rates, given their ballooning wealth.
This isn’t just inequitable — it’s blunting the RBA’s inflation-busting crusade. Commonwealth Bank analysis released Friday shows older Australians increased their spending over the year to April more than younger Australians across all discretionary categories.
CommBank iQ analyst Wade Tubman told The Australian Financial Review: “This increased spending power comes from the higher savings balances and lower debt levels of over-65s, with net benefit rather than pain from the sharp interest rate rises.”
For decades, the Australian government concertedly enriched asset-holding baby boomers through subsidies and tax exemptions in housing, superannuation and elsewhere. But our leaders, so quick to chastise younger generations for supposed profligacy, did not plan for the potential inflationary fallout of clumping spoils into the life period when one faces fewer costs and is least threatened by the central bank’s weapons — unemployment, wage restraint and mortgage stress. Indeed, they’re further enriched when such weapons fire on younger folk, via interest on their (heavily subsidised) private savings.
No wonder they’re spending big on flights and cruises! We’ve inverted our collective belt-tightening for this privileged cohort, and their subsequent decadence is making the rest of us poorer.
Taxing times call for taxing measures
But if not interest rates, then what? A heated debate has kicked off among economic commentators about whether we should consider price controls as an alternative measure. Proponents justify this move on the basis that corporate markups are outpacing merely “passed on” costs.
Some progressives have overstated this case at times, and it’s more applicable in some countries than others. But it does appear many firms, particularly in concentrated markets, are exploiting their power, consumer expectations and a corporate herd mentality to compensate for prior or anticipated disappointments, or simply cash in. Such behaviour didn’t cause the present crisis, but it may perpetuate, amplify or even entrench it, even as supply chain issues subside.
But RBA analysis released on Thursday suggests while supply chain issues have been the predominant cause so far, demand is now increasingly contributing. This is evidenced by strong demand in the services sector. While targeted price controls, subsidies and increased supply in sectors such as energy and housing may help, demand still needs to be dampened among the persistent cash-splashers, plus room made for overdue public investments.
A simpler solution few people are talking about is raising taxes. Taxes also zap funds from consumption, and broad-based ones share the burden more widely than interest rates do.
The revenue must not be spent in an inflationary manner. But it could be spent on public interventions to unblock remaining supply bottlenecks and provide targeted subsidies for the vulnerable. Revenue could also be saved for later public projects, particularly in a downturn. Speaking of downturns, by distributing the burden more broadly, we mitigate the risk of sending particularly exposed households and businesses under and inducing a recession.
Presently, a mixture of corporate and consumption tax hikes would be appropriate. The New York Times’ Ezra Klein has called for a “progressive consumption tax” (a graded percentage of income minus expenditure). Income tax hikes aren’t the best tool right now, as wages aren’t a big driver of inflation, and what small contribution they make is wearable for the benefits. Plus, they too hit younger workers harder than asset-owning superannuants due to concessions.
The key roadblock to such measures is short-term politics. Treasurer Jim Chalmers would undoubtedly be hammered if he made goods and services even more expensive during a cost-of-living crisis. This is why politicians delegated rate-setting power to the RBA.
But allowing politicians to hide behind hapless bureaucrats like RBA governor Philip Lowe has led to an overreliance on their designated tools, and a lack of courage to propose complimentary, more equitable solutions. To avoid voter backlash to incumbents, Klein recommends instituting “automatic stabilisers”, with tax rates rising and falling depending on the inflation rate.
Would you rather your foregone dollars go to a future hospital or your bank/landlord? If Chalmers prosecuted this argument, he might just weather the political cost for those suffering the economic one.
