Unpopular policies could be what’s needed to stop ‘blunt’ rate rises

Economists say there are more levers the federal government could pull to bring down sticky inflation to ease pressure on the Reserve Bank of Australia (RBA) as it wields an increasingly blunt tool.

Hotter-than-expected inflation of 4.3 per cent has triggered market expectations of a fifth interest rate rise at the RBA meeting on Tuesday.

RBA Governor Michele Bullock is determined to rein in inflation back to the 2-3 per cent range and in September declared that “the board will increase interest rates again if that’s what’s needed to get inflation down”.

But in a recent and rare remark against the central bank, Prime Minister Anthony Albanese told Nine newspapers that interest rates were a “blunt instrument”.

So, what sharper tools could be used to tackle inflation?

Independent economist Saul Eslake said the federal government can temporarily raise the compulsory superannuation rate from 12 per cent to 13 per cent to disincentivise consumer spending.

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This would have a similar impact to increasing interest rates by reducing people’s spending power.

But, by increasing the super rate, their money would be returned when they retire.

“People would have less money to spend and that would help reduce demand. But it would spread the burden of reducing demand over a much bigger proportion of the population. Basically, everyone who has a job,” he said.

“And compared with about a quarter of households who have a big mortgage, it could be achieved with much smaller increases in the contribution rate than increases in interest rates because it affects much more people.

“People would know, although they wouldn’t like it, it is still their money and they would get it back when they retired.”

The federal government could legislate those temporary powers for either itself or the RBA but Eslake noted it would require strong political will as both One Nation and the Coalition call for early access to super and doing so would be unpopular among voters.

AMP chief economist Shane Oliver said the federal government could also decrease its spending or increase taxes or both.

“A 1 per cent levy across everybody’s income tax on everybody’s income tax would be one way to do it. That would spread the load,” he said.

“Or, you have a 1 per cent reduction in government spending across the board.”

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Federal and state spending reached its highest level in 40 years, outside the pandemic, at almost 27 per cent of total GDP.

RBA chief economist Sarah Hunter in October acknowledged that “government spending is definitely part of the picture”.

The war in Iran, volatile oil prices and demand in AI have also been blamed for inflation woes in Australia and across the world.

New Zealand, Japan and Canada have all recently raised their own interest rates.

The US held rates steady at its latest meeting after increasing it for the first time in more than three years in September.

Oliver said inflation has been higher and a bigger problem in Australia than it has been overseas as it had been increasing long before the US and Israel sparked the war in Iran on February 28.

He said there has been some wasteful government spending, such as electric vehicle subsidies and pointed to some of the cost of living relief, such as the halving of the fuel excise, as being “counterintuitive”.

“When you cut fuel excise, you’re actually cutting taxes. Most economists would say that is a fiscal easing, which adds to the inflation problem,” he said.

“It doesn’t solve the underlying problem, which is the rise in fuel costs. It just sweeps it under the carpet to some degree.”

Treasurer Jim Chalmers, who has been under growing pressure for the state of the economy, has insisted he is doing his part to help bring down inflation and has repeatedly blamed the war for holding the economy “hostage”.

He ruled out empowering the RBA with more tools but promised to find some budget savings by December.

“We haven’t been examining other tools for the Reserve Bank and we don’t interfere with the work that they do independently. They have monetary policy levers which are longstanding,” Chalmers said after the latest inflation figures were released on Wednesday.

“My job is to focus on my part of the fight against inflation, providing cost of living relief in an appropriate way, managing the budget and the economy in the most responsible way that I can.”

He and Finance Minister Katy Gallagher have, however, both refused to commit to creating greater savings than spending by December.

High recession risk as fears inflation embedded into psyche

Economists and the central bank itself have raised fears that high inflation expectations are becoming embedded in the consumer psyche.

RBA deputy governor Andrew Hauser had said this would be their “nightmare”.

“We are beginning to see some signs that some people in the community are not sure if we’re going to bring inflation back into target at all, or certainly not for an extended period,” he said in October.

“That is the central banker’s nightmare. We can’t allow expectations to shift away from the target.”

Oliver said that if inflation remains above target for an extended period of time, which it has in Australia’s case, consumers and business owners begin to adjust their expectations.

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For example, a business owner may preemptively pass costs on and consumers may “begrudgingly” accept.

“It then becomes another problem for the Reserve Bank. If people don’t believe the target anymore, then it gets harder and harder and harder for them to get inflation back down to the target,” he said.

And if the expectation of high prices becomes entrenched, it may trigger a recession.

“This is a lesson of history,” Eslake said.

“If they do, it will take much bigger increases in interest rates than we’ve had so far to bring inflation back down again. The sort of increases in interest rates that cause recessions.”