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.
Socially and politically we have well and truly crossed that threshold where those who benefit the greatest from the distortions in our taxation system are actively working against those might dare to address the current state of disequilibrium and inequity.
Philip Lowe isn’t hapless in all of this, he is part of an increasingly malign institution that has in concert with APRA wilfully engineered housing bubbles for more than two decades, the wellspring of all of this unearned wealth that the (mostly) boomers now feel entitled to protect by any means.
And now that the housing equity primed demand drivers of inflation have all come home to scoff German river cruises, $90,000 electric cars and restaurant meals every other night of the week, like any Central banker raised in an institutional test tube and kept in a bubble his entire professional life, the coolly indifferent Dr Lowe is now clumsily swinging his blunt instrument around to extinguish the most basic living expenditure of the truly hapless members of society
Most of the mainstream media in this country, the AFR in particular, are manning up and insisting the plebs take their medicine. They bang on about the inflationary impacts of pay rises for nurses and inflation adjusted unemployment benefits, creating distractions about how working from home is destroying labour productivity and fuelling inflation, running interference for the swathe of greedy, myopic, corporate and boomer idiots intent on ensuring that none of their selfish, idiot brethren ever faces their day of reckoning, no matter what the cost to future generations. These fools are a danger to the viability of Australia as a fair and equitable society.
Every current politician and political party and media outlet not actively campaigning for an end to this madness is now complicit in this systematic debasement and corruption of our society. They should be treated with the accordant contempt and met with an equal and opposite political reaction
“They bang on about the inflationary impacts of pay rises for nurses….”
Aaaaahh, that’s why we now have to import Nursing staff for aged Care facilities from the Pacific Islands.
That’s been going on for decades, regardless.
“The viability of Australia as a fair and equitable society.”
Never has been; never will be.
Unlike…?
“The key roadblock to such measures is short-term politics”
I think this line is a little disingenuous, the key roadblock is the repeated, democratically expressed desire by the Australian public to cut taxes and retain unfair distortions across a range of sectors (housing, superannuation). The public need to be moved before the politicians, or else you’d just be setting things up for a 2025 Petter Dutton government.
Politicians should lead and persuade, not be in thrall to the lowest common denominator.
Demos IS the common denominator – hence hoi polloi.
Politicians helped to make tax a dirty word while they promoted the nonsensical trickle down economics and governed for their wealthy donors. We need to get the neoliberalism and money out of politics.
Mrs T was occasionally correct, if for the wrong reasons, and spot on with “First win the argument, then the polits will follow.”
At least we’d get something back, for our collective buck, if taxes were raised, to be spent where needed most in our evermore lopsided society….
Then get on with doing something about the middle class welfare, of such largess, that is negative gearing, deeming rates and such, that the less well-off are subsidising by involuntarily going without ….
And, as used by Labor govt. in ’80s onwards, increase SCG Superannuation Contribution Guarantee, and possibly a modest tiered tax for (well) above pension incomes i.e. high super income.
The issue is boomers. They are retired. They will not hurt one bit. No more taxes from them. Taxes will be imposed on those who can least afford it.
So tax retirement income! Easy fix. Not popoular with some, but certainly doable.
Consumption taxes are generally regressive. Wealth taxes would be even more appropriate. But even fewer people are going to talk about those, which is why you get crazy & complex ideas like “progressive consumption taxes”.
Tax revenue is not “spent”.
Governments do not “save”.
There is no GST on food and on children’s clothing so it wouldn’t be regressive. People could choose to buy something and pay GST or to do without the product. Infinitely fairer as the burden would be spread across the community.
Yet I see GST applied to some of the food items on my shopping dockets. Fresh fruit and vegetables are largely unaffordable to those living below the poverty line. They’re also skipping meals to make ends meet. People incur other unavoidable expenses besides food and children’s clothing. GST has a much greater impact on the spending power of the poor, whilst being barely noticeable to the wealthy. Taxation is necessary to regulate the economy and create a fiscal space for government expenditure, therefore a greater portion of unearned wealth needs to be taxed. The problem is few who are well off can be satisfied with what they have.
GST is applied to processed food, but not fresh food.
Take the consumption tax a step further – tax by the amount of energy consumed by the final product.
Soil covered spuds minimal (apart from excise on the fuel to transport farmgate to duopoly – currently NONE on the tractor ploughing & digging), hot chips at the take-away much higher (all that labour, rent, rates, insurance etc), tinned higher still and top rate on potato consommé served by uniformed flunkies at Doyle’s or Machiavelli’s.
We can’t eat the rich because, being at the top of the food chain, they are full of toxins but it would stroke-of-the-pen simplicity to tax them equitably – 150% seems fair (to begin).
They did not become uber rich by being nice, decent citizens.
Anyone who is still acquiring property for pure investment needs to contribute higher amounts of tax, like a stamp duty, at the onset. Since covid hit the rapid house-price gains (20% incease on median values over 12 months) in Sydney and Melbourne have come despite protracted lockdowns. Labour has decided that the potential public backlash on their oncw-proposed negative gearing changes was too threatening, probably to the party’s political longevity. We must end negative gearing. The headlines argue it helps millionaires and billionaires, but the vast majority of property investors, close to 90%, only have one or two properties. Gee! Then why are property values rising past extreme along with rents? Why are more people likely to never afford one home in future? Why is homelessness increasing? Why are some economists thinking there is a global problem with the current paradigm being an onerous cost to society?
Because there are too many people, and not enough houses.
Extending Capital Gains Tax to the family home would curb the massive increases
Yeah right… that’s a terrific idea ….. not. Family home is very different to an investment property.
You want to stop people selling houses, that’s the way to do it. Why would you sell the family home then, because of CGT have less to spend on another house in the same market?
You wouldn’t.
You’d borrow against it, rent it out, and buy another house.
The CGT would be paid on the death of the owner, sort of like death duties.
It’s actually quite a sensible idea, and the rates could be progressive in the same way Income Tax (should be)…..
…..i.e stay in one home for ten years (so it’s obviously a “Home”) and pay ZERO CGT.
Flick it after a year for a million dollar profit (and before anyone knee-jerks, I have seen million dollar profits recorded in LESS THAN A MONTH) and pay 50% CGT.
Inherited wealth is the bane of civil society, making usurers of some and debtors of all the rest.
Grandma and the hippies were right – tread lightly on the Earth and there is plenty for all needs.
There can never be enough for all greeds.
No it wouldn’t. The increases are a product of not enough housing, and access to bank credit (ie: loose lending).
CGT on the family home in general is a terrible idea. It punishes people for moving house, which most times will be because of events like long-term relationship changes, children, employment, etc.
Absolutely agree. And when assessing the aged pension, the family home should be part of the assets calculation. Why should someone live in a multi million dollar house and get the aged pension while someone who happens to live in a modest house with an investment property (and still paying taxes while pensioners do not) not get a pension. Completely unfair.