When the Reserve Bank governor suggests “we”
are to blame through our consumption patterns for a rate rise he is, in part,
correct. That the Reserve Bank had no choice, as suggested by John Howard, is
also correct. They had no choice because we do have consumption and investment
patterns that are problematic. Moreover, they had no choice because we limit the
tools with which we manage the economy.

The use of interest rates as a blunt
management tool to reign in economic activity and inflation works, roughly, but
is problematic. It is imperfect and indiscriminate in its effect on economic
participants who do not necessarily contribute to inflationary
stimulators.

As
an example, someone occupying their own home, paying a mortgage, spending an
average wage on basic living functions such as groceries, mortgage and utilities
payments, perhaps (though less likely) saving a part of that wage (either
through bank deposit or superannuation) and utilizing a smaller component in
discretionary spending is not, in the greater scheme of things, overly
contributing to inflation. It would appear that this modest lifestyle is the
exception. If you are one of these people, you will be underwriting the cost of
interest rate rises for the behaviour of others.

There
are “external” factors. Purchase of fuel now requires greater expenditure but
will, in many cases, result in less use of fuel as and where possible. Food
costs have been going up, in part because of fuel charges, in part because of
seasonal factors. But whilst cutting into wages are not, in and of themselves,
inflationary. The exception to this is when our incredible expectations continue
to demand bananas at whatever the cost and when an unbridled profit motive
continues to underwrite shareholder expectations. However, inflationary effect
in this area can be prevented through market signals sent by consumers (reducing
demand, profits for the supermarkets, and our waistlines).

The
inflationary cycle kicks in when there is a price rise (food, fuel or otherwise)
followed by a wage rise. This is something the ACTU has never understood. Each
time the ACTU demands yet another wage rise it hurts retired people living on a
fixed income. Prices rise and the purchasing power of the retired is hit. For
some reason the ACTU has always acted as if it hates retirees. For those living
on deposited funds, and reliant on interest levels for greater income, a rate
rise has a short term benefit. But these are people who essentially have
relatively fixed expenditure patterns, that change only when a larger quantum of
discretionary income is made available. A rate rise dampens expenditure at the
younger end of the consumer spectrum but allows a greater expenditure pattern to
occur at the top end.

Let
us not forget the inflationary effect of the eternal drive for profit. The ACTU
and its ilk cannot share all the blame. When deregulation, competition and
globalization have been touted as delivering better quality at lower cost then
we can only assume, with increases in electricity rates, council rates, goods
and services, that other factors are preventing this happy state of affairs.
Some blame can be attributed to environmental compliance costs, increased
quality (though not much) through new processes and geographical factors. The
reality is however, that were it not for competition and the underwriting of
inflation prevention in Australia by Chinese manufacturing, market
inefficiencies and a profit motive driven to excess would be prevailing. As
would inflation.

The
obsession with housing as an investment vehicle in Australia has been with us
for many years. It was exacerbated by the flight of capital from the stock
markets at the collapse of the dot com bubble. The money had to go somewhere.
The obsession has continued (notably during the period 1999 – 2004), with
investment into apartment and housing stock at profligate levels. Meanwhile
“investors” in the eastern states have turned their attention to other states,
while property purchases have been significant from off-shore interests,
contributing to price rises across the nation. There are now no inexpensive
places to live. The focus on property has driven a huge demand for credit which,
in turn, has driven an increase in prices as a result of wage and salary demands
to meet payments. (Our debt exposure continues to sit above 140% of income, an
extremely dangerous situation). It is a vicious see-saw which has resulted in a
generation of young people with no chance of ever owning their own home. Our
housing reliant investment focus has been an inflation
stimulator.

That
lack of housing opportunity has also fueled consumption activity for luxury,
non-durable and other goods and services by individuals who see no real future
in housing (it being unattainable) and who regard superannuation as so far away,
in the immortal view of the young, that it is ignored. An ever present
advertising fraternity (characterized by the likes of Singleton, Murdoch and
Adams – yes, that Adams, he was originally an
advertising man) and a population with an insatiable appetite for
immediate consumer level entertainment and satisfaction has its results. In
effect this has led to the classic challenge of inappropriate allocation of
resources. Debt has not been paid down and the Australian lifestyle, such as it
is, has continued apace.

Even
more damaging has been the fact that over the last 10 years, under the
stewardship of the Howard Government, there has been, proportionally, less
expenditure on those areas that are likely to underwrite the nations prosperity
in times ahead, viz: education, advanced manufacturing, value adding and high
end service provision. The Labor opposition has been absent during much of this
time, to their eternal shame.

The
problem we now have is that, again, we are faced with the potential not just for
this rate rise but a second and, likely, a number more. So
much for Costello’s claim of having slain the inflation dragon. The
compound inflationary effects of fuel costs (not alleviated by a removal of the
fuel tax, the GST and the fuel tax on the fuel tax – no typographical error
there – two taxes and a tax on a tax continuer to apply to fuel, putting the lie
to Howard’s claim he has no control over fuel prices), our consumption choices
and our debt levels mean that we must have higher interest rates apply, under
the current monetary system, in order to prevent an inflation surge. We have not
seen it for some time because we have been fortunate economically. Now however,
with the potential for a downturn, albeit relative, in resource demand – and
unsustainable consumption patterns – the cracks are showing themselves. This
will end in tears with even more people pushed out to the margins. The division
between the haves and have-nots is broadening.

If
use of the broad interest rate level by a central bank board of dubious
qualification and quality should be a tool of last resort what is an
alternative?. A variable GST, able to be applied by select good, service or
geographical region, collected at the point of transaction in real time, may be
more appropriate, or at least be placed within the limited armamentarium
available to exercise economic control. Had Michael Carmody had any vision he
would have looked to develop, using extant transaction and EFTPOS methods, a
real-time GST collection. This would massively reduce the unproductive burden on
consumers and business operators, as well as the exorbitant collection and
administration cost the system provides in its current form. (The same argument
applies to Medicare, who should have been able to introduce real-time
transaction and rebate processing ten years ago when it was
suggested).

A
real-time, variable GST would enable the consumption patterns cited by RBA
Governor MacFarlane to be selectively targeted. It would discriminate against
those engaged in inflationary behaviour but not against those otherwise engaged
in economic activity. It would also provide opportunity to selectively stimulate
sectors of the economy and free up a considerable level of sequestered
productivity, currently devoted to compliance and collection tasks. The approach
would enable real-time economic monitoring, in terms of transaction records,
with data deidentified to ensure the privacy of individuals. Moreover,
geographic reporting would be highly accurate, enabling regional inflationary
hotspots to be targeted.

The
blunt interest rate tool simply dampens economic activity in areas which just
don’t need dampening. It hits people who, individually, may not be net
contributors to inflation but who may be struggling. It is slow in its effect
and there is a delay response which makes modeling and prevention of
overshooting on economic braking difficult.

Real-time
variable GST is not beyond the realm of current off the shelf technology or
reporting systems. At the very least it would provide options in both fiscal and
monetary management and would generate data that would undoubtedly be more
accurate than any Treasury forecast or ATO estimate.

Opponents
will argue that it is revisiting the fiscal approach of the 1950s and ‘60s but
in fact is quite different. The fiscal approach taken then was problematic
because its effect was not able to be measured in a timely or accurate manner.
This applies to monetary controls now. A real-time variable GST (RV-GST) system
has much to commend it and it is time we considered this as a national priority.

Of
course, it would demand we have communications infrastructure of a first world
nation standard, currently lacking in Australia (at third world standards in
comparative urban terms), but with a devotion to infrastructure development we
might get there.

Peter Fray

A lot can happen in 3 months.

3 months is a long time in 2020. Join us to make sense of it all.

Get you first 12 weeks of Crikey for just $12. Cancel anytime.

Peter Fray
Editor-in-chief of Crikey

12 weeks for $12