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Question for Gareth please If , as all economists state, the reason for rate rises is to curb inflation by inhibiting consumer spending , why doesn’t the government give he RBA the power to adjust the GST rate. This would surely impact consumer spending across the board to share the pain , could be targeted by exempting non discretionary expenditure and would have much quicker impact than rate rises surely
- Phillip
I love this question.
It gets to the heart of what we're all experiencing.
In an extreme inflationary episode like this one, we really get to experience how inflation has distributional consequences.
That is, inflation redistributes everyone's purchasing power. It can diminish it for some households (like wage earners and pensioners) while increasing it for other groups (like asset owners and corporations).
But we also see how the policy tools we use to tackle inflation also have distributional consequences.
For example, under the current system, the main tool policymakers use to tackle inflation is interest rates.
By lifting interest rates, the RBA forces households with a mortgage to pay more interest to their banks, thereby taking away some purchasing power from those households so they have less money to spend at the shops.
But Phillip wants to know if there's another way.
He wants to know: what if the RBA manipulated the rate of the GST instead? What impact would that have?
Well, it would lift the prices of consumer goods (that have a GST applied to them) by a uniform rate.
Would that help to bring prices down? You'd be lifting prices everywhere, on top of the price increases that have already occurred, to hopefully stop people buying as much.
The distributional consequences of that policy would be different to the current system.
For one, you'd be asking people who aren't well-off enough to have a mortgage (like renters and some pensioners and young adults) to pay even more at the shops than they are currently, and those price rises would come very quickly.
Anyway, it's a great thought experiment.
If you wanted to go down that path, you'd have to think about all of the possible consequences that would come from it. The current system is all built around the manipulation of interest rates.