The silver lining to this otherwise taxing tale, is that it mostly reflects a household sector that is “jobbed-up” and earning good income. So, is the whinging about higher mortgage rates a bit overdone? Not exactly.

Total gross income rose 5.4 per cent in the year to the December quarter, but disposable gross income rose only 3.3 per cent (that’s once tax and interest repayments are taken out). Once you factor in inflation of more than 7 per cent, fewer households can spoil themselves on takeaway night. And of course, some are having to give up a lot more than a Friday-night treat.

Importantly, as RBA assistant governor Christopher Kent reminded us this week, monetary policy has long and variable lags. That means some households haven’t yet felt the full whack of higher interest rate payments. Many are likely terrified of the damage to be inflicted when they fall over the so-called mortgage cliff – when the low fixed rate mortgages locked in during the pandemic expire.

The Reserve Bank estimated that scheduled mortgage payments are projected to reach a new record this year (and their calculations don’t include potential further rises).

Will the tax-take get much higher? It will increase, but interest rates will drain disposable income more. Most of the labour market improvement is likely to be behind us because the economy is slowing. Also, some of the latest surge in tax receipts is “catch-up” tax that won’t need to be repaid.

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The numbers beg the question: are the stage three tax cuts so bad if they put a bit more money back into already squeezed household budgets? If we think that households deserve a break from tax brackets that don’t reflect inflation – when real wages are falling and interest rates are rising – then yes. The tax cuts due to start in July 2024 will benefit people with annual incomes starting at just $45,000. That’s not a high salary.

But the answer is no if we are more concerned that additional dollars in consumers’ pockets are inflationary – especially when the public sector as a whole is making its own contribution to inflation with enthusiastic spending.

On balance, I think the stage three tax cuts are reasonable because they will land when our inflation problem is behind us. In many ways, these are not even stimulatory when viewed over a multi-year horizon because they are just returning the tax that inflation rushed.

From an equity perspective, there is a strong argument to reconfigure the tax cuts to consider the impact of changes across different income groups in the economy. Mortgage holders who have recently taken on debt should, most sensibly, be given tax relief – although that’s easier said than done.

It also highlights that the Reserve Bank is the best institution to manage inflation. Monetary policy is flexible and can be quickly adjusted to suit the economic times, although it is far from perfect from an equity perspective. Fiscal policy is multilayered, slow to implement and can often create unintended economic consequences.

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The sad reality is that super-loose fiscal and monetary policy settings during the pandemic were a significant part of the reason we have an inflation problem now. If loose policy had not been reversed, high levels of inflation would have continued, and that’s not in anyone’s interest – especially those on low incomes.

If inflation took the cost of a loaf of bread to $20, imagine the cost of takeaway night. It would be a treat reserved for the very few. So be careful whose face you pin to the dartboard. It could be the wrong one.

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