Should workers support using fiscal policy against inflation?

The Australian Workers’ Union commissioned Roy Morgan Research to conduct a poll on the idea that half Labor’s promised tax cuts should be diverted to superannuation.

As in the Galaxy poll of Queenslanders a couple of weeks earlier, a bit over a third of voters wanted the tax cuts in full. In the Galaxy poll, 55% wanted all the tax cuts to be put into superannuation. In the Morgan Poll, 50% wanted the money to be split half each between tax cuts and superannuation.

According to AWU National Secretary Paul Howes:

The poll shows voters are economically literate, and politically sophisticated enough to understand that in the fight against inflation and rising interest rates the option of increased superannuation rather than tax dollars in the pocket is smart stuff.

But should workers really be so keen on establishing the idea that budgetary policy should be used to combat inflation? As RBA Governor Glenn Stevens pointed out in a recent speech:

I would hazard a guess, though, that a good many people who are today paying higher interest rates would instead pay higher taxes in a world where fiscal policy was used more actively to manage the business cycle.

Our guesses don’t need to be too hazardous. The 2006 General Social Survey showed than in the top two quintiles, the people who pay most of the net tax in Australia, nearly half have mortgages, and around a quarter owe $150,000 or more.

At the moment, we are in the unusual budgetary position of having large surpluses. A more usual situation would be that a tightening of fiscal policy would mean an increase in taxes rather than a rejection, redirection, or postponement of tax cuts. So a more active use of fiscal policy would mean that many of the same people would be hit by both levers of anti-inflation policy (disclosure: I am one of them).

And while the RBA will cut interest rates when they deem it prudent to do so, higher taxes won’t go away so quickly. Tax rates rarely change more than once a year, and once they have taken the political heat of imposing extra taxes governments will be reluctant to give up the revenue.

It may well be prudent for Australian workers to put more money into their superannuation accounts. But creating an eco-political orthodoxy that taxes should play a regular and significant role in controlling inflation is something many of them might end up regretting.

8 thoughts on “Should workers support using fiscal policy against inflation?

  1. I’m a touch confused. Are you trying to make a slippery slope argument, ie, if we withhold tax cuts now, that will pave the way for more active fiscal policy (tax increases) in the future? Is Kevin’s razor gang also a form of fiscal policy?
    I would have thought that the debate over the proposed round of tax cuts is a response to an exceptional situation, rather than a debate over the future of economic policy in Australia. Particularly given that the electorate hasn’t seen, and would vociferously oppose, any nominal (as opposed to bracket creep) tax increase in decades.

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  2. Iamspam – While the huge surpluses are an exceptional situation, inflation management will be with us forever. There have been various arguments in recent years that fiscal policy should play a greater role in this task, partly because it would ‘spread the pain’. In some versions of the argument, there would be an independent fiscal authority – in practice it would have to be the RBA to achieve coordination – that could move tax rates up or down purely for demand management purposes.
    Once the principle of using fiscal policy for demand management is entrenched, the independent fiscal authority idea may have some prospect of being adopted. If we are serious about using fiscal policy, that makes more sense that the current very slow budget process, which will take many many months to have any significant impact.

    But that point Stevens was making, and I was supporting, was that because the people who pay a lot of tax are often the same as the people who pay a lot of interest it could focus the pain rather than spread it.

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  3. Australia should do as Singapore does and utilise compulsory personal superannuation contributions to control inflation. The rate of personal contributions can then be adjusted to slow or boost consumption.

    This means that instead of hitting homeowners hard with mortgage increases to control inflation, inflation can be controlled by a method that increases saving while reducing consumption at the same time. Given only about 30% of the population have mortgages, this also means that inflation will be better controlled where more of the populations spending habits are controlled.

    Such monetary policy could be utilised in conjunction with with interest rates, tax and limited use of fiscal policy. The task of raising/lowering of compulsory personal superannuation rates could also be undertaken by the RBA.

    This method would be better than independently adjusting tax rates which would be much more controversial to the general public.

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