Australian living standards have fallen more than 10 per cent in the past two years. And yes, you read that right. Prices have sprinted ahead of wages. Mortgage rates have soared. And so has the tax take, with personal tax now at a record share of incomes.
Much of the world has seen similar pain, but Australia’s drop in our living standards is bigger than most – and larger than anything we’ve seen in past recessions. No wonder the electorate is grumpy.
While optimism has been returning for several months across the United States, Europe and New Zealand, families in Australia are almost as sour as we were back when COVID was at its scariest.
Yet while your pockets are empty, government coffers are full. So why don’t they do more to help?
You’ll be glad to hear Prime Minister Anthony Albanese just asked Treasury for ideas to “take pressure off families on cost of living without putting pressure on inflation”.
But that’s easier said than done. After all, if governments had a magic wand to improve family incomes without also boosting inflation, then they’d have been waving it madly by now.
The reason why cost-of-living measures are modest isn’t that governments here and around the world don’t care – it’s because they’re trying to do something that’s really difficult.
The problem is: when governments give families money, it helps with your cost-of-living challenges. But when you then spend that money, it adds to inflation and hurts your cost of living, so you can end up back almost at square one.
However, because the “help” to your cost of living (from government assistance) is obvious, whereas the “harm” (from the resultant worsening in inflation) is not, the politics of “cost-of-living relief” is much better than its economics. That’s why all the signs are that the May budget will see new policy ideas headed our way.
Yet, there is a risk that attempts to improve things will only end up making them worse. That’s why Treasury will have to keep its thinking cap on to come up with some good ideas.
So here’s mine …
Australia raises about $17 billion a year from taxes on imports. (There are all sorts of exemptions, notably due to free trade agreements. But many products are taxed 5 per cent on arrival here, raising more than $1 billion, with the remainder dominated by the GST paid on imports.)
So, how about we halve our taxes on imports for a year? Doing that eases the cost of living – your dollar will stretch further in buying all sorts of stuff. Even better, much of the resultant extra spend will be on imports (because it is suddenly cheaper to buy from overseas than before).
That’s an important part of this plan because higher imports don’t increase the demands being placed on Australia’s stretched economy, and so they’re less likely to add to inflation here. (See the magic? This idea would raise inflation in other nations more than it raises inflation in Australia.)
This would only be a temporary tax cut because the problem with your cost of living is also temporary.
The important gain is that there’s a cost-of-living benefit to Australian families. But it’s just as important that the improved cost of living isn’t then lost in a puff of inflation. That’s why this idea aims to limit any boost in demand for Australian businesses – because that’s the very inflation risk that this measure is trying to avoid.
Halving import taxes could reduce consumer prices by about half a per cent – thereby making both families and the Reserve Bank happier.
For those with an eye on the politics of this, it would also neutralise the inflation risks of the stage 3 tax cuts.
And, completely coincidentally, prices would jump back up after the next election.
Is this a perfect suggestion? No. GST revenues go to the states, so the feds would have to get their agreement to be topped up by grants for a year instead – or, if the states won’t play ball, there’d need to be a separate import rebate.
And it isn’t just the legalities that’d be tricky. The economics would be too. Not all the cost-of-living relief from cutting taxes on imports would end up being either spent on imports or saved – the two things that wouldn’t threaten a worsening in inflation. But plenty of it would go to imports or savings, making this idea rather better than most.
So here’s hoping …
Source: Thanks smh.com