Can Labor provide cost-of-living relief without feeding inflation and interest rates? An expert panel responds

Anthony Albanese says the government can’t afford to provide energy payments or other relief because to do so would put even more pressure on the RBA to raise interest rates – is he right? Three economists have their say

This week, the prime minister, Anthony Albanese, said he would not be pushing for payments for households to deal with the rising costs of energy, groceries and other financial pressures, because to do so would risk further inflation.

The easy option would have been for us to funnel these savings straight into a cash-splash, a one-off giveaway to buy a headline. Cheap politics and hugely expensive economics.

Not just because of the dollar cost. Not just because that’s ­exactly the sort of short-term ­approach that got Australia into this situation. But because the ­untargeted spending would make the problem worse.

Instead of helping households, it would only add to the inflationary pressures that are eating away at family budgets and devaluing wages. Fiscal policy needs to work with monetary policy, not contradict it.

But is all relief necessarily inflationary? What if cost-of-living payments are targeted at low-income earners or people on welfare payments? Can the government help households without hiking inflation?

Prof John Quiggin

University of Queensland, Laureate fellow

The economic situation facing the majority of Australian households is dire. However, the common framing of the problem in terms of the “cost of living” distracts attention from the real problem, which is the decline in the real purchasing power of wages. Having remained stagnant for years, wages have now fallen far behind inflation. Moreover, the average rate of tax paid is rising because of bracket creep and because of the expiry of the Morrison government’s low- and middle-income tax offset, which was not extended in the October budget.

Neither of these outcomes is likely to improve significantly during the current term of government. The budget papers predict a further decline in real wages this year, and only a partial recovery over subsequent years. And while those on high incomes will benefit from the stage-three tax cuts, there is nothing for those on incomes below $45,000. Even the indexation increases in pensions and benefits lag behind inflation by six months.

In response to this crisis, Albanese has said, in effect, that his hands are tied. First, he denounces relief for low-income earners as “a cash-splash, a one-off giveaway to buy a headline. Cheap politics and hugely expensive economics”. But the same is true, in spades, of the massive stage-three tax cuts, which Labor promised to implement for fear of losing a few marginal high-income voters.

If the stage-three tax cuts had been cancelled or deferred in the October budget, Labor would have had room to improve the position of the worst-off voters, while maintaining a broadly stable ratio of debt to GDP. But Labor was too frightened of negative headlines to grasp this nettle.

Albanese’s other argument is that any expansionary fiscal policy would be cancelled out by the RBA, which would raise the interest rate. He observed that “fiscal policy needs to work with monetary policy, not contradict it”.

There’s an element of truth here, but also a huge problem. As well as maintaining price stability, the RBA is supposed to act to achieve full employment and “the economic prosperity and welfare of the people of Australia”. But under our current policy approach, economic welfare is declining. Unemployment is expected to rise, and real disposable incomes to fall, even in a situation where GDP is growing steadily.

Under the policy of central bank independence, first introduced under the Howard government, there is nothing that can be done about this. The Reserve Bank pursues its inflation target without regard to the policies of the elected government. But this policy has not served Australia, or other countries that have followed this course, at all well. It was necessarily abandoned during both the GFC and the Covid lockdown. If fiscal policy must work with monetary policy, the reverse should also hold true.

It is clear enough that our current economic policy institutions are not fit for purpose. Sadly, that includes the policies of the Albanese government.

Angela Jackson

Lead economist, Impact Economics and Policy

While it is accurate that any additional cost-of-living support would increase aggregate demand across the economy and add to inflationary pressures, if properly targeted these impacts can be minimised, and need to be weighed against the costs of placing more and more Australians into extreme poverty. Poverty itself is costly in terms of increasing rates of poor mental and physical health that reduces participation and productivity, increasing inflationary pressures through reducing the productive capacity of the economy.

Our system automatically provides some protection, with government income support payments indexed every six months to inflation. However, for people relying on government support payments that already placed them in poverty that are now facing double digit increases in rent and energy prices, this is not enough to cover their rising living costs.

Countries around the world are grappling with how to support communities struggling under higher costs of living while not adding to inflation. The International Monetary Fund has advised countries to prioritise protecting vulnerable people through targeted support while keeping a tight fiscal stance to help fight inflation. This advice highlights the need for fiscal policy to protect low-income households from higher food, energy and housing costs.

The Albanese government should certainly not emulate the Morrison budget of March 2022, which provided untargeted and arguably reckless cost-of-living relief that fuelled inflation and made the Reserve Bank’s job of controlling inflation much harder. But the government should consider targeted relief for the lowest income households, consistent with the advice from the International Monetary Fund. Examples include lifting the maximum rate of rent assistance or a temporary increase in the energy supplement, which would help households with their week-to-week costs and be less inflationary than large one-off payments that provide a greater stimulus to the economy.

Managing the economy back on to a low-inflation path without causing a recession and widespread hardship will not be easy, but protecting the most vulnerable should remain our collective priority to minimise the long-term impacts on our economy and community.

Stephen Koukoulas

Managing director, Market Economics

A significant part of the extreme inflation problem relates to the economy overheating – growing too quickly, in other words.

Growth in government demand was an important part of this excessive growth.

The near 50-year low for the unemployment rate of 3.5% and GDP growth set to hit 6% are a legacy of easy monetary policy and reckless fiscal policy in late 2021 and early 2022.

With its series of interest rate rises since May, the RBA is taking away the monetary policy stimulus.

Fiscal policy, which was materially eased by the Morrison government, including in its pre-election budget in March 2022 when the inflation problems were being unleashed, needs to keep moving to a more neutral setting to take some of the heat out of the economy – to slow it down, in other words.

A return to low inflation is the only sustainable way cost-of-living pressures can be contained.

Handing out cash to households would have the effect of supporting already strong spending which would allow and encourage business to easily pass on higher prices, adding to inflation.

Under the current strategy, it is likely inflation will fall towards the RBA target during 2023 at a time when wages growth will probably lift to 4%. This is the path to reversing cost of living concerns.

Cash handouts would keep inflation higher for longer. It would also damage the already fragile budget deficit and it would mean the RBA would need to hike interest rates more than it would otherwise.

Equity and fairness issues relating to the financial pressure for low-income earners can be addressed in a revenue/stimulus-neutral way. If there was an intention to assist low-income earners, the government at a minimum would need to find spending or tax offsets elsewhere ensuring at worst a neutral impact on demand and inflation.

The opportunity to do this remains in place but could face the obvious political difficulty of imposing tax increases or spending cuts to some in the economy to fund any financial assistance for low income earners.


John Quiggin , Angela Jackson and Stephen Koukoulas

The GuardianTramp

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