Hi Chris, thanks for your question.
This is a great question. It goes to the heart of the problem we are dealing with.
The Reserve Bank faces conflicting demands.
On the one hand, he wants to raise interest rates from the emergency low levels they reached during the pandemic so they stop distorting financial and real estate markets. He also doesn’t want people to think he’s lost control of inflation, so he wants to raise rates to keep people’s expectations “anchored”. But he also knows that if he raises rates too quickly it could lead to unemployment, and even a recession.
So, you’re trying to walk a fine line.
But your question about there being other possible options to address inflation is a really interesting one, and there is debate on that point.
In the modern era, where “fiscal” policy (government spending and taxes) has fallen out of fashion as a demand management tool, except in emergencies, central banks are expected to control inflation.
In earlier times, this was not the case.
During the 1950s, for example, when the Australian government was facing much higher inflation than we are seeing today, thanks to the Korean War, Prime Minister Robert Menzies decided to stamp out inflation by raising taxes.
It increased corporate tax, income tax, excise tax and sales tax. Among a list of other things.
At the time, the financial media dubbed it the “Horror Budget” (because of the higher taxes), but Arthur Fadden, the treasurer who drew up the budget, considered it one of the best budgets of his political career .
Anyway, that’s a long way of saying that you can suck inflation out of the system in different ways, using different tools, but tax increases have fallen out of favor in the modern era.
Because?
Last month, former Treasury Secretary Ken Henry said a “windfall tax” on gas exports would help reduce the price of gas for Australian households, which was a major contributor to current inflation.
And this is just an idea.