Wednesday, February 20, 2008

Fighting Inflation in Australia using Super

Australia is one of the few nations in the world where the interest rates are rising and rising hard. Commodities boom, over indulgent consumption and 35 year lows in employment have pushed the economy to the limits of capacity.

The debate in Australia is about how to fight the inflation and the recurrent need for the RBA to raise interest rates to combat inflation now outside its 2-3% band. The Rudd Government has brought back fiscal policy to try and help fight inflation by aiming for a surplus of 1.5 to 2% and avoid the RBA rasing interest rates further (unlikely). Although given that for the past 5 years or so the budget surplus has always come in higher that the forecasted 1% its hard to see how a measly 1.5 to 2% is going to make much of difference. It probably needs to be 2.5 to 3%.

The otherside of the debate is how raising interest rates is a blunt policy instrument for fighting inflation, only effects third of households etc. What is missing from the debate is discussion on what other levers that could be provided to the RBA to manage the economy. In many economies there probably aren't many other levers that central banks could use. But Australia has compulsory super for a majority of employed people. The issue is to remove spending from the economy or put another way to increase savings and reducing consumption. Giving the RBA the ability to manage the percentage of income that is paid into super would give the RBA another lever to pull.

The advantages I see in using super contributions this way are;

  • It increases the savings rate across a very large majority of households
  • It does not directly effect the price of business investment the way interest rates do
  • It is spread more evenly across the economy rather than concetrated in the 1/3 of households with morgages
  • Individuals don't lose the money, it is simply redistribute to return in the future
The biggest problem I see is the mechanics of actually performing the changes. However, this is a solvable problem as it could rolled into financial packages that most if not all businesses use.

Another possible lever is to allow the RBA to change tax percentages about a median point. But I see that being an even tougher operation and also more politically hazardous. It could be a rather useful tool to have in the back pocket though.

Tags: Superannuation, Inflation, Australia