{"id":6115,"date":"2026-05-06T22:00:11","date_gmt":"2026-05-06T22:00:11","guid":{"rendered":"https:\/\/www.europesays.com\/australia\/6115\/"},"modified":"2026-05-06T22:00:11","modified_gmt":"2026-05-06T22:00:11","slug":"what-if-we-used-taxes-or-superannuation-to-control-inflation-not-just-interest-rates","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/australia\/6115\/","title":{"rendered":"What if we used taxes or superannuation to control inflation, not just interest rates?"},"content":{"rendered":"

Would you rather hand over an extra $300 a month to your bank or the federal government?<\/p>\n

I’m guessing most people would emphatically reply, “neither”. But if one or the other was going to get your cash, which would it be?<\/p>\n

The bank, which will pay it out to savers, bondholders and shareholders?<\/p>\n

Or the government, which can use it to reduce debt, fund public services and build infrastructure?<\/p>\n

Currently, governments have decided that the bank and its investors will get your cash because they have outsourced inflation management almost entirely to the Reserve Bank.<\/p>\n

As RBA governor Michele Bullock said at this week’s press conference, interest rates are the only way the bank has to lower demand and get inflation under control.<\/p>\n

Loading Instagram content<\/p>\n

“The interest rate is the tool we’ve got,” she responded to a question from my colleague Emilia Terzon.<\/p>\n

“It’s blunt, it does affect people in different ways, but it’s the best way we’ve got of controlling inflation.”<\/p>\n

On a fairly typical $700,000 mortgage, the three rate rises this year are costing a borrower $317 in extra interest payments each month.<\/p>\n

But what if there was another way?<\/p>\n

Interest rates haven’t always been the primary tool to control inflation<\/p>\n

The last time interest rates were this high, during the post-COVID inflation surge, veteran independent economist Saul Eslake answered ABC audience questions<\/a> about whether there were non-rate alternatives to combat high inflation.<\/p>\n

He went back to economic history, pointing out that changing tax rates was a common method to do this in the more regulated economy of the 50s and 60s.<\/p>\n

“In 1951, in response to the double-digit inflation triggered by the Korean War wool boom, the Menzies Government imposed a 10 per cent surcharge on personal income tax, increases in company tax rates, a requirement that companies pay 10 per cent of their estimated tax liabilities in advance, and an increase in the rate of sales tax from 8.5 per cent to 12.5 per cent,” he noted.<\/p>\n

As Eslake pointed out, this approach had similar drawbacks to raising interest rates.<\/p>\n

Is there a better way to tackle inflation?<\/a><\/p>\n

Numerous people have contacted the ABC asking questions about interest rates and offering suggestions about possible alternatives. We put some of those questions to an economist.<\/p>\n

“These measures ‘worked’, inflation fell from a peak of 23.9 per cent over the year to the December quarter 1951 (the highest ever recorded in Australia), to a low of 1.6 per cent two years later,” he noted before adding:<\/p>\n

“But at the price of sending Australia into its first post-war recession (real GDP shrank by 0.8 per cent in 1952-53, which represented a drop in real per capita GDP of 2.8 per cent), and pushing the unemployment rate up from 1.1 per cent to 2.9 per cent, a figure considered extremely high in those days.”<\/p>\n

Eslake said the extreme measures were in part necessary because the Menzies government waited until after the April 1951 election to act on inflation, even though it was already running at 12 per cent.<\/p>\n

As another leading Australian economist, Nicholas Gruen, put it in a late 90s paper<\/a>:<\/p>\n

“The central problem is that fiscal expansion is generally more politically popular than contraction, which generates a bias towards expansion.”<\/p>\n

In other words, it’s much easier for governments to spend more money on public goods, services, and payments, and to cut taxes, than to do the opposite, even when that’s what the economy needs.<\/p>\n

With stagflation risks rising, what lessons could the treasurer learn from the past?<\/a><\/p>\n

With stagflation risks rising, what lessons could the treasurer learn from the past?<\/p>\n

This is especially true when an election is looming.<\/p>\n

That is one of the principal arguments against using so-called fiscal policies, such as changing tax rates, for economic management; politicians can’t be trusted to put the national interest above their political interests.<\/p>\n

Another argument is that it takes too long to change tax rates because such changes have to be passed by parliament.<\/p>\n

As Bullock noted: “It’s not a very nimble way to address inflation.”<\/p>\n

Is a ‘Central Fiscal Authority’ the answer?<\/p>\n

However, in that same 90s paper, Gruen advocated a potential solution for both of these problems, one supported by another eminent Australian economist, Ross Garnaut.<\/p>\n

That is to create a “Central Fiscal Authority” (CFA), an independent board similar to the Reserve Bank, but with the power to tweak government tax settings within a predetermined range.<\/p>\n

Economic independence<\/a><\/p>\n

It might be time for an independent authority be tasked with the responsibility of fixing our economy, writes Gareth Hutchens<\/p>\n

For example, parliament might change the income tax legislation so that the “base rates” are adjustable by up to 2 percentage points in either direction at the discretion of the CFA.<\/p>\n

Company taxes and potentially the Goods and Services Tax (GST) could also be included, although any change to the GST would require the agreement of the states.<\/p>\n

Such a body wouldn’t replace the RBA or eliminate the need to raise and lower interest rates altogether, but it would work alongside, or even within, the central bank to boost demand when the economy is weak or reduce demand when it is overheating, and inflation is too high.<\/p>\n

That should mean the RBA could be less aggressive with both rate hikes and cuts, reducing the volatility in borrowers’ repayments and in savers’ interest returns.<\/p>\n

This increased interest rate stability might also improve confidence in investment decisions for both individuals and households.<\/p>\n

In his 90s paper, Gruen argued that such a system would have several advantages over relying solely on the central bank.<\/p>\n

Firstly, he argued that changing tax rates “can influence the economy more quickly and in a less sector-specific way than monetary policy, which has very uneven effects”.<\/p>\n

RBA risks recession<\/a><\/p>\n

Monetary policy trade-offs are getting worse \u2014 the Reserve Bank of Australia is confronting rising inflation and downgraded growth forecasts. And there’s nothing much it can do.<\/p>\n

With the PAYE (pay as you earn) system in Australia, temporary changes to income tax rates could be implemented within a fortnight for most workers, which is quicker than interest rate changes that usually take at least a couple of months to affect mortgage repayments and between 12 and 18 months for their full economic effect to be felt.<\/p>\n

Unlike rates, all taxpayers would be affected, not just those with debt.<\/p>\n

Many savers would also see part of their gains from higher interest rates eroded through increased taxation of their interest earnings.<\/p>\n

If the revenue raised were used to reduce government debt, then that would potentially remove cash from the economy more effectively than higher interest rates, which predominantly redistribute money from debtors to savers.<\/p>\n

Finally, as Gruen argued, markets and the wider public might have more faith in an independent fiscal authority than they do in government, as is generally the case with the Reserve Bank.<\/p>\n

“As with monetary policy, greater policy independence could improve not only the policy settings chosen but also their effectiveness, by enhancing policy credibility.”A CFA still comes with drawbacks<\/p>\n

Despite its merits, Gruen’s CFA idea also comes with drawbacks.<\/p>\n

The first would be whether it is constitutional in the first place.<\/p>\n

The House of Representatives is the body charged with taxation, and there would be a serious legal question about whether it could legislatively delegate a degree of this authority to independent technocrats.<\/p>\n

The reason the constitution enforces this ancient Westminster convention is that forcibly taking money from people is seen as one of the ultimate intrusions on personal liberty and therefore a power that properly resides with the “people’s house”, not the Senate or the executive government.<\/p>\n

Another risk that Gruen himself identifies is that economic technocrats may do no better job than politicians, perhaps even worse.<\/p>\n

\"Michele<\/p>\n

Michele Bullock, and particularly her predecessor Philip Lowe, have come in for criticism over their handling of monetary policy. (ABC News: Andrew Kennedy)<\/p>\n

“It is possible that the professional culture of the CFA could come to value fiscal conservatism too highly,” he observed, noting the tendency of many economists towards smaller government and balanced budgets.<\/p>\n

While affecting a larger group than interest rates, which disproportionately hit highly indebted recent home buyers, changing income tax rates doesn’t affect those who aren’t paying income tax.<\/p>\n

Ordinarily, you would think this was a low-income group who shouldn’t bear the burden of reducing inflation, but, due to Australia’s tax exemption for most superannuation income in the retirement phase, many wealthy retirees would also escape the pain, just as most of them do currently with rates, because they have typically paid off their homes.<\/p>\n

Could super contributions be increased instead?<\/p>\n

The same issue applies to a popular alternative suggestion: a temporary increase in the compulsory superannuation guarantee to force workers to increase long-term savings when inflation is too high.<\/p>\n

“Like interest rates, it would leave older people (who are, in general, richer than younger people) unscathed, since older people typically aren’t making contributions to superannuation,” Eslake argues.<\/p>\n

Moreover, those closer to retirement would be able to access that money sooner than those further away, again putting a disproportionate burden on the young.<\/p>\n

On the plus side, however, is that, unlike higher mortgage repayments or taxes, you would at least get your money back in the end (with investment earnings on top).<\/p>\n

Another downside, though, is that putting money into super doesn’t take it out of the economy in the same way as taxes used to pay off government debt.<\/p>\n

That means it probably wouldn’t be as effective at reducing inflation.<\/p>\n

Instead, increased super contributions are bound to flow as investments into the share market, property sector and elsewhere, boosting asset price inflation and the wealth effect, albeit with an increasing leakage overseas as Australia’s super pot outgrows the available local investment opportunities.<\/p>\n

It would also face the same legislative delays and challenges as the idea of temporarily adjusting tax rates.<\/p>\n

LoadingIs there any way governments can help out the RBA?<\/p>\n

In the absence of a scheme like that proposed by Gruen, the Reserve Bank (and Australia’s mortgage borrowers) are counting on their elected representatives to do their bit to fight inflation.<\/p>\n

“When governments are spending a lot of money, and we’re running up against capacity constraints, then they do need to think about whether or not there are ways they can help the inflation problem by looking for ways to constrain demand,” Bullock said in answer to a question from me about this issue at her post-meeting press conference this week.<\/p>\n

\"A<\/p>\n

Michele Bullock was appointed as RBA governor by current Treasurer Jim Chalmers in 2023. (AAP: Lukas Coch)<\/p>\n

Just days out from the federal budget, Bullock expressed her confidence that the Albanese government was doing just that.<\/p>\n

“I personally think that the treasurer, privately and publicly, is focusing on that,” she said, before adding, “But it’s not just the federal government, it’s the state governments as well.”<\/p>\n

Bullock also pointed out that there were “automatic stabilisers”, such as unemployment benefits and bracket creep in income tax rates, that helped with economic management, concluding that she couldn’t see a case for fiscal policy to take a much bigger role.<\/p>\n

“I don’t think actively using fiscal policy to try and address the cycle is necessarily the right way to go,” she said.<\/p>\n

But surely it’s a discussion worth having at the highest levels.<\/p>\n","protected":false},"excerpt":{"rendered":"Would you rather hand over an extra $300 a month to your bank or the federal government? I’m…\n","protected":false},"author":2,"featured_media":6116,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[22,21,7451,2077,7436,1762,7452,1765,7456,7453,7447,7454,7449,7448,7455,1764,5839,1763,7450,546,7457],"class_list":{"0":"post-6115","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-australia","8":"tag-au","9":"tag-austrlia","10":"tag-central-fiscal-authority","11":"tag-economy","12":"tag-gst","13":"tag-inflation","14":"tag-inflation-targetting","15":"tag-interest-rates","16":"tag-lever","17":"tag-macroeconomic-policy","18":"tag-michele-bullock","19":"tag-monetary-policy","20":"tag-nicholas-gruen","21":"tag-philip-lowe","22":"tag-rate-rise","23":"tag-rba","24":"tag-reserve-bank","25":"tag-reserve-bank-of-australia","26":"tag-saul-eslake","27":"tag-tax","28":"tag-tool"},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/posts\/6115","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/comments?post=6115"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/posts\/6115\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/media\/6116"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/media?parent=6115"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/categories?post=6115"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/tags?post=6115"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}