• 23/06/2024

Should government take responsibility for inflation with other options than just the blunt tool of the RBA’s interest rates

The Reserve Bank of Australia (RBA) is responsible for setting the official cash rate, which is the interest rate that banks use to borrow and lend money. The RBA raises interest rates when it wants to slow down the economy and lower inflation. However, there is debate around whether the Australian government should take responsibility for managing inflation and use other options, such as tax changes or cutting government spending, instead of relying solely on the blunt tool of interest rates.

One option that the government could consider is increasing the Goods and Services Tax (GST). The GST is a consumption tax that is currently set at 10%. Increasing the GST would raise revenue for the government, which could be used to reduce the budget deficit or fund new infrastructure projects. However, increasing the GST would also increase the cost of living for many Australians, especially those on low incomes.

RBA Cash Rate Target March 2023

Another option is to cut government spending. This could be done by reducing funding for certain programs or eliminating inefficiencies in the public sector. Cutting government spending would help to reduce the budget deficit, which would in turn help to control inflation. However, cutting government spending could also have negative impacts on the economy, especially if it leads to job losses or reduced consumer spending.

While these options could be effective in managing inflation, they also come with risks and challenges. Increasing the GST or cutting government spending could have negative impacts on certain sectors of the economy and could cause hardship for some Australians. Additionally, these options could be politically unpopular and difficult to implement.

Ultimately, it is important for the government to work with the RBA to manage the economy in a responsible and effective way. The RBA has the expertise and experience to set interest rates at appropriate levels to manage inflation, but the government can also play a role in managing the economy through tax changes and government spending. It is important for the government to carefully consider the risks and benefits of any policy changes and to work collaboratively with the RBA to ensure that the Australian economy remains healthy and stable.

Doug Daniell – Guest Contributor

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