Hi Chris, thanks for your question.
that’s a great question. This goes to the heart of the problem we are facing.
The Reserve Bank faces conflicting demands.
On the one hand, he wants to raise interest rates away from the emergency lows they hit during the pandemic so they stop distorting financial and housing 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 cause unemployment or even a recession.
So he’s trying to walk a fine line.
But your question about the existence of other possible options to fight inflation is really interesting, and there is a debate about it.
In the modern era, when “fiscal” policy (public spending and taxation) is out of fashion as a demand management tool except in emergencies, central banks are expected to control the ‘inflation.
In previous eras, this was not the case.
During the 1950s, for example, when the Australian government was facing much higher inflation than we have today, thanks to the Korean War, Prime Minister Robert Menzies decided to stamp out inflation by raising taxes.
He 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 crafted the budget, considered it one of the best budgets ever. 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.
Last month, former Treasury Secretary Ken Henry announced a “windfall tax” on gas exports that would help reduce the price of gas for Australian households, which has been a major contributor to current inflation.
And that’s just an idea.