Are Interest Rate Levers too Clumsy for a Teetering Economy?
I’ve been having a think lately about whether the use of Interest Rate movements by the Reserve Bank is actually too clumsy an instrument for effective economic management. The potential weakness has emerged only in recent times as the signs of a world-wide economic melt down have begun to expose one of the limitations of the GST as an interest mechanism that taxes consumption.
When the economy is booming and everyone feels rosy, the key requirement is to reduce paperwork and simplify processes to maximise effectiveness. There is little doubt that the GST method is a far more effective system when things are booming.
But I am starting to think that going for a one size fits all approach through a flat consumption tax may not be as great when the only measure left to slow spending is interest rates. Lifting interest rates invariably hits those who can least afford it the hardest. Already pressed to the wall to pay home loans or rents, there is often little discretionary spending left in poorer income families. Interest rate rises are a heavy punishment that in the end, capture many people who are sensible managers of their limited budgets. And frankly I think it is a clumsy and unfair approach.
Which is where I think there might be some benefit in re-visting the old ‘sales-tax’ model that the GST replaced. Not for the purposes of reinstating it but for the purposes of seeing if there is anything of value in the way it worked that could provide a more precise instrument to manage the economy.
The key attribute was the wild variation in taxation rates. That was also its downfall as things became too onerous for what tax level applied to what aspect of a product or service. But that variation could be something that a revamped approach to a GST ought to be considered. Consider then higher rates of GST applied on certain consumer goods. If a Government could act to decrease the incentive on CERTAIN types of consumer goods (i.e the highly discretionary ones) then an increase in a GST rate for that type of product would be a precise instrument for detering spending, slowing economic activity in that sphere.
Significantly, it means that the ‘treat everything as a nail’ approach that hammer-like Interest rate adjustments are, do not need to penalise those who can least afford it. There are a vast number of people who are going to lose their homes, not because they bought a plasma TV or splashed out on a holiday, but because some decisions made by very wealthy senior bankers elsewhere in the world meant that prudent risk management processes were ignored in the search for higher executive bonuses. Yes there were many executives who were prudent, just as there are some households whose priorities were less than switched on to commercial realities. But unfortunately the heavy handed interest rate rises approach is clumsy and penalises those who can least afford the change.
In the paper ‘A Blueprint to Advance Australia Collectively’ which was sent to all major polticial parties in 2000, I suggested that temporary Superannuation incentives might also be a lever. To some extent that idea was picked up but not as fully as it could have been. So more flexibility is required and the flexibility that might be afforded Governments in considering short term increases in GST on certain consumer goods might be just the lever to help.
Just a thought…
I flag my bias towards the need for a vastly improved approach to managing staff in the work environments. V A S T L Y improved. I’m still surprised at how clunky, disorganised or naive some senior managers are when it comes to that part of the business that considers ‘people’. And rather than cover…Read More >
An interesting public workshop in Perth in the first week of October introducing a varied group to the Organisational Evolution model. The Org-Ev is the model I developed for the start up of The Australian Strategic Planning Institute in conjunction with Steven Bowman. Given the diversity of the group, there were a number of surprises…Read More >
A note for those of you in Perth that there are just 4 spaces left for the Introduction to the Organisational Evolution Model workshop at Adina Apartments in Perth. The Org Ev model has been designed to enhance Strategic Planning and decision making and this introductory workshop is aimed at those looking to attend the…Read More >
Later this month I’ll be facilitating a scenario session looking at the potential impact of a long standing heatwave event for the City of Greater Dandenong here in Australia. Heatwaves kill more people than any other weather event. By a long way. Importantly they also have a ‘fat tail’ with physical impairments to individuals often…Read More >
Looking Up Feeling Good will be running an workshop on the Organisational Evolution Model in Perth. The Org-Ev model has been used by a wide number of agencies across almost all industry sectors, and was originally developed for the Australian Strategic Planning Institute. The workshop is limited to 25 people and will take place at…Read More >
If you’re involved with setting policy, allocating funding, designing products or services and delivering on them, then one book you simply must have read is the absolutely astounding ‘Invisible Women’ by Caroline Criado Perez. What Perez has done with this book is ALL OF THE RESEARCH you need to have available to you when you…Read More >
Are we there yet? Have people finally cottoned on to the idea that maybe, things aren’t going so well for the planet and our place in it? Storms, up; floods, up; fires, up; droughts, up; people being displaced by climate events, up. The signals are all around us. And yet, as a species we struggle…Read More >
One of the most challenges aspects for owners of businesses, and also for Boards charged with running businesses, is how to allow for the impact of a decision to unfold over time. Many listed company Boards will be delaying with a CEO on a limited tenure. The Board will have set expectations for performance and…Read More >
Local Governments in Australia face an emerging risk space that many seem unaware of. Brought on by rising costs, especially in business premises rentals, compliance needs and registration costs, research we’ve identified as part of work with a Local Government client is indicating a significant increase in businesses popping up in residential areas. What seems…Read More >