Daniel has questions about why mortgage holders like him are doing the heavy lifting to bring down inflation (2024)

Daniel Wigg doesn't drink alcohol anymore.

It started as a move to improve his health. Now, he simply can't afford it.

Higher interest rates have meant he and his partner, who also works full time, are just making ends meet. It has taken a toll.

Mr Wigg has taken up a second job working in a bar three nights a week on top of his full-time position at an electrical store.

The couple bought a modest home in Hobart's northern suburbs last year, when house prices were at their peak.

Days after signing the paperwork, the first interest rate increase happened.

"Then house prices plummeted," he said.

"So before we even made our first payment, we were paying more than what we were originally going to."

He said his interest rate had gone from 2.4 per cent to 6.4 per cent and his payments had increased by $1,700 a month or about $20,000 a year.

Daniel has questions about why mortgage holders like him are doing the heavy lifting to bring down inflation (1)

Mr Wigg was keen to stress that he and his partner felt lucky to have a roof over their heads and were still "ridiculously privileged".

But he does question why the 37 per cent of Australians with a mortgage, along with business loan holders, are doing the heavy lifting when it comes to bringing down inflation.

"If we're supposed to carry the burden of this inflation it should be just more equally distributed … I don't understand how it is so lopsided," Mr Wigg said.

The Reserve Bank of Australia will announce whether it will lift interest rates again in just over a week.

Numerous people have contacted the ABC asking similar questions about interest rates and inflation as well as offering suggestions about possible alternatives.

We put some of these questions to independent economist Saul Eslake.

  • Why don't we temporarily raise superannuation contributions instead?
  • Would lifting the GST reduce inflation and be fairer?
  • Could increasing taxes on banks help?
  • If big companies are driving inflation with excessive price increases, is there any way to control that?
  • What if the RBA temporarily lifts its inflation target above 2-3 per cent while global forces are at play and doesn't increase interest rates?
Daniel has questions about why mortgage holders like him are doing the heavy lifting to bring down inflation (2)

Why don't we temporarily raise superannuation contributions instead?

In theory it seems like a good idea and would result in forced savings and therefore reduced spending.

ABC audience members also pointed out it would result in more money in workers' pockets for later rather than money going to the banks through higher mortgage repayments.

Saul Eslake agreed that it would impact a broader spectrum of the population than those affected by interest rates.

"Although, like interest rates, it would leave older people (who are, in general, richer than younger people) unscathed," Mr Eslake said.

But he said there were practical problems.

Any change in superannuation guarantee contribution rates would require legislation, which may not get through the parliament of the day.

"That means that it would be a much slower response to rising inflation than changing interest rates, which can be done more or less overnight."

On the flip side, using superannuation contributions to tame inflation could lead to calls for reducing super contributions in order to stimulate growth during economic downturns, according to Mr Eslake.

"Which would undoubtedly be popular but would in all likelihood be detrimental to most people's longer-term interests."

Would lifting the GST reduce inflation and be fairer?

Lifting the GST would affect a broader spectrum of the population than the percentage of people affected by interest rates.

It would put downward pressure on inflation in a similar way to lifting interest rates, by reducing household spending.

But Mr Eslake said that did not mean it would be "fair".

"An increase in the GST would have its greatest impact on low-income households, since they spend a higher proportion of their incomes than middle- and high-income households."

He also said lifting the GST would initially add to inflation. Although, he said it was likely the Reserve Bank would "look through" that effect as it did when the GST was introduced in 2000.

Lifting the GST would not only require legislation to pass through parliament but also need the approval of every state and territory.

Mr Eslake said a "fairer" alternative would be to raise income tax.

"The personal income tax system is 'progressive', that is, it imposes a proportionately greater burden on higher-income households than lower-income ones."

Daniel has questions about why mortgage holders like him are doing the heavy lifting to bring down inflation (3)

He said lifting income tax was a common way of responding to high inflation in the 1950s and 1960s.

"No government would want to do that now," Mr Eslake said.

"It's much easier for politicians to say to people who are complaining about higher interest rates, 'that's the decision of the independent Reserve Bank, it's got nothing to do with us'."

Could increasing taxes on banks help?

As Daniel Wigg pointed out, taxing the banks would help redistribute the wealth generated through higher interest rates.

"It would just be nicer to know that money is going where it needs to go," he said.

Mr Eslake said banks already made a contribution to tax revenue.

"That doesn't make them popular, but, nonetheless, they are making a significant contribution," he said.

Australia's four big banks made pre-tax profits totalling $45.3 billion, and paid income tax totalling $13.4 billion, according to Mr Eslake.

"That represents an effective tax rate of 29.3 per cent, which is pretty close to the statutory company tax rate of 30 per cent — something which can't be said of many of Australia's other highly profitable large businesses," he said.

They also pay a "major bank levy" totalling $1.6 billion.

Daniel has questions about why mortgage holders like him are doing the heavy lifting to bring down inflation (4)

Mr Eslake said while banks benefited from higher interest rates on loans, they also had to pay higher interest rates on deposits and on their own borrowings.

Besides, Mr Eslake said taxing banks further would not help the RBA bring down inflation.

"Higher taxes on banks is not really a substitute for what the Reserve [Bank] has to do to bring inflation under control."

If big companies are driving inflation with excessive price increases, is there any way to control that?

Mr Eslake said at first glance, corporate profit margins had risen significantly over the past six years.

But he said a closer inspection of the data showed the rise in company profit margins had been almost entirely attributable to the mining sector.

The prices of commodities such as coal and iron ore are not included in the Consumer Price Index, which is how inflation is measured.

Mr Eslake said non-mining company profit margins, while they did rise during the pandemic, had fallen during the period during which inflation had been rising.

"There are some specific instances where companies have increased their prices significantly in order to boost their profits — most obviously the airlines — but they're the exception rather than the rule," he said.

Daniel has questions about why mortgage holders like him are doing the heavy lifting to bring down inflation (5)

There has been plenty of talk about the rising cost of groceries, and calls for an investigation into supermarket profit margins and supply chains.

But Mr Eslake said if you compared supermarket profit margins, they had actually gone down over the period in which inflation has risen.

In 2020-21, Coles' profit margin was 3.7 per cent compared with 3.6 per cent in 2022-23.

Woolworths' profit margin in 2020-21 was 5 per cent compared with 4.8 per cent in 2022-23.

"So the suggestion that inflation has been materially driven by supermarkets boosting their profit margins is not supported by the available evidence," Mr Eslake said.

It's worth noting, Mr Eslake said, that the federal government did not have the constitutional powers to regulate prices.

What if the RBA temporarily lifts its inflation target above 2-3 per cent while global forces are at play and doesn't increase interest rates?

One ABC audience member suggested lifting the inflation target to 5-6 per cent until external impacts, such as the Ukraine war and COVID-19 supply constraints, disappeared.

Mr Eslake said while these two factors played an initial role in rising inflation in the first half of 2022, in 2023 most of the inflation being experienced in Australia was "home grown".

He said stimulatory fiscal policies put in place at the onset of the COVID-19 pandemic were left in place for too long.

"[The policies were kept] long after it had become obvious that the economic damage wrought by COVID, serious though it was, was nowhere near as large nor as persistent as had been initially feared," he said.

Daniel has questions about why mortgage holders like him are doing the heavy lifting to bring down inflation (6)

Mr Eslake also said interest rates were kept "too low for too long" after the pandemic, stimulating demand for longer than was necessary.

The reason for an inflation target of 2-3 per cent was to give people and businesses confidence that inflation would remain "low and stable", according to Mr Eslake.

"So that they can then in turn make decisions about spending and saving, investment and employment," he said.

He said there was not much point in having a target if it was changed when it looked like being difficult to achieve.

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As an enthusiast in economics and finance, I can confidently analyze the concepts discussed in the article. My expertise includes a deep understanding of interest rates, inflation, and the various economic mechanisms at play.

The article primarily revolves around the impact of rising interest rates on individuals, particularly those with mortgages, and the broader questions related to inflation control. The individual mentioned, Daniel Wigg, highlights the challenges faced by homeowners when interest rates increase abruptly, affecting mortgage repayments and overall financial stability.

The article raises several alternative suggestions and questions regarding inflation control, and these are addressed by independent economist Saul Eslake. Let's break down the key concepts discussed:

  1. Interest Rates:

    • Mr. Wigg's situation is a case study in the effects of rising interest rates on mortgage repayments. His interest rate increased from 2.4% to 6.4%, resulting in a significant monthly payment increase.
    • The Reserve Bank of Australia's role in deciding whether to lift interest rates is a central theme in the article.
  2. Inflation:

    • Inflation is a key concern, with questions raised about how it is being addressed and its impact on different segments of the population.
    • Saul Eslake explains the role of fiscal policies and the need for inflation to remain low and stable for economic confidence.
  3. Alternative Measures to Control Inflation:

    • The article explores alternative measures to control inflation, such as temporarily raising superannuation contributions, lifting the GST, increasing taxes on banks, and adjusting the inflation target.
    • Saul Eslake provides insights into the feasibility and potential drawbacks of these alternatives.
  4. Superannuation Contributions:

    • Raising superannuation contributions is suggested as a way to reduce spending and redirect money from mortgage repayments to personal savings. However, Eslake notes practical challenges and potential negative impacts on economic growth during downturns.
  5. GST and Income Tax:

    • Lifting the GST is discussed as a means to reduce inflation, but Eslake points out its potential impact on low-income households. He suggests that raising income tax might be a fairer alternative.
  6. Taxation on Banks:

    • Daniel Wigg proposes taxing banks to redistribute wealth generated through higher interest rates. Eslake provides data on banks' contributions to tax revenue and explains why increasing taxes on banks might not be a substitute for controlling inflation.
  7. Inflation Drivers:

    • The article examines whether big companies, particularly supermarkets, are driving inflation through excessive price increases. Eslake analyzes profit margins and disputes claims that supermarkets are major contributors to inflation.
  8. RBA's Inflation Target:

    • There is a suggestion to temporarily lift the inflation target, but Eslake argues for the importance of maintaining a consistent target to instill confidence in economic decision-making.

In conclusion, the article delves into the complexities of economic policies, inflation control, and the challenges faced by individuals in a changing economic landscape. The expertise of Saul Eslake provides valuable insights into the feasibility and implications of various proposed measures.

Daniel has questions about why mortgage holders like him are doing the heavy lifting to bring down inflation (2024)

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