Please find below a guest post by long-time MacroBusiness reader, Sam Birmingham, questioning whether a floating rate GST should be added to the RBA’s toolkit.
Another month, another RBA meeting…
Say what you will about central bankers and their ability to manage economies, but with such a limited monetary policy toolshed and such a wide range of competing interests and problems, I can’t help but think that their job is going to get even harder in the years to come.
Our own Reserve Bank has some pretty substantial objectives, from contributing to “the stability of the currency” and “maintenance of full employment” to ensuring “the economic prosperity and welfare of the people of Australia”.
Noble aspirations, to be sure, but when your main weapons are incremental changes to the monthly cash rate and jawboning (whether by formal speeches or morning television appearances) what hope do you have?
Sure, they could do more to help on the currency front, and when we don’t have 3.00% of room to move on interest rates perhaps they will follow The Bernanke down the quantitative easing path, or advocate flexible inflation targeting a la Mark Carney and the not-so-independent BoJ.
But what if central bankers had more tools at their disposal with which to effect monetary policy…? After all, interest rates have their fair share of limitations and problems:
- In a world that is drowning in too much debt, from households to sovereigns, for how much longer can we encourage more borrowing to help economies grow? The closer they get to ZIRP, the more it feels like central bankers are “pushing on a piece of string”. See HnH’s Australia’s Bull Trap for more on financial repression.
- Tweaking the cash rate creates a clear divide between “winners and losers” – savers will rates higher, while indebted households welcome every 25bp cut. How can such a discriminatory outcome contribute to the prosperity and welfare of all Australians? And don’t even get me started on the generational inequity of money printing!
- The RBA relies on intermediaries (read “banks) to bridge the gap between it and the community, but given our banks’ reliance on wholesale borrowing and the impact on their cost of funds, the effect of cash rate cuts/hikes is muted in “the new normal”. This is even more relevant when the world is practically insolvent and one can only expect bonds prices to fall (ie. interest rates to rise) in the next stage of the cycle, whenever it comes.
- Further on the intermediary note, if we accept the existence – heck, even the possibility – of TBTF then are we not putting the nation’s economic prosperity at even greater risk by relying on systemically important institutions to transmit monetary policy?
At the risk of oversimplifying, the monetary process works like this:
- Company remunerates employee for their work
- Government requires that PAYG and superannuation be withheld from total remuneration package
- Employee receives net pay in their bank account
- Bank deducts mortgage repayment
- Employee uses remaining money to pay bills and “consume”
- Whatever is left over (if any) is saved, to fund future investment or consumption.
The RBA’s cash rate principally targets stage 4 to impact stages 5 and, to a lesser extent, 6… But what if their monetary policy toolshed gave our central bank scope to directly target other stages in the process?
For example, could the rate of superannuation contributions be adjusted to leave employees with more/less cash in their pocket, thereby impacting their current consumption and investment decisions? Arguably this could work, but it is politically untenable, not to mention that more funds flowing into super funds when the economy is bubbling along runs pro-cyclical and risks asset inflation… So let’s rule that one out.
But humour me for a moment, and consider whether monetary policy might directly target stage 5 of the process via – wait for it – a floating GST rate.
Do I think this is likely? Absolutely not… Our politicians can’t get anywhere on what seems to me like common sense (and long overdue) tax reform – from negative gearing to superannuation rorts – and Swanny wouldn’t even let Ken Henry think about consumption tax in his wide-ranging review!
But for the sake of Saturday morning pontification, let’s imagine a fantasyland where reform happens, monetary and fiscal policy work hand-in-hand, and decision makers act in the best interests of all their constituents…
My questions for the MacroBusiness audience are thus:
- Could the GST rate be periodically adjusted to help the RBA achieve its objectives?; and
- If so, would this be a useful addition to the RBA’s toolshed?
Some observations to get the debate started:
A) The transmission mechanism is already established – almost every business pays/withholds GST, completes their much-loved BAS forms, and pays/receives GST to/from the ATO.
Sure, there will be complaints about more paperwork and leakage through the “cash economy”, but those negatives already exist. Retailers will worry about having to adjust price-tags, but let’s pretend that all prices are shown ex.GST and the consumption tax – whether it be 9% or 11% – is simply added by computers at the point-of-sale.
B) Adjusting the rate of GST affects all Australians concurrently – we obviously can’t all be net borrowers or net savers but, for better or worse, we are all net consumers.
Indeed, one might argue that such a tax change would be progressive… A struggling household might defer its decision to buy a $44,000 car until the consumption tax falls (thereby “saving”, say, $400) whereas a wealthier family might be less likely to defer a similar spending decision because it represents smaller percentage of their money pie. In other words, those who can afford to pay more tax, do.
C) The impact of rate adjustments would still be greatest at the margins, but by spreading the load across all households could the burden be reduced for those slightly-less-marginal households who feel the pain of every interest rate rise?
D) Could a floating rate GST have the added benefit of being counter-cyclical?
By collecting more consumption tax in good times would we be better equipped to stimulate the economy in bad times? (Remember, we’re in fantasyland and pollies don’t squander our tax dollars, for the purpose of this exercise at least…)
Let’s say, for the sake of hypothetical, the “surplus” GST that is collected when its rate is above 10% could be quarantined. This could provide a buffer for the Government’s tax take when the floating GST drops below 10%, or perhaps even set aside for stimulatory spending – preferably on Productivity Commission-approved projects – when the economy slows.
Over to you…
