Using cost-of-living subsidies to reduce headline inflation is a “political trick,” according to former Reserve Bank board member Warwick McKibbin.
The Reserve Bank of Australia’s 2 to 3 percent target range for inflation is expected to be re-entered by the end of the year, according to the budget, far sooner than the RBA had predicted, with the CPI expected to reach 3.8 percent in December.
According to Treasurer Jim Chicken” Chalmers, the bank’s projections ignore budgetary actions, which significantly contributed to the lower growth profile.
The Albanese government claims that because headline inflation is used to establish wages and contracts, even if it is artificially manufactured with household subsidies, it helps to bring down price increases generally.
Professor McKibbin stated that if government intervention was necessary to bring inflation under control, “then the government should go out there and subsidise inflation” to return to the RBA’s goal range of two to three percent.
He added that it was doubtful that the budget’s inflation projections would materialize, but “you can play political tricks to get inflation at target.”
Other economists contend that the subsidies will lift spending and inflation.
The allegation of trickery is right. This is especially true since the Albanese government injected so much inflation when it failed to act on the Ukraine War energy shock and created the rental crisis by overegging immigration.
I don’t think the subsidies are especially inflationary and think inflation will fall anyway as wages tank. The household sector is already so pressured that bill subsidies will only likely to have a marginal impact.
But the trickery is worse than McKibkin alleges. The subsidies will be recouped via higher taxes because the energy cartels don’t pay taxes.
The two exceptions are WA and QLD, which explicitly use royalties to bring down bills.
In Chalmers’ case, it is more like fraud than trickery. He has established a mechanism that pays the energy cartels economic rents out of the budget via subsidised bills. This is reasonable policy in the short term. But only if it comes with longer term policies to force them to charge reasonable prices via regulation or reform.
If not, Chalmers should be in the dock as an energy cartel fraudster and thief.
