Australian Interest Rates on Hold: More Permanent Relief from Cost of Living Pressures?

The AIM Network

2 years ago

By Denis Bright

The cheers of relief from staff members in the Nine Newsroom following the announcement of the pause in increases in the RBA’s cash rates were indicators of the importance of this issue for mortgagees and renters. Landlords potentially under pressure from any eleventh ongoing monthly increase in interest rates would also have responded with new compensatory rent increases. The Nine newsroom was upbeat in announcing the pause in interest rate increases just after the early afternoon news bulletin on 4 April 2023.

More economists believe the Reserve Bank of Australia (RBA) will hit pause on its record-breaking run of interest rate hikes in April before resuming once more in May amid financial industry instability.

Yesterday Australia’s unemployment rate fell to 3.5 per cent in the wake of a falling monthly inflation indicator, generally showing a stronger economy.

But news of Credit Suisse being forced to borrow billions to keep the doors open, along with the collapse of the Silicon Valley Bank and Signature Bank has some economists tipping that Australia’s central bank will hold on its course of rate hiking.

The building industry is also sensitive to interest rate hikes with more interest rate hikes. New developments, large and small become less profitable when construction costs have to be absorbed on depressed profitability levels as new costs have to be absorbed on a falling property market.

The underlying villain of inflationary pressures is being challenged by the crude mechanism of monetary policy initiatives through interest rate increases. These recessions or near misses from economic downturns caused great misery in Australia in every decade since the early 1980s. The most recent challenges included the GFC and the COVID-19 crisis. Hence the RBA’s projections for key indicators of the Australian economy are not very thrilling. Economic growth levels in from 2023-25 are insufficient to maintain unemployment levels at 2022 rates.

Reporting on this issue is still often perceived as an Australian problem when it is in fact a global dilemma that has been made worse by the impact of strategic instability with Russia and China.

Regrettably, the Labor Government is locked into the delivery of Stage 3 tax cuts from July 2024 unless some adjustments are made in the forthcoming federal budget. The Tax Office has delivered its brief on this issue on 11 October 2022. The rhetoric still contained the blunt language of that terrible Robodebt era even though the LNP had lost office 5 months earlier.

The stage 3 tax cuts are due in July 2024. They are part of the government’s income tax package, introduced and legislated in 2018 and 2019. Under the stage 3 tax cuts, the 37% tax bracket would cease while the 32.5% bracket would drop to 30%. The threshold for the top tax bracket would also rise from $180,000 to $200,000.

After July 1, 2024, the tax cuts will be effective. Some of the expected changes include:

The higher tax threshold will increase from $180,000 to $200,000

The $120,001 – $180,000 tax bracket will cease

Income between $45,001 and $200,000 will be taxed at 30%

Once they take effect, the stage 3 cuts are likely to cause an economic ripple effect. To bear the cost of the cuts, the government may reduce budget expenditure. That would mean that it may spend less on welfare programs. That may trickle down to the expenditure of most Australians.

As the government decreases spending on welfare, households are likely to reduce their demand since they no longer enjoy benefits from the welfare programs. Thus, instead of injecting money into the economy, the cuts may result in tighter economic measures.

My concerns would also relate to any deterioration with economic relations with China which assisted with that resources boom after the recession of the early 1990s.

Trading Economics (TE) is always a handy resource in monitoring the impact of market volatility on the value of the Australian dollar. TE predicts a conversion rate of 60.834 Australian cents to the US dollar in a year’s time compared with 67.516 cents on 4 April. There has been an overall decline in the Australian dollar by 11.02 percent over the last year. Here are the grim statistics for the dollar since June 1973:

Halving of the Value of the Aussie Dollar Since June 1973

Conservatives and their far-right allies on the crossbench of course blame this situation on years of wasteful government spending and a sheer lack of discipline across society. There is no truth in this interpretation. The Labor government is now in power to fix up the mess. Australians work longer and harder, employment has been increasingly casualized with less than affordable costs of home ownership or rents. Our rates of government spending and deficits are indeed very low by world standards.

The onset of more difficult times later in 2023 has been contained by the growth in resources and food exports which improved the federal government’ revenue take by $13 billion in 2022-23. The incoming Labor government has been particularly prudent with spending outlays which have been reduced by $7.5 billion resulting in a net improvement of $20.5 billion.

The LNP failed to diversify the Australian economy more proactively by claiming that corporations could best handle macro-economic challenges on a low taxation base. Many of the major Anglo-American multinationals chip into the LNP’s chorus line with systematic and legalized tax avoidance as coverage in the updates from ABC news on the shame list of companies involved with such practices. There is a big time lag in the publication of this data. The situation in 2023-24 is unlikely to be released until late 2025 when the next federal election results will be political history.

Opening up the Future Fund of Australia and the various state/territory public investment funds to capital investment flows from the private sector is one possible mechanism for restoring national economic sovereignty in this era of contemporary globalization. These capital flows into secondary social investment funds should not be at the expense of present arrangements. Capital investment flows would need to be cleared on security grounds to fund essential private public partnerships as in the Singapore economy with Tamasek Holdings and the Government of Singapore Investment Corporation (GIC).

Back home, the Perrottet Government in NSW made the mistake of relying on the proceeds from privatization of state assets to maintain the NSW Generations Fund.

The disposal of state assets in the Westconnex Motorway Project was one of the last of key assets available for privatization for pork barrelling projects. The use of state taxation revenue loomed large on the horizons into the 2030s if the state LNP had remained in government.

A reinforcing shadow to innovative national social planning agenda, is the largely unreported Economic Diplomacy of successive US Administrations. This national aggrandisement commenced long before 2012 when Donald Trump moved into the White House in 2013.

This US focused economic diplomacy relies on high interest rates to protect the US dollar and the Wall Street Financial system with its ties to Britain and worldwide global tax havens in an aggressively Anglo-American First Global Strategy.

High US interest rates are the tip of an array of policies including unequal trading agreements, strategic commitment to facilitate global purchases of US equipment, systematic tax evasion, cultural agendas of news and entertainment networks and so the list goes on. Only intervention from federal Labor saved the Pharmaceutical Benefits Scheme (PBS) through last minute amendments to the Howard Government’s Australia US Free Trade Agreement which was an alien concept to the US Big Pharma Networks.

Joining the Conga line to buy more weapons from the British and US Industrial and Military Complexes as recommended by the Morrison Government with the support of our Admirals and Vice Admirals will not help our depressing economic indicators or social stresses in a more neoliberal society.

While federal Labor is enjoying popularity at levels achieved by Curtin, Whitlam, Hawke, Keating and Rudd in their honeymoon phases, now is the time to act on those cheers which rang out through the Nine newsroom when the pause on interest rates was announced on 4 April 2023.

This is the road to immortalization in the eyes of current and future generations of Australians who want new solutions in public policy over banal political rhetoric.

Just a cheery postscript for the current high profile of the Australian Labor Movement: Lyrics for the victory laps after every new progressive decision in Canberra straight from the from the progressive edge of the American Revolution within the Democratic Party and the wider mainstream popular culture:

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Denis Bright is a financial member of the Media, Entertainment and Arts Alliance (MEAA). Denis is committed to consensus-building in these difficult times. Your feedback by using the Reply button on The AIMN site is always most appreciated. It can liven up discussion. I appreciate your little intrusions with comments and from other insiders at The AIMN. Full names are not required when making comments. However, a valid email must be submitted if you decide to hit the Reply button.