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Relying on the Reserve Bank

By Harold Levien - posted Wednesday, 24 September 2008


Government could also combat inflation through some complementary actions if it gets the interest rate elephant off its back since these actions involve increased spending.

An increased public housing program for lower and middle income groups would reduce rents - and house prices - and therefore the CPI. Such a program would produce greater certainty of a substantial and more rapid increase in housing supply than the proposed tax incentives to the private sector. The macro effects of funding rental housing through cutting into the surplus or through Government borrowing would be little different to funding through the private sector. In either case the competition for resources could be avoided by appropriate Reserve Bank credit cuts as outlined above.

A substantial increase in funding for public and other poorly funded schools, especially to increase the employability of the scholastically weakest school leavers, and for the States' TAFE colleges would contribute to reducing the shortage of skilled and semi-skilled labour while hundreds of thousands remain on unemployment benefits and many work short hours because they haven't acquired the needed skills.

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Expanding affordable, quality child care would release scores of thousands of mothers into the work-force and also help overcome labour shortages.

The above two progams would reduce dependence on the current level of immigration which, over the past decade, has been the largest since the post-war migrant boom. With the exception of a relatively small number of skilled migrants filling key vacancies migrants add much more to demand than to supply and are therefore a major inflationary factor especially through their impact on house prices and rents.

The government's budgetary approach to inflation will result in the exacerbation of some of our worst social problems and obstructs a long-term solution to inflation.

Additionally the current free market in finance lending hurts the financially weakest most - such as households paying off mortgages - and the financially most powerful least - such as those firms in a market situation which enables them to pass on higher rates to customers. Surely it is time to rethink the efficacy of present policy.

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About the Author

Harold Levien, in the 1950s immediately after graduating in economics, founded and edited VOICE, The Australian Independent Monthly. It lasted for five years. As a journal of comment its contributors included many of the most respected authorities on economic and political issues of the time. He wrote Vietnam, Myth and Reality in 1967. It went into several printings. Harold has written many articles which have appeared in the Herald, Bulletin, Quadrant, National Times, Australian Options, the Journal of Australian Political Economy and others. Before retiring he taught economics for 27 years.

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