Conceptually, managing the economy is simple: if inflation is rampant, suck money out; if recession is raging, pump money in.
There are two players in this economic management game: the Reserve Bank of Australia, which operates the simple monetary lever of the cash rate, and the Government which manages the hugely more complex fiscal levers of timed revenue and expenditure. Ideally, the RBA and the Government agree on whether to be sucking money or pumping money at any given time.
Setting the cash rate is often described as a “blunt instrument”. Why? Because the cash rate flows directly into mortgage rates, and in Australia only about a third of households have a mortgage, so the “heavy lifting” for managing the economy falls on a minority. There is also some positive feedback in the blunt instrument: the RBA raises the cash rate, mortgage rates rise, landlords raise rents, which increases the consumer price index, and measured inflation rises. Should the RBA discount the effects its cash rate rises have on inflation?
Is there a “sharper” way of managing cash in the economy? The Australian Bureau of Statistics estimates that currently, 64.1% of Australians are employed. Employers are required to pay the Superannuation Guarantee, currently 11.5% of an employee’s base salary. Suppose the Government amended the Superannuation Guarantee (Administration) Act 1992 to include a personal component. To control excessive inflation, the Government could nominate an additional levy that employers would deduct from the employee’s base salary and pay into the employee’s superannuation fund as a personal contribution.
There are advantages to this measure of controlling the economy. At present, when the cash rate raises mortgage rates, the mortgages lenders benefit. A mortgage payer sees their hard-earned money flow to the lenders. Under the Superannuation Guarantee levy arrangement, money would flow into the employee’s Superannuation Guarantee personal contribution, boosting their superannuation balance. With about twice the number of employees to households, the control method has wider application. Another benefit is recession management. If the Australian economy moves into recession, the Government could allow those with a Superannuation Guarantee personal contribution balance to draw down funds. These drawdowns would ease the pressure on the Government to find funds to pump into the economy to provide recession relief. Using the personal contribution to ease a recession could consequently reduce the Government’s gross debt.
What part should retired people receiving a self-funded pension play? These superannuants could be included in the Superannuation Guarantee levy arrangement. Pensions would be reduced by the levy amount during times of excessive inflation, and this money would be made available for drawdown during times of recession. No doubt this will be a controversial subject that should be debated before introduction. In some circumstances, people are excluded from making additional superannuation contributions, and a levy would increase superannuation balances.
Using the cash rate as an economic control measure is patently unfair. As mortgage rates rise, mortgage payers have income taken from them and paid to mortgage lenders. Only about a third of Australian households suffer this impost, limiting the effectiveness of the cash rate control measure. By contrast, using a Superannuation Guarantee levy to create a personal component of the fund’s balance leaves ownership of the personal contribution with the fund’s owner. An added bonus is that personal contributions could be released to revive the economy during a recession.
Chris Mills, AM, is a MSc in Systems Management and is a systems designer and builder.
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