Kids Go Hungry in the Name of Prosperity


Is it fair to take food from a hungry child and give it to a prosperous retiree?

This is not a trick question – the answer is obvious – yet this is exactly what is happening right now as a direct result of the way we fight inflation. Higher interest rates take money from family budgets. Yet when rates rise, retired people who have money in the bank get bigger interest payments on it.

Back in 1990, in a typically bold statement, Paul Keating vowed that he would never allow unelected officials to control monetary policy. "I will not abrogate responsibility for the stance of monetary policy from the elected government to unelected and unrepresentative public officials in the name of fighting inflation," he said.

But unelected officials, on the Reserve Bank board, do set rates now.

The highly respected National Centre for Economic Modelling (NATSEM) has just reported that 1.1 million Australian families were already suffering "financial stress" before this week’s rate rise. These mostly young families with dependant children were spending more than 30 per cent of their combined income on home loan repayments and other housing costs. This has to hit the food budget.

There will be more families in that plight soon. The new recruits will arrive when the latest rise – and whatever the banks feel like adding to it – come into effect.

The Federal Government, which commissioned NATSEM’s research, is pleading with the banks for restraint. But the banks’ idea of restraint and that of the Government (and public) are far apart. These families are trapped. If they give up their expensive homes they will find themselves paying exorbitant rents – if they are lucky enough to find a rental property.

It is probably not fair to blame the Reserve Bank’s board entirely for all this. Even though it seems to be styling its recent announcements on old John Wayne scripts.

Under the new system, which evolved gradually in the 1990s, successive governments gradually gave the Reserve Bank the job of fighting inflation. That was finally formalised in 1996, in documents signed by the then Treasurer, Peter Costello. But the Government gave the Bank only one weapon with which to fight inflation: the right to adjust interest rates. That’s a blunt instrument if there ever was one.

The politicians thought this was a great idea – it gave the public someone else to blame for unpopular decisions. But the public saw through that and quickly began blaming the politicians, quite rightly, for allowing situations to arise that made rate rises necessary. 

There are advantages in the present system. Before it came along, politicians could delay necessary rate rises for political reasons and in the months approaching an election. But the real issue is that it transfers cash from young families with big mortgages and hungry children to well-heeled retirees who have money to invest.

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