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Not-a-Blog - Miscellaneous Ideas

Alternatives to Interest Rate Increases

By Bruce Barbour

A suggestion similar to this was sent to the Treasurer in April 2008 (at around the time of the "20:20 Summit").

In seems to me to be inequitable that the only allowed method that the Reserve Bank has to carry out their charter to control inflation is to increase interest rates. With this method there are winners and losers - those that have high debt and often lower incomes, new home owners, are hit with large cost increases, while those that are comparably wealthy, with maybe a couple of hundred thousand in cash and possible a higher income, benefit from higher returns on that cash.

While this method can stay as a tool for the Reserve Bank, I propose an alternative additional tool for control that would be more equitable.

I propose that the Reserve Bank be given the power to require additional payments into employees' Superannuation funds. Currently the compulsory contribution is 9%. If the Reserve Bank determined that it was necessary to decrease liquidity to control inflation they could order that the percentage of wages paid as Superannuation be increased. The increase payment could come from the employer, the employee or a combination of both. I haven't done the financial modeling so the figures I suggest are just illustrative. If the Reserve Bank determined that it was necessary to raise Superannuation payments by 0.5%, this could be made up of a payment of 0.25% from the Employer and 0.25% from the employee, or it could all come from the employees wages. The rate could be varied quarterly, if necessary. It could also be restricted to applying to higher incomes, for example not coming into effect until income was above, say, $1000 per month or even a higher rate apply to high income earners. These additional contributions would still have the current tax concessional status, or even a better one - no 15% contributions tax, especially for low income earners.

The benefit of system is that the winner and loser is the same person (at least for the employee contribution). The employee would lose the money for immediate expenditure but it would still be their's for retirement. The impact is spread across the community, with a lesser impact on the lower paid. Even Government wins in the long term with decreased pension payments.

I have not received any response as yet. If I get a response I will update this page.

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