Photo by Marcus Reubenstein on Unsplash

This year’s federal budget did something most commentators didn’t expect. A Labor government chose to address cost of living pressures through a universal payment – a $300 per household energy rebate.

It offended an ingrained Australian sensibility that favours means-testing, stoked media attention, and elicited a mix of dismay and derision from Opposition and crossbenchers. It also responded to a new political reality – high inflation, specifically the falling real wages and rising interest rates that have come with it.

The backlash to the rebate’s universalism reflects a peculiar tendency in Anglo democracies, and especially Australia, to tightly target anything considered welfare (but not anything else). As Treasurer Jim Chalmers said, it seems odd to oppose the rich getting a $300 rebate on equity grounds but to support them getting a $9,000 tax cut.

It is also important to put the energy rebate in perspective. The quantum is relatively small ($75 a quarter, costing the budget $3.5 billion in total), and other budget measures follow the usual targeting logic.

Indeed, the Treasurer made a virtue of containing spending, emphasising a now all-too-familiar political budgetary logic to prioritise surpluses over all else. In turn, this budgetary logic reinforces the focus on targeting, which minimises budgetary costs (even if it exaggerates economic costs through high effective marginal tax rates).

The politics of inflation has changed, but the toolkit hasn’t

So why didn’t the energy rebate follow the same familiar pattern – as it (at least partly) did in last year’s budget?

The Treasurer’s justification for leaving the rebate untargeted reflects a new political problem and an old political solution. Targeting is less suited to the challenges inflation poses, and the rebate reflects a technocratic impulse to avoid political constraints by ‘massaging’ the numbers.

The politics of inflation are not only about the cost-of-living impact of rising prices. After all, if incomes rise with prices, then the changes largely wash out. The squeeze being felt by households reflects how the politics of inflation changed with the liberalisation of the economy.

It has been decades since we have seen any kind of sustained inflation. Indeed, economic policy has been entirely remade to ensure inflation never returns. We have almost entirely dismantled the systems of wage arbitration that once ensured workers would not be hurt by inflation by indexing wages to changes in prices. Instead, with unions and workers industrially weaker and no automatic system to protect them, real wages have fallen faster than at any time on record.

The effort to dismantle wage indexation reflected the dynamics of the last bout of inflation, where rising prices fuelled inflation, which then fuelled wages and so on. With real wages plummeting, you might think policy makers would be rallying to push them back up. But instead, the most important policymaker on inflation, the Reserve Bank of Australia (RBA), has consistently raised concerns that wage rises might still be a problem.

Around the world, central banks have reached into their kit for the only tool they know – when inflation rises, smash the economy with higher interest rate rises. The stated goal of this exercise is to weaken the economy and the labour market to supress wage growth. And even though wages obviously aren’t driving inflation, the RBA has stuck to the formula.

This leads to a second budget problem. The combination of falling real wages and rising interest rates has created a very different political problem than the one targeting was designed to fix.

Targeting is partly a creature of liberalisation, designed to compensate the ‘losers’ of economic reform. But as the Treasurer says, households are now struggling up and down as mortgage repayments race ahead of family incomes.

The cost-of-living crisis is partly about inflation, but it is just as much about interest rates.

Hard rules create clever workarounds: Universalism as a policy solution

The energy rebate cleverly targets both these issues because it works by reducing the cost of energy. By keeping downward pressure on prices, the energy rebate contributes directly to holding down inflation (or at least the way we measure inflation). The rent assistance increase and the drug price freeze introduced in this year’s budget also have the same effect.

Targeting prices does not require universalism. Rent assistance is targeted, and while everyone can access the Pharmaceutical Benefits Scheme (PBS), prices are lower for those with concession cards.

But targeting requires a complex apparatus connecting fiscal support to incomes, a fact that reveals how similar targeting and taxation really are. Both use the same policy machinery to track people’s incomes and make deductions accordingly. The politics of tax and welfare may differ – the mechanics (and economics) are surprisingly similar.

The government’s problem is that interest rates and real wages impact many households that are otherwise outside the systems of welfare and targeting. And because the support is delivered by reductions in energy bills, the government cannot manage the scheme directly.

The tighter rules around tax privacy make it practically difficult to share the data with energy companies in the way governments routinely share welfare data (like if someone is on a pension). The universalism of the problem caused by inflation, combined with the very different politics of tax and welfare, lead to universalism as a policy solution in this case.

Many economists have raised questions over the effectiveness of the budget’s tactics. After all, they reason, reducing costs has the same impact on disposable income as increasing payments, and so is just as likely to fuel inflation.

But this misses the politics of economic management. Just as our obsession with the ‘budget bottom line’ leads to all sorts of workarounds in fiscal policy, so our obsession with a relatively arbitrary monetary rule (the RBA’s 2-3% inflation target) is likely to make policies such as the energy rebate more effective.

Arguably, if it were not for the inflation target, interest rates would already be falling. Confidence is weak and demand sluggish. Outside inflation, the fundamentals do not justify tight monetary policy, which the RBA acknowledges we currently have. But the RBA can’t cut rates unless it is confident inflation is falling below 3%.

Three percent might be an economically arbitrary figure for inflation, but its political significance keeps interest rates high. The politics of inflation targeting, like the politics of fiscal surplus, are tricky to take on directly.

But hard rules create clever work arounds. The government may not have embraced Isabella Weber’s controversial call to target prices and profit margins, but the budget suggests it might be experimenting with fiscal alternatives. Given the rigidity of monetary rules, fiscal tricks to hasten the decline of inflation (or at least the official measures) might just work.

It’s nothing compared to Coalition’s pandemic innovation

The Labor Party’s tilt towards universalism in Budget 2024-25 is small beer compared to the crisis-driven policy innovation of the Morrison Coalition government during COVID-19. The pandemic saw much larger fiscal interventions, including changes that moved JobSeeker away from targeting and towards universalism.

However, in both cases, it appears new circumstances and pressures are changing the economic rules. The ‘snap back’ from COVID policies, despite the benefits these measures provided for many on low incomes, suggests the political rules may be changing more slowly.

If that is the case, we are likely to see more ‘work arounds’ to manage the emerging economic risks of the 21st century but without any guarantee of the more thoroughgoing shift to greater universalism required to tackle underlying social problems.

This article has 1 comment

  1. A universal citizen’s dividend based on the Crown collecting rent from its land and resources is sensible and represents a sharing by all in the common wealth of the Commonwealth.

    By contrast, a universal basic income funded by taxing half the population on their earnings from honest labour or industry, be they male or female, rich or poor, is just a manifestation of social envy.

    Australian egalitarianism is admirable, social envy is a public vice.

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