Dear Treasurer, please don’t “help” the cost of living crisis

It is time to stop. To breathe. It is long past time to mobilize strength for long-term, difficult economic reforms such as tax reform, energy market reform and reducing emissions.

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This is something the new Labor government understands. Chalmers displayed promising signs that he is patient in allowing the Morrison government’s reduction in fuel tax to expire on Thursday.

But can our new government withstand the insatiable demand of gamblers to “do something” about the cost of living crisis?

Chalmers took an important and timely lesson in the case of Kwasi Quarting (British Chancellor) about how financial markets might respond if they over-emphasize easing.

Global capital markets have been alarmed by tax cuts and energy subsidies worth hundreds of millions of pounds. They panicked last week about the UK’s inability to sell enough bonds for its growing government debt. Yields rose higher, causing the Bank of England’s intervention to buy bonds and calm markets.

Economists fear that the massive increase in consumer demand during a time of shortages will cause a rise in UK inflation, already at over 10%. This will require greater action by the Bank of England to increase borrowing rates.

Kwasi Quarting, British ChancellorHis name is:Bloomberg

It’s Newton’s third law, applied to the economy. Every measure to loosen fiscal (either cutting taxes or increasing spending), requires an equal reaction from monetary (by raising lending rate).

This rule applies here too. Chalmers should pay attention to this lesson as his October 25 mini budget looms large.

With its pre-election Budget, the Morrison government created unfounded expectations that politicians would be able to step in and help reduce the rising cost per capita.

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The solution to immediate inflation problems is not in Canberra but at the Reserve Bank of Sydney headquarters.

Thereafter, the Fed’s board members wage an all-out war against inflation. This is a speedy and massive effort that has been unmatched since the 1990s.

Once it’s finished — and most economists expect it to be relatively soon, albeit it could extend into early next year — the appropriate thing to do is sit back and wait to see if it works.

In fact, the rate at which hot and heavy drugs are being pumped into the economy’s veins is a drastic intervention. However, it will take time for it to make its way through the system.

The higher-than-normal proportion of borrowers currently taking out fixed-rate loans — with less than 2 percent loans still closed for three or four years — means the pain will be late for many.

However, when it does arrive, the high borrowing costs can cause havoc in family budgets.

As debt-burdened households reduce spending, we are currently going through a difficult period of adjustment. This is all part of the point. To ease the pain would be to reduce the potency of drug.

Even though Canberra might feel tempted to inject money into the system to “help”, it would be a dollar that the Reserve Bank would have to take out of large pockets through higher interest rates.

The bottom line is that Australians cannot afford another “cost-of-living” budget, like the one we had in March. It was full of tax cuts and giveaways designed to help us pay our bills.

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Families have no choice but to research the rising prices and borrow as much as they can. Then, cut back as much as you can in the hope that the high rates of drug costs will be reduced enough to alleviate the price pressures.

It will be easier for us all to manage our future household budgets by slowing down the economy so that inflation stays within the 2-3 percent target range of Reserve Bank.

While the temptation to “do something”, to alleviate the pressures on the cost of living within this budget is strong, financial forbearance should prevail.

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Originally published at Brisbane News Station