Why don't governments put up taxes instead of interest rates?

[oz_mark]

Whether putting up taxes would reduce inflation, would depend on what the government of the day did with the money. So, the only way that would work is iof the government increased taxes, but not spending. And announce a giant surplus. Or thay could cut spending, and leave taxes the same.

Raising taxes is also more time consuming, as it requires legislative change. Raising the GST would be even more problematic, as it requires the agreement of the states.

But realistically, the RBA doesn't have other tools at its disposal.

 

[Seat0B]

Whether putting up taxes would reduce inflation, would depend on what the government of the day did with the money. So, the only way that would work is iof the government increased taxes, but not spending. And announce a giant surplus. Or thay could cut spending, and leave taxes the same.

Raising taxes is also more time consuming, as it requires legislative change. Raising the GST would be even more problematic, as it requires the agreement of the states.

But realistically, the RBA doesn't have other tools at its disposal.

Yes and I think this links back to a lot of earlier posts about political will. It's hard for governments of any stripe to resist calls to spend the surplus helping people doing it tough, which as @Lynda2475 points out is often people who would spend anything they received from the government out of necessity (the whole point of providing a help payment), which in turn contributes to rising inflation as they spend the money. It is truly a wicked problem.

 

[RooFlyer]

Another reason for putting up interest rates rather than taxes is that an interest-rate rise takes money out of the economy almost straight away and can be at variable rates . Whereas taxes can be deferred or even not paid at all. Except for something like the GST of course, and no one is going to touch that!

I wish the media would sometimes pay more attention to the benefits of higher interest rates, such as interest on deposits relied on by retirees etc. With interest at record low levels we were “doing it tough“. But on balance, of course it’s fairer for interest-rates to be lower for the new families and up and comers.

The only reason I maintain a very small mortgage is to have a large wad of pre-payment money available for instant access in an absolute emergency.

 

[Pushka]

Son and DIL fixed the majority of their home loan for four years just about two years ago. They have a very small variable loan for the balance which is fully offset. So fixed rates do work under earler ( and current ) situations. They are currently in a great space but have cautioned them to expect a nasty surprise in about 18 months.

My niece on the other hand had her nasty surprise last week. They had refinanced and had expected the broker to follow through on their instruction to fix rates for 4 years. She didn't. She did it only for two years and last week that fell due. $1800 a month extra just like that.

Taxes aren't the way the reduce inflation as evidenced by earlier responses. But I do think GST should be increased.

Post automatically merged: Jul 10, 2023

The only reason I maintain a very small mortgage is to have a large wad of pre-payment money available for instant access in an absolute emergency.

We were discussing this just yesterday. Ours is fully offset (but because banks being banks we are still required to pay the bank as if it isn't fully offset but it all comes straight off the principal). We decided to just keep rolling with it for emergencies and because we are too old to get another loan.

 

[Lynda2475]

The resulting increases fall hard on a single sector of the economy - mortgage holders, and have little impact on other sectors of the economy, which makes it a pretty unfair/uneven impact.

I dont think it is unfair at all. Current mortgage holders have since 2009 had 14 years of crazy low interest rates, giving them a huge opportunity to get ahead in repayments.

The current increases will have a positive effect on others i.e. those saving up for a deposit (as opposed to earning nothing making it harder to get into the market), those who rely on earning a return on savings (which is not just boomer retirees) and everyone of working ages superannuation after years of lackluster returns.

No one should have expected interest rates to remain under 5%, the average rates have always hovered in the 8% or higher; they tell you to budget for 10% so as not to borrow too much.

 

[dajop]

Because our relative tax rates are already too high by international standards and actually should be coming down (as planned thankfully) not going up to attract people with brains to Australia

Income tax is not the only barrier. There's all sorts of factors that come into play. And a degree of parochialism that sometimes makes experience outside of Australia (even as an Australian, or perhaps especially as an Australian) put you at a disadvantage rather than being seen as an asset by potential employers.

 

[Pushka]

I dont think it is unfair at all. Current mortgage holders have since 2009 had 14 years of crazy low interest rates, giving them a huge opportunity to get ahead in repayments.

The current increases will have a positive effect on others i.e. those saving up for a deposit (as opposed to earning nothing making it harder to get into the market), those who rely on earning a return on savings (which is not just boomer retirees) and everyone of working ages superannuation after years of lackluster returns.

No one should have expected interest rates to remain under 5%, the average rates have always hovered in the 8% or higher; they tell you to budget for 10% so as not to borrow too much.

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Not sure about other states but SA has seen around 20% increase in house price plus now, the lowest sale stock ever creating a rental crisis as well. Although it's quite good to see RE Agents having to scrounge for sales, even if once they have a house for sale, it will sell. I know my generation had huge interest rates, I think we had it easier.

If you don't borrow to match the sale price you don't get the house.

 

[Lynda2475]

If you don't borrow to match the sale price you don't get the house.

But first buyers need to be more realistic about what they can afford (and make sure they have 20% deposit so some proper equity first). Your first property doesn't need to be a house or a forever home, get into the market via a unit or townhouse, or move a little further out, or buy an investment with a tenant to pay off where you can afford whilst you rent where you want to be - all better options than taking on a mortgage you cant afford.

A friends daughter keen to get into market, bought a property with 2 friends, a good lawyer can draw up proper contract including buy-out provisions; there are many ways to get into the market that are not contingent on 3% interest rates.

 

[Pushka]

But first buyers need to be more realistic about what they can afford (and make sure they have 20% deposit so some proper equity first). Your first property doesn't need to be a house or a forever home, get into the market via a unit or townhouse, or move a little further out, or buy an investment with a tenant to pay off where you can afford whilst you rent where you want to be - all better options than taking on a mortgage you cant afford.

A friends daughter keen to get into market, bought a property with 2 friends, a good lawyer can draw up proper contract including buy-out provisions; there are many ways to get into the market that are not contingent on 3% interest rates.

I'd not encourage any family member to go in with a group of friends.

 

[MARTINE]

I'd not encourage any family member to go in with a group of friends.

Agree - too many moving parts - variables - partners - inlaws (and outlaws) that when it goes south its goes very bad. My parents always said never put yourself in the position of having to sell in a hurry

 

[Lynda2475]

No in laws or partners involved. 3 singles bought an investment property; none are living in it, 3 separate loans. Comes down to the quality of your friends and the skill of the solicitor in drafting the contract. Choose your friends and solicitor wisely, much less chance of a break-up than a romantic couple where divorce rate is over 50%.

 

[dajop]

But first buyers need to be more realistic about what they can afford (and make sure they have 20% deposit so some proper equity first). Your first property doesn't need to be a house or a forever home, get into the market via a unit or townhouse, or move a little further out, or buy an investment with a tenant to pay off where you can afford whilst you rent where you want to be - all better options than taking on a mortgage you cant afford.

Interesting. I think the modern - instant gratification ideals - are making this mentally challening for people, there's an array of surreality TV shows (the Block, Better H&G etc) that tend to promote ideals that are unattainable and somehow undermine people's happiness in being satisfied with what they have. Although maybe those currently in their teens who have a tendency to shun mainstream media will less swayed by this (but will be swayed by other social factors).

You also get certain parts of the media that overdramatise things, likee making comments how "because of the real estate crisis people are now forced to live in share households in their twenties", as if this was a bad thing. I was in my 20's in the 90's, and I lived in share households for all but 15 months of my 20s, it's not new, it helps to save whilst still being able to enjoy that time in your life.

And people do have to lower the expectations, heard of relatives bemoaning that because of interest rate rises, they can't afford to have a landscaper in to put in their garden. Thinking back to my parents the garden was evolved over years. Probably back to first point, an expectation of having everything all at once.

Not to deny that there are people suffering, I tend be of the view, that long term renters who have no hope of getting into the property market are facing a more difficult future than those who have to downscale their dreams.

 

[TheRealTMA]

Don’t realiy have sympathy for all these real estate agents continually promoting housing investments for their own self interest. Why is there this strange belief that the renters should pay the mortgage for them investments in housing? IMHO rents should be fixed on an annual etc basis. Investors make the profit on rising housing prices when they sell.

 

[Pushka]

Don’t realiy have sympathy for all these real estate agents continually promoting housing investments for their own self interest. Why is there this strange belief that the renters should pay the mortgage for them investments in housing? IMHO rents should be fixed on an annual etc basis. Investors make the profit on rising housing prices when they sell.

And investors may rely on the rent for income after retirement. Costs are increasing across the board not just mortgage rates. Councils. Property managers. Body corporate rates. Insurance. Repairs. And when they sell CGT takes a significant whack out of any profit. Fixing rents on an annual basis is just not the answer.

 

[downgraded]

And investors may rely on the rent for income after retirement. Costs are increasing across the board not just mortgage rates. Councils. Property managers. Body corporate rates. Insurance. Repairs. And when they sell CGT takes a significant whack out of any profit. Fixing rents on an annual basis is just not the answer.

But there in lies the dilemma on how retirement is funded, particularly when such properties are held in instruments related to super. It's always the problem that no one knows how long they will live for, but certain incentives for retirement saving should come with an expectation that they are not accumulated as inter-generational wealth.

Completely agree though except those costs are largely expensable so aren't absorbed at their headline rates. There are some crack pot ideas going around at the moment on rental affordability and most would clearly have completely predictable consequences.

 

[dajop]

And investors may rely on the rent for income after retirement. Costs are increasing across the board not just mortgage rates. Councils. Property managers. Body corporate rates. Insurance. Repairs. And when they sell CGT takes a significant whack out of any profit. Fixing rents on an annual basis is just not the answer.

Yes, and furthemore it is highly dependent on the type of stock. Sure, houses or anything with a significant land component can give rise to significant capital gains. For less land intensive housing stock (flats and apartments) capital gains tend to be less, and rental income is more significant part of the overall return - and probably more likely to be relied on to provide a steady income stream than the capital gain sugar hit.

 

[Seat0B]

We were discussing this just yesterday. Ours is fully offset (but because banks being banks we are still required to pay the bank as if it isn't fully offset but it all comes straight off the principal). We decided to just keep rolling with it for emergencies and because we are too old to get another loan.

....for the same reason (being too old), we have kept a line of credit available - if we don't use it, then we pay nothing but it is available for emergency use.

 

[Seat0B]

And investors may rely on the rent for income after retirement. Costs are increasing across the board not just mortgage rates. Councils. Property managers. Body corporate rates. Insurance. Repairs. And when they sell CGT takes a significant whack out of any profit. Fixing rents on an annual basis is just not the answer.

As a landlord, I'd be happy to fix my rent if all the costs you mention were also fixed. We have made an active decision to get out of the ACT (rent rises capped to 110% of CPI and virtually no way to get a tenant out of the house and thus really hard to sell unless the buyer will accept the tenant) and Victoria (massive make work on-costs including annual test and tag of electrical appliances, annual professional smoke alarm check, annual gas check - all at landlord's cost, and cash payments to tenants for every inspection if you are trying to sell the property). They will certainly get their wish that investors (who use the net income to live on in retirement) will leave the market. Then they moan about lack of supply of rental homes....

 

[jb747]

‘Cos they’d never go down. Not much of a mechanism when it’s actually rewarding the mob who may be responsible in the first place.

 

[dajop]

and Victoria (massive make work on-costs including annual test and tag of electrical appliances, annual professional smoke alarm check, annual gas check - all at landlord's cost,

What is costly about these is the fox in also in charge of the hen house. Such service providers are not just neutral inspectors, they are also companies that reap considerable profit from fixing the things they find fault with.