Shift unfair rate pain, urges expert

A TREASURY official has said higher rates are unfairly hurting indebted households and called instead for tighter government spending.

Broken piggy bank /File

Shift unfair rate pain, urges expert

A SENIOR Treasury official yesterday blamed higher interest rates for unfairly hurting indebted Australian households and called instead for tighter government spending to tackle the worst inflation in almost 17 years.

Acting executive director of Treasury's macroeconomic group, Dr David Gruen, said recent rate rises had increased household indebtedness.

He said the ratio of household debt to annual after-tax income was now 160 per cent compared to 100 per cent at the start of the millennium.

"Monetary policy is often described as a blunt instrument but in many ways `blunt' is not a particularly informative adjective,'' Dr Gruen told an Australian Business Economists luncheon in Sydney.

"In reality, however, monetary policy acts disproportionately on heavily indebted households and firms, and on housing investment.''

Dr Gruen's comments came a day after the Reserve Bank of Australia decided to leave official interest rates on hold at a near 12-year high of 7.25 per cent, following rate rises in February and March. Monthly repayments on an average $250,000 home loan climbed by $50 after last month's official rate increase.

Dr Gruen said yesterday the Federal Government's commitment to maintain a Budget surplus of at least 1.5 per cent of gross domestic product would help bring down inflation, now at its highest levels since the September quarter of 1991.

"Tightening fiscal policy does not reduce the total amount of restraint required across the economy to contain inflationary pressures, but it can spread the necessary restraint more widely, and hence more evenly, taking pressure off interest rates and inflation,'' he said.

Dr Gruen said a rapid increase in skilled migration - which had swelled by 650,000 in five years and was expected to grow by 350,000 in the next two years - would put pressure on infrastructure before it helped ease labour market tightness.

Dr Gruen said new Australian iron ore and coal contracts, likely to be settled by late June, could add 10 per cent to the nation's terms of trade by the end of 2008.

The fast-paced development of China and India is expected to improve Australia's terms of trade in future years.

"We are looking at an extended period of strong growth in these countries,'' Dr Gruen said after the address.

"That doesn't mean there won't be bumps but they may be why Australia's resources prices will be higher for longer.''