With inflation heading towards 5.0%, interest rates on the rise, energy prices spiraling and recession risk building, I get the desire for government to ‘do something’.
The two big ideas I have seen pop up recently an increase in the minimum-wage above -inflation and a cut to the fuel excise.
Both sound compassionate and helpful, but both actually make the underlying problem worse.
Above-inflation wage increases
Award-reliant industries — hospitality, retail, aged care — are labour-intensive with thin margins. They don't absorb mandated cost increases. They pass them through as higher prices or cut headcount. In a slowing economy, they do both.
Worse, the RBA is watching unit labour costs closely. An aggressive Fair Work decision removes the Board's path to early rate cuts — meaning mortgage holders pay more for longer. The people it's designed to protect are the most likely to lose hours or jobs entirely.
Cutting fuel excise during a shortage
A fuel shortage is a supply problem. Cutting excise is a demand intervention. You're subsidising consumption of a scarce commodity — removing the price signal that rations demand. The shortage gets worse, not better.
The CPI dips temporarily. Then the cut expires and the snapback looks like a fresh inflation surge. The fiscal hit gives the RBA another reason to hold rates higher. And it's regressive — higher-income households with bigger vehicles capture most of the benefit.
The pattern
Demand-side fixes for supply-side problems. Pro-cyclical policy in a stagflationary environment. The politically easy answer and the economically correct answer are pointing in opposite directions.
Which is exactly why we'll probably get more of what doesn't work.